19 November 1997 External T.I. 9721035 - MEANING OF CONTRIBUTION

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Has a beneficiary made a contribution to the trust where the beneficiary returns an income over-payment to the trust?

Position:

Generally, no.

Reasons:

The position and rationale is in line with that set out in paragraph 19 of IT-381R3.

XXXXXXXXXX 972103
T. Murphy
Attention: XXXXXXXXXX

November 19, 1997

Dear Sirs:

Re: Reimbursements of over-payments of trust income

This is in reply to your letter dated July 28, 1997. As described in your letter, when a testamentary trust is required to distribute the whole of its income each year, the trustee will usually estimate in advance the amount of its anticipated income and make monthly distributions to the income beneficiaries of one-twelfth of the estimated amount. When the yearly accounts are prepared, it may be determined that an insufficient amount has been paid out, in which case the deficiency is paid promptly, soon after year-end.

However, if the trustee has over-estimated the annual income and made excessive distributions to the income beneficiaries, the excess will usually be repaid to the trust, either by deduction from distributions in the following year or by an actual payment by the beneficiary to the trustee.

If the beneficiary actually makes a payment to the trustee, you ask whether the payment would be regarded as a contribution to the trust which would result in the trust ceasing to be a testamentary trust as defined in subsection 108(1) of the Income Tax Act.

In your letter you make reference to the position set out in paragraph 19 of Interpretation Bulletin IT-381R3 and ask whether similar reasoning would apply to the above described situation. Paragraph 19 provides that where an income beneficiary agrees to pay a trust's tax liability arising from a designation under subsection 104(13.1) or (13.2), the payment by the income beneficiary of the tax payable by the trust relating to the designation is not a contribution for the purpose of subparagraph (b) or (c) of the definition of testamentary trust in subsection 108(1), or a gift for the purposes of paragraph 122(2)(d). This is the case whether the payment is made by: (a) reimbursing the trustee, (b) providing a cheque payable to the taxing authority, or (c) receiving a net amount from the trustee reflecting the beneficiary's share of income less the relevant taxes payable by the trust. Considered in the development of the bulletin position was the fact that the decision to distribute the income to the income beneficiary and to have the tax paid at the trust level, rather than the beneficiary level, should protect the capital beneficiaries from the adverse effect of the trust paying the tax.

The same element of adverse effect would be present in the scenario described above. Therefore, generally, we would not view an income beneficiary as making a contribution to a trust where:

- the terms of the trust provide that all income is payable on an annual basis,

- there has been an honest over-estimation of the anticipated annual income of the trust payable to the income beneficiary, and

- the income beneficiary acknowledges the over-payment and returns it to the trust.

This opinion is provided in accordance with the comments in paragraph 22 Information Circular 70-6R3. It is not an advance income tax ruling and, accordingly, it is not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch