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: 1. When is an amount considered payable by a mutual fund trust (and therefore income to its beneficiaries)?
2. When is a deduction available to an EBP for amounts payable to its beneficiaries?
3. When is an income distribution by an EBP taxable to its beneficiaries?
Position: 1. At the time that the amount is paid to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount.
2. Only when actually paid.
3. Only when actually received.
Reasons: 1. Subsection 104(24). 2. Paragraph 104(6)(a.1). 3. Paragraph 6(1)(g).
XXXXXXXXXX 2000-006082
G. Kauppinen
March 6, 2001
Dear XXXXXXXXXX:
Re: Employee Benefit Plan ("EBP")
This is in reply to your facsimile transmission dated December 8, 2000 regarding the reporting of year-end distributions of income earned in an EBP.
Specifically, you advise that, as the trustee of various EBPs, you do not receive the details of income distributions from units of mutual fund trusts held by an EBP until January of the following year although the distribution is declared by the mutual fund trusts as at December 31 of a given year. Once you find out the details of the income earned, you pay the income to the beneficiaries of the EBP (i.e., in January) but issue T4s to the beneficiaries reporting the income as if it was received in December of the prior year. You remit the withholding tax on these payments to the beneficiaries in January and you are assessed late remittance penalties.
You have asked if there is some way to solve this problem.
We have assumed in the following commentary that the EBPs are trusts for purposes of the Income Tax Act ("Act").
Pursuant to subsection 104(24) of the Act, an amount shall be deemed not to have become payable to a beneficiary of a trust in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount.
While most mutual fund trusts calculate the amount of income for a year to be distributed to their unitholders after the year-end, the trust indentures of these trusts typically provide that those amounts are due and payable at the end of the year and that the unitholders have the legal right to enforce payment of those amounts as at the year-end. The Canada Customs and Revenue Agency generally considers such provisions to result in the income distributions of the mutual fund trusts to fall within the ambit of subsection 104(24) of the Act. Therefore, in your case, the EBP will be taxable on the income from the mutual fund trust as of December 31 of a given year and not the next calendar year in which the income is actually received (say, in January).
Even though the EBP will be taxable on the mutual fund trust income as of December 31, it will not get a deduction for income distributed to its beneficiaries until it is actually paid to those beneficiaries pursuant to paragraph 104(6)(a.1) of the Act. Consequently, in your example, the deduction for mutual fund trust income distributed by an EBP will only be available to the EBP for the year after that income is taxable to the EBP and the "matching" is lost.
This result clearly follows from the wording of paragraph 104(6)(a.1) of the Act. If you feel that the result is inappropriate, you should bring it to the attention of the Department of Finance, which is responsible for amendments to the law.
Pursuant to paragraph 6(1)(g) of the Act, beneficiaries of an EBP are taxable on amounts received from an EBP in the year that those amounts are received. Accordingly, in your example, the T4s should be issued for the "January" calendar year. If the withholding tax is remitted within the required time after the income distributions are made to the beneficiaries of the EBP, there will be no penalties for late remittances.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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