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: Issues relating to the definition of "income" under subsection 108(3) of the Income Tax Act.
Position: General comments regarding the definition of "income" under subsection 108(3) of the Income Tax Act and under sections 909 and 910 of the Civil Code of Quebec.
Reasons: Subsection 108(3) of the Income Tax Act and sections 908 to 910 of the Civil Code of Quebec.
April 26, 2001
Re: Technical Interpretation Request
Income or Capital Nature of Dividend
This is in reply to your fax of March 2, 2001 regarding the above-noted subject. More specifically, you have requested our opinion as to the nature of certain payments received by a spousal trust for the purposes of the definition of "income" under subsection 108(3) of the Income Tax Act (the "Act"). You requested that such determination be made in connection with the following facts:
a) Mr X is the sole shareholder of a Canadian operating company ("Opco");
b) Mr. X dies and under his will he bequeaths all of his assets to a spousal trust (the "Trust") that provides for his wife, Mrs. X, to receive all income of the Trust during her lifetime with no one other than Mrs. X to receive income or capital of the Trust while she is alive;
c) Mr. X's children are capital beneficiaries under the will and are to receive the assets of the Trust upon Mrs. X's death;
d) At the time of Mr. X's death, Opco has retained earnings of $150,000.00;
e) Since Mr. X's death, the retained earnings of Opco have increased by $350,000.00;
f) No dividends have been declared or paid to the sole shareholder of Opco since the death of Mr. X;
g) Mr. X, Mrs. X, the children of Mr. X, Opco and the trustees of the Trust are all residents of Quebec and are subject to Quebec's civil law.
In light of these facts, you require our comments as to whether the following payments to the Trust would constitute income within the meaning of subsection 108(3) of the Act:
1. A cash dividend paid by Opco out of its retained earnings;
2. Redemption proceeds for shares of Opco received by the Trust as a stock dividend;
3. A deemed dividend in respect of which Opco elected under subsection 83(2) of the Act.
You also inquire as to whether the trustees of a trust would be able to exercise discretion as to the nature of a payment received by the trust where the trust deed provides for such discretion.
The particular circumstances in your letter on which you have asked for our views appear to refer to a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments which may be of assistance to you.
Question 1. - Cash dividend
Subsection 108(3) of the Act provides that for the purposes of the definition of "income interest" in subsection 108(1), the income of a trust is its income computed without reference to the provisions of the Act. However, for the purposes of determining whether a trust qualifies as a spousal trust under subsection 70(6), subsection 108(3) provides that the term "income" means the income of the trust computed without reference to the Act, minus certain dividends, including any dividends on which the paying corporation has elected under section 83.
Therefore, for the purposes of subsection 108(3) of the Act, the income of a trust subject to the civil law of the Province of Quebec must be determined in accordance with the Civil Code of Quebec (the "CCQ"). In this regard, the third paragraph of section 910 of the CCQ provides that "Revenues comprise sums of money yielded by property, such as... dividends, except those representing the distribution of capital of a legal person;". Hence, cash dividends paid to a trust by a corporation out of its retained earnings would constitute revenues to the trust within the meaning of subsection 108(3) of the Act. Support for this proposition can be found in the decision of Munro c. Common, C.S. Mtl., no 500-05-005322-894, July 14, 1992.
Where the trust to which such dividends are paid is a spousal trust under subsection 70(6)(b) of the Act, these dividends would have to be distributed to the spouse of the taxpayer under which the trust was created. However, if the spouse beneficiary can legally enforce payment of all income of the trust but indicates in writing to the trustee(s) of the trust a desire not to receive some or all of such income, the fact that some income is retained by the trust and added to the capital of the trust will not, by itself, disqualify the trust as a spousal trust.
Question 2. - Proceeds from the redemption of shares
Section 909 of the CCQ provides that the shares of the capital stock of a corporation are capital. Pursuant to this section, "the price for any disposal of capital" is also considered as capital. Accordingly, where the shares of a corporation held by a trust are redeemed, the proceeds resulting from such redemption will be considered as capital, and therefore will not form part of the trust's income within the meaning of subsection 108(3).
Question 3. - Subsection 83(2) dividend
As earlier mentioned, subsection 108(3) of the Act provides, for the purposes of determining whether a trust qualifies as a spousal trust under subsection 70(6), that the term "income" means the income of the trust computed without reference to the Act, minus certain dividends, including any dividends on which the paying corporation has elected under section 83. As a result, a trust will not be disqualified as a spousal trust by reason only of the fact that distributions of dividends subject to a section 83 election are not payable to the spouse beneficiary (Interpretation Bulletin IT-305R4, paragraph 13).
However, it should be noted that for the purposes of the definition of "income interest" in subsection 108(1), subsection 108(3) does not provide that dividends subject to a section 83 election are excluded. Therefore, a beneficiary who is entitled to receive such distributions has an income interest rather than a capital interest in the trust.
Question 4. - Trustee's power to distinguish income and capital items
The Canada Customs and Revenue Agency's (the "CCRA") view is that a discretionary power granted to the trustee of a trust to distinguish income and capital items cannot change the nature of an amount of income or deductible expense into a capital receipt or expenditure and vice versa. The CCRA does not accept that a trustee can, at his discretion, determine what is income and what is capital. The decisions rendered in Succession Terrill v. M.R.N., 87 DTC 492 (T.C.C.), and Munro c. Common, supra, support such a conclusion.
The above comments are an expression of opinion only and are not binding on the CCRA, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.
Alain Godin, Manager
International and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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