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: clarification of the level of documentation required in order to have 3rd party payments made by a discretionary trust on behalf of a child beneficiary
Position: review of criteria set out in ITTN# 11, noting that it is not reasonable to conclude that a pre-set percentage of the household expenses is for the child's benefit; the facts must support that the child has benefited from such expenditures
Reasons: the determination of what expenditures can reasonably be said to be for the child's benefit is a question of fact
March 30, 2000
Kitchener-Waterloo Tax Services Office HEADQUARTERS
Verification, Enforcement and Compliance A. Humenuk
Research Directorate
Attention: Gary Huenemoeder
992896
Payments Made by a Trust for the Benefit of a Minor Beneficiary
We are writing in response to your memorandum of November 3, 1999, concerning item (c) of "Payments Made by a Trust for the Benefit of a Minor Beneficiary" as set out in Income Tax Technical News No. 11 dated September 30, 1997.
In the case of a payment from a discretionary trust to a parent representing a reimbursement of household expenditures, we agree with your view that the onus of proving that the payment is for the child's benefit has not been met where household expenditures are totalled and divided by the number of family members to approximate the child's share of the expenditures. The Degrace Family Trust case supports this view. Quoting from that case:
The evidence established that Mrs. Degrace spent the monies on ordinary family household expenses. The evidence falls far short of establishing payment in the year to the beneficiary.
Assuming, without deciding, that payment of trust funds to a trustee and expenditure of such funds by the trustee for the benefit of a beneficiary may constitute payment to a beneficiary within the meaning of subsection 104(24) of the Act, the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee and for a purpose which is unequivocally for the benefit of [the] beneficiary.
The evidence here shows nothing more than the use by a person who happened to be a trustee of trust property to pay ordinary expenses of a household in which the trustee and beneficiaries resided. For that reason alone the appeal must fail.
In essence, when it comes to household expenditures, it will be very difficult for the trustee to substantiate that the payments are unequivocally for the child's benefit. The position you propose to take, that an expenditure must be documented and established as being for the benefit of a specific beneficiary, is within the guidelines of the Technical News position and in accordance with the Degrace case.
The above comments with respect to household expenditures would also be applicable to any other type of expenditure by the trustee. In all cases the trustee must substantiate that the expenditures are unequivocally for the child's benefit.
Please note that the 1999 Federal Budget included a proposal to impose an additional tax on certain passive income received by a child. Provided that proposed section 120.4 is enacted in substantially the same form as set out in the draft legislation released by the Department of Finance on September 10, 1999, the additional tax would typically apply to "split income" as defined in subsection 120.4(1) received by a child who has not attained the age of 17 before the beginning of the year. Split income includes income received from a trust which can reasonably be considered to
(A) be in respect of taxable dividends received in respect of shares of the capital stock of a corporation (other than shares of a class listed on a prescribed stock exchange or shares of the capital stock of a mutual fund corporation),
(B) arise because of the application of section 15 in respect of the ownership by any person of shares of the capital stock of a corporation (other than shares of a class listed on a prescribed stock exchange), or
(C) be income derived from the provision of goods or services by a partnership or trust to or in support of a business carried on by
(I) a person who is related to the child at any time in the year,
(II) a corporation of which a person who is related to the child is a specified shareholder at any time in the year, or
(III) a professional corporation of which a person related to the child is a shareholder at any time in the year.
Since the new legislation effectively taxes minors at the highest marginal rates on the amount of their "split income", the tax benefit to be derived from third party payments made by a discretionary trust to a minor will be greatly reduced for taxation years after 1999.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (819) 994-2898. The severed copy will be sent to you for delivery to the client.
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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