19 March 2002 External T.I. 2001-0112945 - Distribution from a Trust

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 fully discretionary trust to pay income from one source to one beneficiary and to pay income from another source to another beneficiary.

Position: Yes.

Reasons: Where a trust is fully discretionary, the trustee can choose the amount, type and source of income that it wishes to distribute to the beneficiaries. Where the taxable dividends received from a corporation are distributed by the trust to a beneficiary, subsection 104(19) enables the trustee to designate that the distributed taxable dividends are deemed to have been received by the beneficiary from the corporation.

XXXXXXXXXX J.D. Brooks
2001-011294
April 4, 2002

Dear XXXXXXXXXX:

This is in reply to your letter of November 23, 2001, in which you queried whether it is possible to trace income that is received by a beneficiary of a trust to a specific source in the hands of the trust.

You presented two hypothetical examples which we have generalized as follows. In the first example, a fully discretionary inter-vivos trust holds several properties for the benefit of two individuals, one of whom has not attained the age of 17 years. On shares of a public corporation (a "Pubco") as defined in subsection 89(1) of Income Tax Act, the trust receives $3000 in taxable dividends, and on shares of a Canadian-controlled private corporation (a "CCPC") as defined in subsection 125(7), it receives $5000 in taxable dividends. It is intended to distribute all of the trust's income to the two beneficiaries. You noted that if the dividends earned on the CCPC shares were paid to the minor beneficiary, a tax on split income as defined in section 120.4 would be exigible. Accordingly, you queried whether it would be possible to pay those dividends to the adult beneficiary, and to pay to the minor beneficiary the dividends received by the trust on its Pubco shares.

In the second example, a fully discretionary inter-vivos trust holds properties for the benefit of an individual and a corporation ("Holdco"). The trust receives dividends on its shares of a CCPC and on its shares of a Pubco. Holdco directly owns sufficient

shares of the CCPC that the CCPC, as a payor of dividends to Holdco, is connected with Holdco within the meaning of subsection 186(4). You queried whether it would be possible to pay to Holdco the dividends that the trust received from the CCPC and thus not be subject to Part IV tax.

Our Comments

The situation set out in your letter appears to relate to an actual situation. Confirmation of the tax implications of proposed transactions is given only in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.

With respect to your first example, we note that where a trust is resident in Canada throughout a taxation year and, in that year, receives a taxable dividend from a taxable Canadian corporation, subsection 104(19) enables the trust to make designations with respect to a distribution of the dividend to the trust's beneficiaries with the result that the beneficiaries will be deemed to have received the dividend from the corporation. In order for a designation to be made in respect of a dividend or a portion of a dividend received by a trust, it must be reasonable to consider that it was included in the amount that was paid or payable to a particular beneficiary and included in the beneficiary's income (e.g., pursuant to subsection 104(13)). In making this determination, one needs to consider all of the circumstances including the terms and conditions of the trust arrangement. In the scenario described above, since the trustee has full discretion with respect to distributions of income and capital, the trustee can choose to exercise his or her discretion to make the $3000 of taxable dividends received from Pubco payable to the minor beneficiary and distribute those dividends to the minor beneficiary. Accordingly, provided that the trustee makes the appropriate designations under subsection 104(19), the taxable dividends paid to the minor beneficiary would not be subject to tax under section 120.4.

With respect to your second example, we note that subsection 104(19) applies to the designated beneficiary for purposes of the Act other than Part XIII. Thus, subject to the comments we made above concerning the first example, it is possible for purposes of section 186 to designate under subsection 104(19) that the taxable dividends received by the trust from the CCPC and distributed to Holdco be deemed to be received directly by Holdco from the CCPC, and the taxable dividends received by the trust from the Pubco and distributed to the individual be deemed to be received directly by the individual from the Pubco. Accordingly, Part IV tax would not be payable under paragraph 186(1)(a), though it may be payable under paragraph 186(1)(b).

The comments above represent an expression of opinion which, as indicated in paragraph 22 of Information Circular 70-6R4, is not an advance income tax ruling and, accordingly, is not binding on the Canada Customs and Revenue Agency. The comments in this letter pertain only to the provisions mentioned and do not take into consideration the possible application of subsection 245(2) of the Act in any particular fact situation.

Yours truly,

T. Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate

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