Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Summaries

Purpose (p. 265)

[S]ubsection 107(1.2))…is intended to prevent the beneficiary from realizing a loss on the valuation of the trust interest as a result of non-taxable distributions made to the beneficiary when no economic loss has actually been incurred.

Example of gain computation on sale of capital interest (p. 267)

[C]onsider a beneficiary who holds a capital interest in a Canadian resident inter vivos personal trust. The capital interest has not been acquired for consideration by the beneficiary, who is the only capital beneficiary under the trust. The trust holds a single capital property, which has an adjusted cost base of $500 and a fair market value of $1,000. Under subsection 107(1.1), the beneficiary's cost of the capital interest is deemed to be nil. The cost amount to the beneficiary of her capital interest in the trust, as determined for the purposes of subsection 108(1), is $500. Assume that the beneficiary were to sell the capital interest in the trust for proceeds of disposition of $1,000. Paragraph 107(1)(a) provides that for the purpose of computing the beneficiary's capital gain, if any, from the disposition of the capital interest in the trust, the adjusted cost base is deemed to be the greater of its adjusted cost base, as otherwise determined, to the taxpayer immediately before the disposition ($0) and the cost amount to the taxpayer immediately before the disposition ($500). Accordingly, the beneficiary would realize a capital gain of $500 on the disposition of the capital interest in the trust. If instead of disposing of the capital interest, the trust sold its capital property and realized a $500 capital gain, which the trust allocated to the beneficiary pursuant to a designation made under subsection 104(21), die capital gain deemed to have been realized by the capital beneficiary would be the same as the gain that the beneficiary would have realized if the capital interest in the trust had been disposed of to a third party.

The Canada Revenue Agency (CRA) has illustrated the manner in which paragraph 107(1)(a) applies in computing the capital gain on the deemed disposition of a capital interest in a trust in a 2004 technical interpretation. [fn 20: …2004-0061841E5]

Potential for double taxation (p. 270)

The sale or other disposition of a capital interest in a trust could give rise-to double taxation to the purchaser of the interest when the trust disposes of its property to a third party following the acquisition of the trust interest by the purchaser. Because the inside cost of the trusts property is not increased as a result of the transfer of the capital interest in the trust, gain may be realized on the subsequent sale….

Example of sale of ½ of capital interest plus ½ of right to enforce income payment (p.271)

[A]ssume that a beneficiary's capital interest in a unit trust initially consists of 1,000 units purchased for $10,000 on December 23, 2015. The trust has a December 31 year-end and has not made an election under subsection 132.11(1). It makes $400 of its income payable to the beneficiary on December 31, 2015 in respect of its 2015 taxation year. However, before the beneficiary's assignable right to enforce the payment of the $400 is satisfied, the beneficiary sells one-half of her capital interest in the trust (500 units and one-half of the right to enforce payment) to a third party for $5,700.

Under subsection 104(13), the beneficiary is required to include $400 in computing her income for the 2015 taxation year. The right to enforce payment of the $400 amount by the trust is treated as part of the beneficiary's capital interest in the trust under subsectionT08(l). Under paragraph (i) of the definition of "disposition" in subsection 248(1), a payment by the trust in satisfaction of the right is not a disposition. However, the sale of the 500 units in the trust is a partial disposition of the beneficiary's capital interest that includes part of the beneficiary's right to enforce a payment from the trust. Because the adjusted cost base of the right disposed of-is nil, the beneficiary realizes a capital gain of $200 (one-half of the total amount to which the right to enforce relates) on the sale to the third party.

Subsection 248(25.4) is intended to apply in these circumstances to provide an increase in the adjusted cost base of the beneficiary's capital interest in the trust by $200. Consequently, the total adjusted cost base of the 500 units sold is $5,200: $5,000 + $200. As a result

CRA denial of s. 107(2) where beneficiary issued a promissory note (pp. 283-4)

[T]he CRA takes the position that if the beneficiary is instead issued a promissory note by the personal trust in satisfaction of her capital interest in the trust, subsection 107(2) does not apply, and the rollover that would otherwise be available in respect of the distribution is denied…. [fn 42: 2014-0538261C6] …

The CRA's conclusions in this technical interpretation may represent an overly narrow reading of subsection 107(2). No authority is cited for the proposition that the issuance of a promissory note to a beneficiary does not constitute a "distribution of property" to the beneficiary; in light of the expansive definition of "property" in subsection 248(1), a promissory note issued to the beneficiary should qualify as property, and the issuance of the note by the trust may well constitute a distribution within the meaning of the Act. In practical and economic terms, this is equivalent to a distribution of cash that is subsequently advanced to the trust by the beneficiary…

Charity as beneficiary or donee (p. 285)

[I]s subsection 118.1(3), which provides for a charitable donation tax credit, or subsection 107(2) applicable on the distribution of capital property of a trust to a discretionary capital beneficiary that is a Canadian registered charity? A similar issue arises in the context of testamentary trusts by virtue of subsection 118.1(5),…[fn 45: 2012-047216117]…In the CRA's view…[i]f the facts indicate that the trust distributed capital property to a charity in satisfaction of a capital interest, subsection 107 (2) generally applies. If however, the facts suggest that the capital property of the trust was given to the charity as a gift, and not in satisfaction of any capital interest, subsection 118.1(3) generally applies.

Timing of disposition of distributed property (p. 286)

[T]he CRA believes that the date of actual distribution is the time when property is distributed for the purposes of subsection 107(2). This complicates the position of a trust described in paragraph 104(4)(a) that has non-resident capital beneficiaries and is deemed to dispose of its property at fair market value first on the death of the spouse and again when the property is actually distributed to the non-residents….

CRA position re unnamed partnership, with named-beneficiary partners, as a beneficiary (pp. 292-4)

[T]he CRA was recently asked, in the context of an unpublished request for a technical interpretation, whether subsection 107(2) applies to a distribution of property by a Canadian-resident personal trust to a newly formed limited partnership, all of whose partners are individual beneficiaries under the trust. The CRA declined to confirm that the rollover provision was applicable in respect of a distribution proposed to be made to the limited partnership, unless the deed of settlement of the trust was amended or varied to include the partnership as a named beneficiary.

In this case, the beneficiaries of the trust were defined in the deed of settlement to include certain named individuals, their children, and more remote issue. Each of the beneficiaries was a non-resident of Canada for the purposes of the Act. The terms of the trust provided the Canadian-resident trustees with the discretion to pay or transfer to all or any one or more of the adult beneficiaries of the trust or to apply for the benefit of all or any one or more of the beneficiaries of the trust the whole or any part of the capital thereof in such manner as may be determined by the trustees in their absolute and uncontrolled discretion.

The trustees proposed to distribute certain property of the trust to a newly formed limited partnership governed by and established pursuant to the laws of Ontario. Each of the partners, including the general partner, was an individual who was also a beneficiary under the trust. The property of the trust to be distributed was composed solely of real, property situated in Canada.

The taxpayer’s representative had argued that a distribution of property by the trust to the partnership constituted a distribution to the partnership as a beneficiary under the trust in satisfaction of the partnership s capital interest therein. The trust provided that the trustees could, in their discretion, distribute the property to or for the benefit of all or any one or more of the individual beneficiaries….

[T]he only question at issue was presumably whether the trustees had, as a matter of trust law, the power to distribute property to the beneficiaries of the trust in their capacity as partners of the partnership. …

There appears to have been a very compelling position that subsection 107(2) should apply to a direct distribution of trust property to the partnership on the basis that the partnership should be regarded as a beneficiary under the trust, even without a variation of the terms of the trust. The trustees clearly had the discretion to encroach on capital for the purpose of distributing trust property to the partnership if the distribution would benefit one or more of the individual beneficiaries under the trust….[T]he CRA was not prepared to confirm that the provision applied. This position appears to be contrary to the meaning of a "beneficiary" in general trust law, which includes any person or partnership that may receive a distribution of property under the trust; it also appears to run counter to the broad definition of a "beneficiary" under a trust in subsection 108(1),…

Distribution of life insurance policy (p. 298)

On the distribution of a life insurance policy in Canada," as defined in subsection 138(12), the CRAs view is that subsection 107(2) takes precedence over subsection 148(7), and the policy may therefore be distributed on a tax-deferred rollover basis -for the purposes of the Act. [fn 78: 2011-0391781E5]

CRA requirement that a devisee formally assume the mortgage (p. 284)

The CRA has-also taken the position that when an inter vivos trust (or estate) distributes a rental property subject to a mortgage (or hypothec in Quebec) to a beneficiary, the mortgage represents an amount payable by the beneficiary for the property, and the interest thereon is therefore deductible under subparagraph 20(l)(c)(ii), subject to the usual conditions in that paragraph, provided that the "assumption by [the beneficiary] of the hypothec loan charging the property is a condition, of the distribution." [fn 43: 2014-0537141C6]…At common law, a devisee of real property of an estate takes the property subject to the charge without any requirement that the devisee specifically assume the mortgage, in the absence of any contrary indication in a will. The CRA's requirement that the debt be formally assumed as a condition of acquiring the property appears to be a narrow interpretation of subparagraph 20(l)(c)(ii),…

Meaning of right “as a beneficiary” (pp. 290-1)

[T]he term "beneficially interested" is defined exceptionally broadly in subsection 248(25)…[but] still requires the relevant person or partnership to have a right "as a beneficiary under a trust" to receive any of the trust's income or capital….

In Pilkington v. lnland Revenue Commissioners, [fn 58: [1964] AC 612 (HL).] the House of Lords concluded that the trustees could exercise the power of advancement at issue by transferring certain property of a trust to a newly settled trust fund for the benefit of one of the children of a beneficiary who had a life interest in the property, despite the fact that the advanced beneficiary's children and siblings were secondary or remainder capital beneficiaries under the new settlement….

Similarly, in Re Halsted's Will Trusts, [fn 61: [1937] 2 AII ER 570 (Ch.D.).] the court considered a direction by a testator that part of his residuary estate be held on trust to pay the income therefrom to one of his sons, and that after the son's death it revert to the testator's estate….The court held that the trustees had the power to settle the amount on a new trust for the benefit of the son during his lifetime and, following his death, for the benefit of his wife and child, concluding that the power of advancement could be exercised to benefit the named beneficiary's family members on the basis of this provision.

Limitations of s. 107(2.002) election (pp. 303-4)

The effect of making an election under subsection 107(2.002) in respect of a distribution of a property made to a beneficiary in full or partial satisfaction of the beneficiary's capital interest in a trust is that the rollover provision in subsection 107 (2) does not apply in respect of the distribution; instead, the distribution occurs on a taxable basis. However, when the election is made, subsection 107(2.002) deems the cost amount of the beneficiary's capital interest in the trust to be nil for the purposes of subparagraph 107(l)(a)(ii). The beneficiary may therefore realize a gain on the deemed disposition of her capital interest in the trust pursuant to subsection 107(2.1). …

An election under subsection 107(2.002) may thus ensure that the beneficiary acquires the distributed property at a higher adjusted cost base, with the result that capital gains or income accrued by the non-resident trust before the distribution is not subject to tax in Canada on a subsequent disposition of the distributed property by a Canadian-resident beneficiary. However, the election may result in the current realization of gain on the deemed disposition of all or part of the beneficiary's capital interest in the trust pursuant to subsection 107(2.1), which by virtue of the election is deemed to have a nil cost amount. [fn 93: See…2015-0582701E5…and…2004-0062121E5] Accordingly, in many circumstances it may be more efficient, subject to applicable foreign tax considerations, for a non-resident trust to realize an actual disposition of the property before the distribution. …

The sole purpose of the election is to enable the beneficiary to acquire the distributed property at a cost equal to its fair market value,…[T]his purpose can be achieved in a variety of other ways, such as an actual disposition of the property (for example, a transfer to a wholly owned subsidiary of the trust) before the distribution, or even a sale of the property to the beneficiary in consideration for a promissory note, which is subsequently set off against a capital distribution made by the trust to the beneficiary. The imposition of tax on the beneficiary when an election under subsection 107(2.002) is made renders the election of limited use in most circumstances….

Use of s. 107(2.01) or (2.001) to address “inhabited” requirement in principal residence definition (pp. 305-6)

[S]ubsection 40(7) does not deem the beneficiary to have inhabited the property…as the definition in section 54 requires….

The election in subsection 107(2.01) addresses this issue by deeming the trust to have disposed of the residence immediately before the distribution under subsection 107(2), and to have reacquired the property at a cost equal to its fair market value at that time, thereby allowing the trust to claim the principal residence exemption under paragraph 40(2)(b)….

It may be possible for the trust to obtain an equivalent result pursuant to an election under subsection 107(2.001) in respect of the distribution. In this case, the gain in respect of the property is realized on the distribution, and the principal residence exemption may be claimed by the trust at that time.

Exclusions for capital and income distributions and application of FX gains thereto (p. 306, 308)

[A]lthough these amounts are excluded from the definition of disposition in subsection 248(1), they otherwise affect the tax cost of the beneficiary's interest in the trust or are included in computing income from the trust, and they are therefore taken into account in determining whether there has been a disposition of all or part of the beneficiary's capital interest in the trust for the purposes of subsection 107(2.1). This result occurs because only part of a distribution by a trust may consist of these amounts….

[E]ven if a cash distribution is solely in respect of an amount referred to in paragraphs (h) or (i), the distribution may be denominated in foreign currency, in which case the trust may recognize a foreign currency gain or loss on the distribution. Accordingly, subsection 107(2.1) nevertheless applies in respect of the distribution.

Limited application of s. 107(2.1)(d) to a non-resident trust/potential preferability of sale and distribution (p. 310)

[I]t does not appear that the reference to subsection 75(2) in paragraph 107(2.1)(d) will continue to have application because non-resident trusts are no longer subject to subsection 75(2).

Therefore, in limited circumstances a non-resident trust that makes a capital distribution to a Canadian-resident beneficiary may be subject to tax in Canada by virtue of paragraph 107(2.1)(d). This is the case when the trust is revocable, the settlor (or another contributor to the trust) is a capital beneficiary under the trust, or subsection 107(4.1) otherwise applies as discussed in greater detail below. If subsection 107(4.1) applies, the rollover provision in subsection 107(2) is inapplicable. Under paragraph I67(2.1)(d), the beneficiary is deemed to have disposed of a portion of die capital interest in die trust at the time of the distribution, and generally realizes a capital gain equal to the difference between the fair market value of the property received from the trust on the distribution and the tax cost of the property to the trust immediately before the distribution. The beneficiary generally acquires any capital property so distributed at a cost that is equal to its fair market value. However, this rule should not apply to distributions of cash and property, other than appreciated property, and therefore these assets should continue to be received by the beneficiary on a non-taxable basis. To avoid adverse tax consequences, the trustee may wish to avoid making a distribution in land to Canadian-resident beneficiaries. Rather, it may be more efficient from a tax perspective for the trust to sell the property and distribute the proceeds arising from the sale to the Canadian-resident beneficiaries in the following calendar year. This is not necessary if the trust is not revocable, the settlor or other contributors of property to the trust are not capital beneficiaries, and subsection 107(4.1) is otherwise inapplicable…

Example of operation of s. 107(2.1) (pp. 314-5)

[A] commercial trust distributes non-depreciable capital property (shares) to its beneficiary resident in Canada in satisfaction of the beneficiary's capital interest in the trust. The adjusted cost base of the shares is $40. The adjusted cost base of the beneficiary's I capital interest is $20. The fair market value of the property is $100.

Results:

1. Subsection 107(2.1) applies to the distribution.

2. The trust is deemed by paragraph 107(2.1) (a) to have disposed of the property for proceeds of $100, so there is a capital .gain of $60 on the resulting disposition and a taxable gain of $30.

3. The beneficiary is deemed by paragraph 107(2.1) to have acquired the property at a cost of $100.

4. Because the distribution gives rise to a capital gain at the trust level, die amount of the capital gain ($60) reduces the proceeds of disposition of the beneficiary's capital interest under subparagraph 107(2.1)(c)(ii). The beneficiary is deemed to have disposed of the capital interest for proceeds of $40 ($100 — $60). A1ternatively, in the event that the payment of the gain were considered to be payment of the capital gains of the trust to which paragraph (i) of the definition "disposition" in subsection 248(1) applied, $40 would be determined under j subparagraph 107(2.1)(c)(i) and no amount would be determined under sub paragraph 107(2.1)(c)(ii). Consequently under both of the alternative analyses, the beneficiary's proceeds of disposition of the beneficiary's capital interest in the trust are $40.

5. Consequently, the capital gain from the disposition of the capital interest is $20 ($40 — $20).

6. If the trust is a mutual fund trust, the distribution occurs in a taxation year of the trust before its 2003 taxation year, the trust has elected under subsection 107(2.11) in respect of the year and the trust so elects under paragraph 107(2.1)(e), the beneficiary's proceeds of disposition of its capital interest are deemed to be equal to the fair market value of the property distributed (i.e., the amount determined under paragraph 107(2.1)(a)). Consequently, the capital gain from the disposition of the capital interest is $80 ($100 — $20). In these circumstances, the capital gains refund mechanism in section 132 would apply to offset the capital gains realized on the distribution at the trust level.

Distribution of gain by distribution of related property (p. 312)

[T]he CRA expressed the view that in the absence of any evidence of an intention to the contrary, it is reasonable to conclude that the distribution of property with an accrued gain includes the capital gain that has accrued on such property and to the extent that the capital gain was included in the trust's income for tax purposes, it is payable to the beneficiary. [fn 106: 2003-0000695…See also…2004-0062121E5] This conclusion appears to be correct; when the trust has distributed the property subject to an accrued gain to the beneficiary the gain on the distribution has arguably been paid because the trust no longer has the property to distribute, and the beneficiary to which the distribution was made is the person who should be considered to have received it. This may not be the case, however, when the wording of the trust document does not permit a gain to be allocated to the beneficiary who receives the distribution in kind, or when the trustees expressly determine not to make the income paid or payable to the beneficiary. …

Effect of s. 107(2.11) election (p. 314)

[A]ccordingly, in the absence of an election under subsection 107(2.11), the portion of the trust's income representing the taxable portion of the capital gain that is distributed to the non-resident beneficiary is subject to withholding tax under part XIII as a distribution of trust income.

Broad scope accorded by CRA to s. 107(4.1) (pp. 324-6)

The CRA has consistently taken the position that the application of subsection 107(4.1) is not limited to the property in respect of which subsection 75(2) applied….

This interpretation of subsection 107(4.1) can give rise to extremely harsh results. Consider, for example, the case of a settlor who makes a nominal contribution to a trust on its settlement but retains a power that results in the application of subsection 75(2), or even inadvertently becomes subject to its application by, for instance, becoming the sole trustee of the trust for a brief period on the death of a co-trustee, pending the appointment of a replacement trustee. According to the CRA's interpretation, subsection 107(4.1) potentially applies to deny a rollover under subsection 107 (2) in respect of die distribution of every asset held by the trust, even when the remaining trust property is acquired by the trust with borrowed funds or the property is contributed to the trust by third parties. …

The CRA has long maintained that subsection 107(4.1), which as a precondition to its application, requires that "subsection 75(2) was applicable...at a particular time in respect of any property" of the trust or of a trust that received the property pursuant to a qualifying disposition before that time, does not require that income, gain,, or loss has actually been attributed to the settlor of the trust under subsection 75(2)….[fn 133: …9207365…See also 9714685….] …

[T]he basis for the CRA's position appears to be that the word "applicable in paragraph 107(4.1)(b) is broader than the word "applied,"…

[T]he CRA's interpretation of subsection 107(4.1) effectively reads down the postamble to subsection 75(2).…

Further extension of s. 107(4.1) (p. 330)

[A]mendments…extend subsection 107(4.1) to apply not only if subsection 75(2) was applicable at a particular time in respect of any property of the trust but also if subsection 75(2) "would have been applicable if it were read without reference to the phrase while the person is resident in Canada' and subsection 75(3) were read without reference to paragraph (c.2)." The effect of this amendment is that subsection 107(4.1) may apply to prevent a tax-deferred rollover of trust property under subsection 107(2), even when the contributor has always been a non-resident of Canada and therefore no attribution of income would have resulted under subsection 75 (2).

Effect of ss. 94(8.1) and (8.2)

By deeming the relevant transfers and loans not to be arm's-length transfers (as otherwise defined in subsection 94(1)), they will be considered to be contributions made to the trust by the Canadian resident. To the extent that the Canadian resident is a resident contributor to the trust for the purposes of section 94, the trust is deemed to be resident in Canada pursuant to paragraph 94(3)(a), subject j:o the application of an exemption contained in section 94.

Requirements for valid disclaimer of income interest (pp. 340

A taxpayer who executes a valid disclaimer of an income interest in a trust is generally considered not to have acquired the income interest….In order-to constitute a valid disclaimer for these purposes, the CRA's position is that the refusal must occur within a reasonable time after the recipient becomes aware of the gift or interest and before the recipient accepts any funds or benefits in respect of the gift or interest. However, if die taxpayer accepts any funds from the trust in respect of die income interest or executes a disclaimer in respect of the income interest in favour of another- person, the taxpayer is considered to have acquired the income interest and therefore cannot execute a valid disclaimer. [fn 174: [S6-F2-C1], at paragraphs 1.13 to 1.15. The CRA's position in this regard appears to be inconsistent with judicial authority in Ontario. In Re Coulson, 1977 Can1.II 1060 (ONCA), the Ontario Court of Appeal held that an income beneficiary who had been receiving income from a trust on an annual basis could validly disclaim the income from her interest in the trust in a particular, taxation year, and then continue to receive the income in subsequent taxation years….]

[I]n Murphy Estate…[t]he court noted that a disclaimer is a refusal to accept an interest that has been bequeathed to a disclaiming party. Its effect is to void the gift as if the disclaiming party never received it. The gift becomes part of the estate of the deceased and the disclaiming party has no right to direct who is to receive the gift.

Effect of McKenzie: amount distributed not also proceeds (p. 345)

[McKenzie]…confirms that when property is distributed by a trust to a taxpayer in satisfaction of all or any part of the taxpayer's income interest in the trust, the amount of the proceeds of disposition of the income interest need not be included in computing the beneficiary's income for the year, because the amount distributed to the beneficiary in satisfaction of the income interest could otherwise be subject to double taxation.

Distinction between disposition and termination (p. 349)

The CRA has considered a situation in which an estate of which the deceased's wife was the income beneficiary for life and her sons-were the capital beneficiaries was wound up in accordance with a court order, her income interest was terminated prematurely, and the capital was distributed to the sons. She agreed to relinquish her income interest for consideration provided by the sons—namely, a contractual undertaking to pay her a fixed dollar amount per year for life. [fn 186: ATR-3…cancelled September 30, 2012] The CRA characterized the transaction as the disposition by the wife of her income interest for proceeds equal to the actuarial value of the agreed upon annuity. The proceeds were treated as ordinary income pursuant to subsection 106(2).

This conclusion by the CRA appears to be incorrect because it assumes that paragraph 106(2)(a) can apply to a disposition of an income interest, even though no one acquires the interest and the disposition occurs in connection with the termination of the trust…. [S]ubsection 106(2)…is intended to apply to situations in which an income beneficiary voluntarily transfers an income interest to a third party (the acquiror) for consideration (or deemed consideration in the case of a gift), following which the acquiror becomes eligible to receive the income that would otherwise have been distributed by the trust to the transferor. The provision is premised on the continuation of the income interest, the trust, and the trust capital….

Demarcation between s. 106(2) and 106(3)

[S]ubsection l06(2) … is intended to apply to situations in which an income interest is disposed of to and acquired by a third party, while subsection 106(3) deals with the situation in which an income interest is disposed of to the trust itself and thereby eliminated. As explained in McKenzie, the purpose of subsection 106(2), consistent with the general scheme of tire Act, is to tax economic gains realized by an income beneficiary on the transfer of its trust interest to a third party for consideration. A subsidiary purpose is to tax the gains as ordinary income, and not as capital gains, since the beneficiary is monetizing a future income stream that would otherwise have been taxable as ordinary income in his hands. The apparent purpose of subsection 106(3) is to assimilate the taxation of the transactions to which it applies to a gift of trust property made by the settlor to the beneficiary.

Requirements for valid disclaimer of income interest (p. 340)

A taxpayer who executes a valid disclaimer of an income interest in a trust is generally considered not to have acquired the income interest….In order-to constitute a valid disclaimer for these purposes, the CRA's position is that the refusal must occur within a reasonable time after the recipient becomes aware of the gift or interest and before the recipient accepts any funds or benefits in respect of the gift or interest. However, if die taxpayer accepts any funds from the trust in respect of die income interest or executes a disclaimer in respect of the income interest in favour of another- person, the taxpayer is considered to have acquired the income interest and therefore cannot execute a valid disclaimer. [fn 174: [S6-F2-C1], at paragraphs 1.13 to 1.15. The CRA's position in this regard appears to be inconsistent with judicial authority in Ontario. In Re Coulson, 1977 Can1.II 1060 (ONCA), the Ontario Court of Appeal held that an income beneficiary who had been receiving income from a trust on an annual basis could validly disclaim the income from her interest in the trust in a particular, taxation year, and then continue to receive the income in subsequent taxation years….]

[I]n Murphy Estate [2015 TCC 8]…[t]he court noted that a disclaimer is a refusal to accept an interest that has been bequeathed to a disclaiming party. Its effect is to void the gift as if the disclaiming party never received it. The gift becomes part of the estate of the deceased and the disclaiming party has no right to direct who is to receive the gift.

Words and Phrases
disclaimer

Whether attribution rules apply from a release or surrender (p. 343)

The CRA states m paragraph 1.15 of Income Tax Folio S6-F2-C1 that the attribution rules in subsections 74.1(1) and (2) apply if the taxpayer's spouse or minor children benefit under the terms of the trust as a consequence of the release or surrender of the income interest in the trust by the taxpayer. These rules apply even when the taxpayer does not direct in any manner what person is entitled to benefit in respect of the interest or if the person so designated would be entitled to benefit under the trust in the same manner without the taxpayer's direction. This conclusion appears to be incorrect because neither a release or surrender of the income interest without directing who will benefit therefrom nor the release or surrender of an income interest when a designation or agreement is made in favour of a person who would otherwise benefit under the terms of the trust appears to constitute a "transfer" of property within the meaning of the attribution provisions.

Personal-use property of the trust (p. 358)

[T]he CRA has adopted the administrative position that when property owned by a trust was or would have been personal-use property of an individual, it does not generally seek to assess a benefit under subsection 105(1), provided that the trust is effectively standing in the place of the individual and no benefit or tax advantage would have arisen if the individual had allowed the use of the property. [fn 210: …9707317…1997: "Revenue Canada Round Table…Question 69…]

Interrelationship with 104(13) (pp. 359-360)

The interrelationship of "benefits" under subsection 105(1) and "income payable" under section 10-4(13) is unclear. "Which section is applicable to income that is distributed by a trust-in the year to a beneficiary? In Lyons v. MNR, the Tax Review Board concluded that subsection 105(1) applied when an income beneficiary under a testamentary trust assigned her income interest, so that the amounts received by the assignee of the interest were viewed as benefits to be included in the income of the assignee under subsection 105(1). However, it apparently was not argued that the effect pf the assignment was to make the assignee a beneficiary of the testamentary trust, so that the amounts payable to the assignee should have been, included in the income of the assignee by virtue of subsection 104(13). One possible ramification is the inability of the purchaser of an income interest, as was the situation of the taxpayer in this case, to claim a deduction for the cost of the income interest, except in respect of an amount included in income pursuant to subsection 104(13) or 105(2).

Another possible ramification is that deductions taken by a trust for income tax purposes may be "wasted" when these deductions are not permitted for trust law purposes (for example, when the trust incurs an allowable business investment loss)….

Relief under s. 52(1) (p. 362)

Subsection 52(1) may assist in avoiding a second level of taxation when a benefit arises pursuant to subsection 105(1) by virtue of a sale of property by the trust to a beneficiary at less than fair market value. While paragraph 69(l)(b) generally applies in this circumstance to deem the trust to have disposed of the property for proceeds equal to its fair market value at the time of the disposition; there is no provision in the Act that otherwise increases the cost base to the beneficiary to fair market value on a corresponding basis..

Payment of necessities (p. 363)

[A]mounts that would, as a matter of trust accounting principles, be regarded as on account of the income beneficiaries (such as running expenses and other expenditures of a recurring nature, including property taxes) should be subject to the provision; however, expenditures incurred to preserve of maintain the property for the benefit of the capital beneficiaries, including major renovations and capital improvements, should not fall within the scope of subsection 105(2).

Payment of life tenant’s condo fees (p. 363)

In Blackstien v. The Queen, [fn 229: 1997 CanL11 83 (TCC).] the court concluded that subsection 105(2) did not apply to include an amount in the income of a life tenant in respect of maintenance paid by the estate of her deceased husband on a condominium residence in Toronto because the payment was not made to fulfill an obligation arising "under the terms of the trust arrangement."…