19 November 2001 External T.I. 2001-0106995 - Meaning of "income" under 108(3)

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether it is possible for a trust, which provides that the amount which is payable to the income beneficiary in any year during the beneficiary's lifetime is defined as a percentage of the total value of the trust property at the commencement of that year, to qualify as a spousal trust, an alter ego trust or a joint spousal or common-law partner trust.

Position: No.

Reasons: In order for a trust created by a taxpayer to qualify as a spousal trust, an alter ego trust or a joint spousal or common-law partner trust, the taxpayer's spouse or common-law partner in the case of a spousal trust, the taxpayer in the case of an alter ego trust, and the taxpayer in combination with the taxpayer's spouse or common-law partner in the case of a joint spousal or common-law partner trust, must be entitled to receive all of the income of the trust. For the purposes of this requirement, the income of a trust, as provided under subsection 108(3) of the Income Tax Act, is the income of the trust computed for trust accounting purposes minus certain specified dividends.

XXXXXXXXXX 							2001-010699
								Éric Allard-Pouliot
November 19, 2001

Dear XXXXXXXXXX:

Re: Technical Interpretation Request : Meaning of "income" Under Subsection 108(3)

This is in reply to your letter of October 25, 2000, in which you requested our opinion regarding the above-noted subject. More particularly, you requested our opinion as to whether it is possible for a trust, which provides that the amount which is payable to an income beneficiary in any year during the beneficiary's lifetime is defined as a percentage of the total value of the trust property at the commencement of that year, to qualify as a spousal trust, an alter ego trust or a joint spousal or common-law partner trust. You mention in your request that such trusts are known as "unitrusts" or "percentage trusts".

Pursuant to subsection 248(1) and subparagraphs 104(4)(a)(iii) and (iv) of the Income Tax Act (the "Act"), in order for a trust created by a taxpayer to qualify as a spousal trust, an alter ego trust or a joint spousal or common-law partner trust, the taxpayer's spouse or common-law partner in the case of a spousal trust, the taxpayer in the case of an alter ego trust, and the taxpayer in combination with the taxpayer's spouse or common-law partner in the case of a joint spousal or common-law partner trust, must be entitled to receive all of the income of the trust that arose before their death. For the purposes of this requirement, the income of a trust, as provided under subsection 108(3) of the Act, is its income computed without reference to the provisions of the Act, minus certain specified dividends.

The Canada Customs and Revenue Agency's (the "CCRA") position with respect to subsection 108(3) of the Act is stated in Interpretation Bulletins IT-305R4 and IT-385R2. Paragraph 1 of IT-385R2 provides that "Income of a personal trust [...] means income computed for trust accounting purposes and not for income tax purposes...", whereas in paragraph 13 of IT-305R4 it is stated that "...subsection 108(3) provides that the income of the trust is its income calculated under trust rules (rather than in accordance with the Act)...".

This position is in accordance with the 1992 Technical Notes under subsection 108(3) of the Act which provide that "income", as defined in subsection 108(3) for the purposes of paragraph 104(4)(a), "...is considered to be trust accounting income minus specified dividends."

In light of the foregoing, a trust under which the income beneficiary's entitlement to the income of the trust would be limited to a certain percentage of the value of the trust property could not qualify as a spousal trust, an alter ego trust or a joint spousal or common-law partner trust since the income beneficiary would not be entitled, as required under paragraph 104(4)(a) of the Act, to receive all of the "income" of the trust within the meaning of subsection 108(3) of the Act.

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.

Yours truly,

Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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