CRA indicates that a deemed dividend realized by trust is deductible only if made irrevocably payable by the trustees in the year pursuant to trust deed terms

Following the death of the spouse respecting a spousal trust, the trust’s sole asset (a private company) is wound-up, thereby giving rise to a deemed dividend under s. 84(2). Can this dividend be made payable to the residuary beneficiaries of the trust (the surviving children) given that the trust deed does not contain an extended definition of income, but also given that the children’s interests in the trust at that point are vested indefeasibly? CRA stated:

[I]f the terms of the trust indenture are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend for the purposes of subsection 84(2), we will generally allow a deduction by virtue of paragraph 104(6)(b) in respect of that deemed income. However, this deduction will be permitted to the extent that the trustee exercises this power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in satisfaction of the beneficiary’s interest in the capital of the trust.

One of the debatable points in the above is that if all the property has vested indefeasibly equally in the two beneficiaries, then presumably the trustees on that basis (and irrespective of the trust indenture definition of income) could pay the deemed dividend to the beneficiaries.

Neal Armstrong. Summary of 5 October APFF Roundtable, Q.2 under s. 104(24).