Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Summaries

Determination of income for trust accounting purposes (pp. 129-130)

[A] trust's income for the purposes of the Act often differs from its income for trust accounting purposes. Trust accounting income refers to the income that is available to the income beneficiaries. The principles for determining trust accounting income may be set out in the trust instrument, which may, for example, provide that tire trusts income is compared in accordance with the Act. If the trust instrument does not include a comprehensive definition of "trust income," then the trust's income for trust accounting purposes is determined under the applicable provincial or territorial law. Canadian provinces and territories have not legislated the computation of trust .income, and it is primarily determined on the basis of common-law principles. The jurisprudence has generally held that trust accounting income includes interest, rent, and royalties received by a trust. Capital gains and phantom taxable income (such as foreign, accrual property income included under subsection 91(1)) are capital receipts or "nothings" for trust accounting purposes. The jurisprudence has held that the treatment of corporate distributions as being on account of income or capital is based on their legal form. Dividends paid out of current or retained earnings are traditionally treated as income for trust accounting purpose. [fn 39: Hill v. Permanent Trustee Co. of New South Wales, [1930] AC 720 (PC).] Stock dividends, share redemptions, winding-up distributions, and returns of capital are generally treated as capital receipts for trust accounting purposes.

Adoption of trust accounting rules under s. 108(3) (p. 130)

Subject to subsection 108(3), a trust's income under the Act includes any taxable capital gains or deemed income realized by the trust, even though these amounts are often treated as capital receipts or nothings for trust accounting purposes. Subsection 108(3) provides that for the purposes of the definitions "income interest," and "lifetime benefit trust" in the qualified trust annuity rules in section 60.011, and "exempt foreign trust" in subsection 94(1), the income of a trust is its income computed under trust accounting principles. For the purposes of the rules related, to an alter ego, spousal, common-law partner, joint spousal, and joint common-law partner trust, subsection 108(3) provides that the trusts income is its income computed for trust accounting purposes minus the capital dividends or capital gains dividends that it has received.

Affiliation of discretionary beneficiary with trust (p. 133)

[W]hen the person has a discretionary interest in the income or capital or a trust, discretion is deemed to have been exercised in favour of the beneficiary pursuant to paragraph 251.1(4)(d). Thus, a discretionary beneficiary of a trust is generally affiliated with the trust. The CRA has interpreted paragraph 251.1(4)(d) broadly and found that a charity is a majority-interest beneficiary of a trust when the trustee has the discretion to make a gift to the charity under the declaration of trust.[fn 54: 2009-0308611R3….] This interpretation may not be correct as a matter of trust law. A trustee's power to make a gift to a charity does not necessarily mean that the charity has an interest as a beneficiary in the trust, because it is unclear whether the charity has the power to compel the administration of the trust, which is generally recognized as a necessary condition for a person to be considered a beneficiary.

Uncertain application of loss-restriction rules (pp. 153-4)

The application of the loss restriction event rules to discretionary trusts is unclear. Paragraph 251.1(4)(d) deems a discretionary beneficiary of a trust to be a majority-interest beneficiary in determining whether a person and a trust are affiliated. Paragraph 251.1(4)(d) does not deem a discretionary beneficiary to be a majority-interest beneficiary for the purposes of the Act, or for the loss restriction event rules in section 251.2. From a policy perspective, the extension of the loss restriction event rules to trusts was primarily intended to stop the acquisition of SIFT' trusts with accrued losses by corporations. This policy concern does not apply to discretionary family trusts. More generally, as discussed in chapter 1, a discretionary beneficiary's interest is not assignable as a matter of law, and consequently loss trading is unlikely to occur between arm's-length persons through a discretionary trust. If paragraph 251.1(4)(d) applied for the purposes of the loss restriction event rules, then a family trust for the benefit of issue of the settlor could conceivably have a- loss restriction event every time a new beneficiary is born. We understand that the Department of Finance intends to provide clarifying amendments to determine when and if a discretionary beneficiary is a majority-interest beneficiary of a trust for the purposes of the loss restriction event rules.

Loss restriction event on addition of charity or distant relative as beneficiary (p. 157)

[C]ommentators have noted that the exercise of discretion by a trustee to add a charity or distant relative as a beneficiary could result in a change in the majority-interest beneficiaries and thereby result in a loss restriction event for the trust….

Limited scope of s. 251.1(l)(g)(ii) (p. 134)

Subparagraph 251.1(l)(g)(ii) provides that a trust is affiliated with a person that would be affiliated with a majority-interest beneficiary if subsection 251.1(1) were read without paragraph 251.l(l)(g). Accordingly, two trusts are not affiliated simply because they share the same majority-interest beneficiary. The explanatory notes to subparagraph 251.1(l)(g)(ii) state that-the provision was intended to ensure that a trust would be affiliated with another trust when the first trust controlled a corporation that was a majority-interest beneficiary of the second trust. On the basis of the CRA's interpretation of majority-interest beneficiary, subparagraph 251.1(1)(g)(ii) is relevant only in determining whether two trusts are unaffiliated.

Circularity problem where estate capital gains realized in 1st year (p 139)

The CRA has acknowledged that the wording of subsections 40(3.61) and 164(6) can create an inappropriate circularity problem when an estate realizes capital gains in the first year after death, since the loss arising on the redemption of the shares must be applied to the estate's capital gains for the year after, death and cannot be carried back to offset the capital gain arising on death. [fn 70: …2012-0462941C6…. This circularity problem was identified by Nick Moraitis and Manu Kakkar, in "Potential Circularity Problem with Estate Loss Carryback" (2006) 6:3 Tax far the Owner-Manager 6-7.] Since subsection 40(3.61) applies only to the extent that the loss is carried back to the year of death, subsection 40(3.6) applies, to deny the losses that would otherwise be applied against the estate's capital losses in the year of death.

No s. 112(3.2) stop loss for s. 84.1 capital dividend (p. 140)

[T]he CRA has indicated in other contexts that a dividend deemed to be paid under paragraph 84.1(1)(b) is not deemed to be paid on the shares. [fn 73: …2011-0414731E5…] Assuming that the CRAs interpretation is correct, subsections 112(3) to (7) would not apply in respect of a capital dividend that is deemed to be paid under paragraph 84.1(1)(b).

50% solution addressing s. 112(3.2) (p. 143)

[i]t many be preferable to redeem shares owned by an estate through a combination of capital dividends and taxable dividends pursuant to the so-called 50 percent solution strategy. [fn 76: See Joel Cuperfain and Robin Goodman, "Life Insurance Planning," in 2001 Prairie Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2001), 12:1-40.] Under the 50 percent solution, the corporation increases the stated and paid-up capital of the class of shares held by the estate so that the estate is deemed to receive a taxable dividend on the shares equal to 50 percent of the difference between the paid-up capital of the shares and their fair market value. Following this deemed, taxable dividend, the corporation redeems the shares and elects for the deemed dividend under subsection 84(3) to be a capital dividend. Because the estate is deemed to have received taxable dividends on the shares equal to the capital dividends that were received, subsection 112(3.2) should not apply to deny any of the loss realized on the redemption of the shares. It does not appear to be possible to implement the 50 percent solution by redeeming all of the shares and electing for one-half of the subsection 84(3) deemed dividend to be a capital dividend and one-half of the deemed dividend to be a taxable dividend because subsection 84(3) deems the corporation to have paid a dividend on a separate class of shares made up of the shares that are redeemed, acquired, or cancelled, and the deemed taxable dividend is deemed to arise on a separate class of shares from the deemed capital dividend and does not reduce the impact of subsection 112(3.2) or (3.3).,,,

Potential for s. 107(1)(c) to result in double taxation (pp. 144-145)

When the beneficiary is itself a trust, paragraph 107(1)(c) reduces its loss by the amount of any dividends that it is deemed to have received under subsection 104(19) or (20), even if the beneficiary trust flowed out those amounts to its beneficiaries. Consequently, there is a possibility that paragraph 107(l)(c) could result in double taxation by reducing a trust's loss on the disposition of a capital interest in another trust, and by reducing a loss of a beneficiary of the first mentioned trust from the disposition of an interest in the trust. Subparagraph 107(2)(c)(ii), which is discussed in detail in chapter 4 and is intended to prevent double counting, may not apply to the application of paragraph 107(l)(c) to both taxpayers because this rule applies only to losses realized by the same taxpayer.

Application where trustees vest all interests of a beneficiary (pp. 154-155)

Paragraph 251.2(3)(b) provides that variations or amendments to a trust and the exercise or failure to exercise a power do not give rise to a loss restriction event for the trust, provided that each majority-interest beneficiary or member of a majority-interest group of beneficiaries is affiliated with the trust immediately before the variation, amendment, or failure to exercise a power. This exception should apply when the trustees of a discretionary trust vest all of the income or capital interests in a beneficiary, because the trust is affiliated with the discretionary beneficiary immediately before the exercise of discretion pursuant to paragraph 251.1(4)(d).

Trustees not necessarily a group (pp. 158-9)

[T]he CRA has relied on Consolidated Holding as establishing a presumption that trustees act in concert as a group. This presumption ignores two key factual findings in Consolidated Holding—namely, that Harold and Robert Gavin were held to be acting as a group with respect to their personal shareholdings in Consolidated Holding and that the terms of the will provided that they could bind the decision of the third trustee. If the trust had required the unanimous consent of the trustees and the trustees had no other connection, it is unclear whether the court would have come to the same conclusion. [fn 125: Mark Brender,…2007 Conference Report…31:1-49.]

Trustees not necessarily a group (pp. 158-9)

[T]he CRA has relied on Consolidated Holding as establishing a presumption that trustees act in concert as a group. This presumption ignores two key factual findings in Consolidated Holding—namely, that Harold and Robert Gavin were held to be acting as a group with respect to their personal shareholdings in Consolidated Holding and that the terms of the will provided that they could bind the decision of the third trustee. If the trust had required the unanimous consent of the trustees and the trustees had no other connection, it is unclear whether the court would have come to the same conclusion. [fn 125: Mark Brender,…2007 Conference Report…31:1-49.]

Implications of exclusion of discretionary trusts (p. 161)

[B]ecause the new legislation specifically excludes discretionary trusts, a change of trustee in a discretionary trust now arguably results in an acquisition of control of a corporate subsidiary. However, paragraph 256(7)(i) is merely a safe-harbour provision, and it should not be interpreted to affect the legal tests established by the jurisprudence discussed above.

Extinguishing of unused LP losses (pp. 170-171)

Other than for the purposes of paragraph of 98(5)(g), this paragraph [70(6)(d.1)] provides that the deceased is, deemed not to have disposed of the partnership interest as a consequence of the taxpayer's death; the spouse, common-law partner, or trust is deemed to have acquired the partnership interest at a cost equal to the cost to the deceased; and the adjustments made in computing the adjusted cost base of the deceased in the partnership interest described in subsections 53(1) and (2) apply in computing the adjusted cost base of the interest to the spouse, common-law 1 partner, or trust. As a result of these provisions, the at-risk amount to the spouse, common-law partner, or trust is generally equal to the at-risk amount of the deceased. However, the deceased limited partnership losses are not transferred with the partnership interest, and therefore any unused limited-partnership losses of the deceased are not available to a transferee of the limited partnership interest.

Treaty relief from residency requirement in 70(6) – but “will” requirement (p. 171)

Subsection 70(6) applies to a transfer to a taxpayers spouse only when the taxpayer and the spouse were resident in Canada immediately before the taxpayer's death. If the property is to be transferred or distributed to a spousal trust created under the taxpayers will, subsection 70(6) requires that the taxpayer be resident in Canada immediately before death, and the trust must be resident in Canada immediately after the property vests in the trust. Article XXIX B(5) of the Canada-US tax treaty provides some relief from this requirement for individuals who are residents of the United States immediately before death. It deems a US resident individual and her spouse to be residents of Canada for the purposes of subsection 70(6). In addition, a spousal trust with US-resident trustees that would otherwise qualify for rollover treatment under subsection 70(6) may apply for competent authority relief so that it is deemed to be resident in Canada for the purposes of subsection 70(6). Article XXIX B(5) still requires that the transfer of property to the spousal trust be made under a will. This can raise practical difficulties because US individuals often use an inter vivos trust to reduce or defer US estate tax. A transfer made under the terms of such a trust does not qualify for competent authority relief under article XXIX B(5) because the transfer is not made under a deceased person's will. [F.n. 161…2009-094591117]

Spousal trust funded with insurance proceeds (p. 175)

The CRA accepts that a trust funded with insurance pursuant to a beneficiary-designation or under the taxpayer's will may qualify as a testamentary trust, even if the terms of the trust are set out in another document, provided that the trust is not funded before the taxpayer's death with property. [F.n.174… 2002-0143685 … 2014-0529361E5] However, the CRA does not accept that such a trust qualifies as a spousal trust for the purposes of subsection 70(6) because the terms of the trust are not set out in the will. In our view, the CRA's position appears to be incorrect. A pre-existing declaration of trust that is funded and created pursuant to the terms of the taxpayer's will should be treated as having been created under the terms of the taxpayer's will because the trust did not exist before the transfer.

Transfer resulting from disclaimer or release (p. 176)

A transfer made to a spousal trust occurs as a consequence of death if the transfer of property is made (1) under the terms of a will; (2) under a will if the original beneficiary of the property disclaims her interest in the property, and the executors transfer the property to a spousal trust; or (3) under a will if the original beneficiary of the property releases or surrenders her interest in the property, and the executors transfer the property to the spousal trust.[F.n.178 The CRA is of the view that a disclaimer or release can be used only to add property to an otherwise valid trust. A disclaimer or release by beneficiaries of their interests in a trust cannot be used to cure a tainted spousal trust.] A transfer of property to the trust for consideration is treated as occurring as a consequence of death when the will requires the spouse or spousal trust to make the payment for the property.

Relevance of documents external to will in determining indefeasible vesting (pp. 182-3)

According to… Boger Estate, whether property is vested indefeasibly is generally determined on the basis of the terms of the will. Thus, property does not vest indefeasibly in a spouse or spousal trust if under the terms of the will, the property must be transferred to another beneficiary on the occurrence of.an event (for example, the remarriage of the spouse). However, it should be possible to vest property indefeasibly in a spouse or spousal trust if the spouse or spousal trust may be required to transfer the property under an external agreement. Notwithstanding this aspect of the decision in Boger Estate, the CRA has indicated that it also looks at the effect of other agreements in. respect of the beneficial interest in determining whether the interest has vested indefeasibly. …[F.n.201 …9337025…] The CRA's position is often relevant in the context of private company shares transferred on the death of a shareholder when the terms of the shareholders' agreement address the treatment of the shares on death. …

Although this position is difficult to reconcile with Boger Estate, there is some support for the CRA's position in the jurisprudence.

In Parkes Estate v. MNR, [F.n. 203 86 DTC 1214 (TCC)] … [t]he testator had entered a buy-sell agreement with his brother under which the surviving shareholder of the two of them was required to purchase and the executor of the deceased's estate was required to sell the shares…In the court's view, the buy-sell agreement operated to prevent the shares from vesting indefeasibly in the spouse.

Transfer of partial interest to spousal trust (p. 184)

It seems to be possible for an interest in property to vest in a spousal trust, even if the entire property is not transferred to the trust. For example, the CRA has confirmed that a spousal rollover is available with respect to an undivided interest in real property that is transferred to the spousal trust if the children receive the remaining undivided interest. [F.n.209 – 2003-0006025]

Situations where a spousal trust can be tainted/correction through disclaimer (pp. 187-8)

The CRA…has expressed the view that a spousal trust does not qualify when the terms of the trust:

  • permit the renting of real estate owned by the trust to a person other than the spouse for less than fair market value rent, or the lending of money to a person other than the spouse on less than fair market value terms, even if the lease or loan is never entered into; [F.n. 219 …S6-F2-C1…1.10. See also … 2003-0019235]
  • provide that trust property can be distributed to the children of the deceased in any circumstances before the spouse's death (for example, if the spouse remarries); [F.n.220 … 2002-0154435] or
  • permit or require the trust to pay life insurance premiums. [F.n.221 … 2006-0185551C6]

The CRA's view regarding life insurance on the life of the spouse is questionable. Its position is based on the fact that the benefits of the insurance policy are enjoyed by a person other than the spouse. However, the benefits are not enjoyed before the spouse's death, and therefore the requirements of subsection 70(6) appear to be met. …

If an otherwise qualifying spousal trust provides for beneficial interests for other beneficiaries that taint the trust, it should be possible for beneficiaries other than the spouse of the deceased to disclaim their interests and cleanse the tainted spousal trust. Although … Gilbert Estate … [F.n.222 83 DTC 645 (TRB).] … held that a son's disclaimer of his interest in a trust did not cleanse an otherwise qualifying spousal trust, Maria Elena Hoffstein noted that Gilbert Estate was decided before subsection 248(8) was enacted and may have been legislatively overturned by the enactment. [F.n.223 Maria Elena Hoffstein, "Restructuring the Will and the Testamentary Trust: Methods, Underlying Legal Principles, and Tax Considerations," Personal Tax Planning feature (2012) Canadian Tax Journal 719-39.]

Treaty relief from residency requirement in 70(6) – but “will” requirement (p. 171)

Subsection 70(6) applies to a transfer to a taxpayers spouse only when the taxpayer and the spouse were resident in Canada immediately before the taxpayer's death. If the property is to be transferred or distributed to a spousal trust created under the taxpayers will, subsection 70(6) requires that the taxpayer be resident in Canada immediately before death, and the trust must be resident in Canada immediately after the property vests in the trust. Article XXIX B(5) of the Canada-US tax treaty provides some relief from this requirement for individuals who are residents of the United States immediately before death. It deems a US resident individual and her spouse to be residents of Canada for the purposes of subsection 70(6). In addition, a spousal trust with US-resident trustees that would otherwise qualify for rollover treatment under subsection 70(6) may apply for competent authority relief so that it is deemed to be resident in Canada for the purposes of subsection 70(6). Article XXIX B(5) still requires that the transfer of property to the spousal trust be made under a will. This can raise practical difficulties because US individuals often use an inter vivos trust to reduce or defer US estate tax. A transfer made under the terms of such a trust does not qualify for competent authority relief under article XXIX B(5) because the transfer is not made under a deceased person's will. [F.n. 161…2009-094591117]

Under-the-will requirement where varied (p. 173)

It is the CRAs view that a trust is not created under a taxpayer's will when the trust is created under provincial variation-of-trusts legislation, or through agreement of the beneficiaries of the taxpayer's estate. [F.n. 165 - IT-305R4…at paragraph 12.] Similarly, the CRA believes that an otherwise tainted spousal trust cannot be cured through a disclaimer by a non-spouse beneficiary after death. [F.n. 166 - There is an argument that the CRA's views, in this regard are incorrect, since a disclaimer of a beneficial interest in a trust makes the interest void ab initio.] The CRA's position is based on its view that an agreement of the beneficiaries or an order under variation-of-trusts legislation cannot be made retroactively to amend the terms of a will. The decisions of the Tax Court in Murphy Estate… [F.n.167 2015 TCC 8], and… in Shinewald v. Putter … [F.n.168 2014 MBQB 254] appear to support the CRA's position.

Effect of disclaimer or release (pp. 177-8)

Under the common law, a disclaimer means a refusal to accept a gift or other transfer of property. …

A beneficiary who executes a valid disclaimer in respect of property to be received under a will is considered never to have received the property. [F.n.184 … S6-F2-C1, paragraph 1.10].

When a person executing a disclaimer receives consideration, a question can arise whether the disclaimer is valid. ..

In the common-law provinces and territories, a release or surrender refers to an extinguishment or discharge of a right to property. …

If property is disclaimed, released, or surrendered, do the executors have the power under the terms of a will to transfer the property to a spousal trust? The executors should have this power if the will provides that the residue of the estate is to be paid to the trust, or if the executors have discretion to add property to the spousal trust. …

If the will does not give executors authority to deal with a disclaimer release, or surrender, the courts generally attempt to give effect to the testator's intent and make gifts or distributions that are consistent with the overall spirit of the will.

Example of application (p. 190)

Paragraph 104(4)(a.2)…can apply when a trust borrows money from an income beneficiary and. distributes the borrowed funds to a capital beneficiary, thereby decreasing the value of the income beneficiary's interest, in the trust and reducing the tax that would be payable in respect of a deemed disposition of the income beneficiary's interest on death.

Purpose (p. 192)

Paragraph 104(4)(a.3) is an anti-avoidance rule…[whose] purpose… is to ensure that a taxpayer cannot use the rollover in subsection 73(1) to defer the consequences of the deemed disposition of the taxpayer's property on becoming a non-resident.

Immediate reduction of capital gain/deferred credit (pp. 197-8)

A subsection 118.1(6) election can be made in respect of a gift of non-qualifying securities to immediately reduce the capital gain realized, in respect of the gift, even though the charitable donation tax credit is available only at a subsequent time. [F.n.259 – CRA document no. 2013-0486701E5, July 15, 2013.] For example, assume that a trust holds private company shares with a fair market value of $1 million and a $100,000 cost, and it wants to donate the shares to a private foundation. If the trustees donate the shares to the foundation, the trust is subject to tax in respect of a $450,000 taxable capital gain. However, the trustees can make an election under subsection 118.1(6), in which case the trust is deemed to have disposed of the shares for an amount equal to their adjusted cost base so that no gain is realized. Subsection 118.1(13) provides that the gift is not made until a subsequent year when the shares cease to be non-qualifying securities or are disposed of by the foundation.

Deduction in executor’s year or of formula amount (p. 203)

[S]ubsection 104(6) can potentially apply to amounts paid or payable from an estate. However, Canadian common law generally provides that an executor is not required to distribute income to the beneficiaries of the estate in the estate's first year (the so-called executor's year). Accordingly, it can be argued that no amount of income is deductible to the estate under subsection 104(6), unless the income is actually paid to the beneficiaries during the year. Nonetheless, as an administrative matter the CRA permits an executor to make income payable to the beneficiaries of an estate during the executor's year, provided that no beneficiary objects to this treatment. [F.n. 275 … IT-286R2.] …

The CRA accepts that an amount may be deductible to the trust when the amount is determined by a formula and is not calculated until the preparation of the trust's tax return after the end of the applicable year. [F.n. 276 Ginsburg v. MNR, 92 DTC 1774 (TCC).]

Deduction for payment for benefit of minor with parent’s consent (pp. 205-6)

The court in Langer Family Trust held that subsection 104(24) applies to payments of expenses only when the beneficiary consents. However, in many cases beneficiaries are minors and cannot consent to a payment by the trust. Recognizing this difficulty, the CRA generally permits a deduction under subparagraph 104(6) (b) when (1) the trustee exercises his discretion pursuant to the terms of the trust to make the amount of the trust's income payable to the child in the year before the payment is made, (2) a parent or guardian of the beneficiary directs the trustee or otherwise consents to the payment of the relevant expense on behalf of the child, and (3) it is reasonable to conclude that the minor beneficiary benefits from the payment. [F.n.283 – Cindy Radu and Siân Matthews, "Trust Administration—Best Practices," in 2010 Atlantic Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2010), 4A:l-20. With respect to the final requirement…[see] 1999-001310.]

Whether a benefit to parent when trust pays for child’s necessities (p. 206)

An ancillary question is whether the payment is treated as a benefit under sub-section 105(1).

To avoid this risk, trustees could refrain from paying for necessities and pay only for other expenses of the children, such as summer camp, private school, tutors, and extracurricular activities. …

[CRA’s] administrative position is that a parent has not received a benefit when the trustees pays for the necessities of a minor beneficiary in accordance with the terms of the trust. [F.n. 287… 970648.]

Issue whether beneficiary can thwart retention (p. 207)

Subsection 104(18) permits an estate to retain income until a beneficiary attains a certain age. However, because the income must unconditionally vest, there is a question whether the beneficiary can cause a distribution to occur pursuant to the rule in Saunders v. Vautier….

Effect of specified factor (p. 208)

Subsection 104(7.01) limits the amount of the deduction under subsection 104(6) for distributions of Canadian-source income by a section 94 deemed resident trust to beneficiaries who are not resident in Canada, ensuring that the income is subject to part I tax in the trust. …

The specified factor of 0.35 operates as a form of rough justice, but does not distinguish between different rates of tax….

Streaming of dividends and interest (pp. 121-3)

The CRA has confirmed that in the case of a fully discretionary trust, the trustees have discretion about how the income is allocated and can allocate the dividend exclusively to the Canadian resident and the interest exclusively to the non-resident. [F.n. 309 … 2001-0112945.] When the trust deed mandates that income be paid to two (or more) beneficiaries without indicating how the income is to be split, the CRA generally requires that each, source of income be distributed on a pro rata basis. [F.n. 310 … 901027.]

Deemed receipt at year-end (p. 214)

The CRA's view is that a beneficiary is deemed to receive a dividend from a trust that made a designation under subsection 104(19) at the end of the taxation year, and not when the distribution is in fact made. [F.n. 313 … 2013-0495741C6 … and … 2013-0495801C6.] The reason for this timing is that a trust may make a designation under subsection 104(19) only to the extent that it is a resident of Canada throughout its taxation year, and the trust cannot know if it is resident throughout the year until the year (or the deemed taxation year) ends. This timing potentially allows corporations to defer payment of part IV tax through the interposition of a trust.

Streaming of dividends to non-resident beneficiaries (p. 223)

[A]ssume that a Canadian-resident inter vivos trust receives a dividend of $10,000 on shares of a US public corporation, and $10,000 of Canadian-source interest income. The trust makes $5,000 of its income payable to a Canadian-resident individual beneficiary, makes $5,000 payable to a Canadian-resident charity, and retains $10,000 of income in the trust. Under the Canada-US tax treaty, the US withholding tax on the dividend is $1,500. It is preferable that the $10,000 payable to the Canadian-resident beneficiary is from the US-source dividend. When the trust is fully discretionary, it should be possible to allocate the income in this manner.

Net capital losses generally carried forward rather than back (pp. 216-7)

The amount included in a beneficiary's income under subsection 104(13) or (14) or section 105 cannot be reduced when a trust carries back capital losses (or non-capital losses) to a prior year and allocates the amounts against the trust's income. These amounts remain taxable to the beneficiaries. However, the carryback of net capital losses reduces the trust's net taxable capital gains and eligible taxable capital gains for the purposes of the designations in subsections 104(21) and (21.2), and therefore reduces the amounts that are designated to the beneficiaries under these subsections. Accordingly, in many cases a trust carries forward net capital losses to be applied in future years and does not carry back net capital losses to prior years.

Narrow CRA interpretation of principal business test (p. 236)

Since the principal business test in paragraph 20(1)(bb) requires only that the principal business of the service provider include the provision of investment administration or management services, in theory the test should be met when it is established that the service provider has a principal business and that its investment administration or management services are sufficiently interconnected with the activities of its principal business. …

In a 2005 technical interpretation, [CRA] took the position that a service provider whose principal business included the maintenance of account records did not satisfy the test because "[the service provider's] services do not include time spent on the custody of securities, the collection and remittance of income, and the right to buy and sell on [its] own judgment on behalf of some clients without reference to those clients. [F.n. 382 … 2005-0124131E5.]

Purpose of s. 104(2) (pp. 246-7)

Lloyd F. Raphael has stated that the "apparent purpose of [subsection 104(2)] is to prevent a settlor from splitting potential income of a trust for a beneficiary by the creation of several trusts, each with smaller incomes, for the same beneficiary. [F.n.420 – Lloyd F. Raphael, Canadian Income Taxation of Trusts, 3d ed. (Toronto: CCH Canadian, 1993), at 267.] He has also stated that the power to consolidate trusts under subsection 104(2) was introduced into the Act because of the reasoning of the courts in Holden v. Minister of National Revenue. [F.n.421 – (1933), 1 DTC 243 (PC). ] … The Privy Council concluded that on a true construction of the will there were three distinct trusts, which should be assessed and taxed separately.

Potential retroactive effect (p 247)

The designation under subsection 104(2) is clearly effective once the designation is made, but it is not clear whether the subsection permits the minister to make the designation effective for the time before the designation was made. It has been suggested that the designation may be effective for the earlier period. In commenting on the Mitchell case [56 DTC 521], Lloyd F. Raphael has stated that "if the original trust property received by the trusts from the settlor is substituted for other property, whether by sale or exchange, it would appear that the Minister could make the designation after the substitution or that the designation could be made retroactively to the date of the creation of the trusts, seeing that the wording of the subsection is not limited to the trusts' incomes of any year." [F.n. 424 …Supra note 420, at 270.] This statement was noted by the CRA in a technical interpretation…. [F.n.425 … 9238787.]

Treatment of losses (p. 248)

The designation under subsection 104(2) deems the property of all the trusts to be the property of the designated single trust, and the income of all the trusts to be the income of the designated single trust. It is not clear whether the word "income," as used in this context, should also include loss. The inclusion of loss may be consistent with the underlying concepts of treating all trusts as if they were one trust. However, the CRA has suggested that subsection 104(2) should not be used to consolidate the income of one trust with the loss of another trust. [F.n. 426 Ibid.]