CRA indicates that a trust cannot get a deduction for distributing phantom income if the trust deed lacks a phantom income clause

Regarding a trust that receives FAPI from a CFA or a s. 84(1) dividend from a Canadian corporation, and then distributes an equivalent cash amount to its beneficiaries, CRA reiterated the general principle that “[i]f the amount cannot be paid in accordance with the terms of the trust and the relevant trust law, the amount cannot be considered to have become payable for the purposes of subsections 104(6) and (13),” and then stated, more specifically:

[W]here an amount included in the taxable income of a trust is not recognized as income or capital for trust law purposes (referred to as “phantom income”), the terms of the trust must specifically permit an amount equivalent to the phantom income to be paid or payable or, alternatively, provide the trustees with the discretion to pay out or make payable amounts that are defined as income under the Act in order for the phantom income to become payable to any beneficiary.

Accordingly, whether the distribution of the phantom (FAPI or s. 84(1)) income generated a s. 104(6) deduction to the trust turned on whether or not the trust deed contained a clause granting the trustee the power to use other assets of the trust to distribute the deemed income.

Neal Armstrong. Summary of 3 May 2022 CALU Roundtable Q.9, 2022-0928891C6 under s. 104(6).