25 June 2003 Internal T.I. 2003-0021817 - DEDUCTIBILITY OF LUMP-SUM PAID IN YEAR

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 the trustee fees (the "Fee") paid by an Estate in a taxation year for services performed over a XXXXXXXXXX year period ending in the year are deductible under paragraph 20(1)(bb) of the Act?

Position:

Any portion of the Fee (other than a commission) that is attributable to the administration or management of shares or securities of the Estate would be deductible in the taxation year in which the Fee is paid under paragraph 20(1)(bb) of the Act.

Reasons:

There is no time limit in paragraph 20(1)(bb).

Paragraph 20(1)(bb) requires that the amount be paid in the year for services in respect of the administration or management of shares or securities of the taxpayer provided that the service provider's principle business includes the provision of the said services. Section 20(1) imposes an additional test to the effect that the Fee incurred must be wholly applicable to services in respect of the administration or management of shares or securities of the taxpayer and not be only consequential to the taxpayer. That is, there must be a clear connection between the amount sought to be deducted and the administration or management of shares or securities services provided to the taxpayer. There is no time limit in either paragraph 20(1)(bb) or section 20(1) of the Act.

										June 25, 2003

	TORONTO NORTH TSO					HEADQUARTERS
	Workload Development 442-2-3				Income Tax Rulings
					 					   Directorate
	Attention:  Stan Chew, Team Leader				Philip Diguer CGA
(613) 957-8953

										2003-002181

Paragraph 20(1)(bb) of the Income Tax Act (Canada) (the "Act")

This is in response to your memorandum dated May 30, 2003, in which you request our views regarding the application of paragraph 20(1)(bb) of the Act to trustee fees paid in a taxation year for services performed over a XXXXXXXXXX year period ending in the year the fees are paid.

In particular you describe a situation where a trustee has been paid a lump-sum fee (the "Fee") in XXXXXXXXXX in the aggregate amount of $XXXXXXXXXX. The fee was levied for work performed in regards to a testamentary trust (the "Estate") by a trustee (who deals at arm's length with the trust and the beneficiaries) over the past XXXXXXXXXX years and is comprised of the following:

Description
Period covered
Amount

Care and Management Fee
XXXXXXXXXX
$XXXXXXXXXX
Care and Management Fee- capital
XXXXXXXXXX
$XXXXXXXXXX
Income fee GST
XXXXXXXXXX
$XXXXXXXXXX
Miscellaneous
XXXXXXXXXX
$XXXXXXXXXX
Total (Fee)

$XXXXXXXXXX

You ask

In your view, there is sufficient ambiguity in the relevant provisions of the Act such that it is not evident whether the Fee is deductible in the taxation year in which it is paid pursuant to paragraph 20(1)(bb) of the Act.

Is the Fee deductible under paragraph 20(1)(bb) of the Act?

Our comment

We have not been provided with a breakdown of the assets of the Estate (i.e. are there assets other than shares and securities?). Additionally, we have not been provided with a detailed breakdown by year of the type, nature or method of computing the fees in question (i.e. is there a portion established as a percentage of the assets and another as a percentage of the income).

Moreover, we have not been provided with a copy of the contract or other relevant documents which set out the rights and obligations of both the Estate and the trustee with respect to the care and management of the Estate by the trustee. Accordingly, we are unable to determine the basis for the fees and the eligibility of the fees for deduction under paragraph 20(1)(bb). Moreover, without this essential information we are unable to consider the reasonableness of the amount of the Fee. Nevertheless, we offer the following comments which we hope will be of assistance.

The law

In order that a care and management fee levied by a trustee for administration and management services provided to a testamentary trust be deductible under paragraph 20(1)(bb) of the Act it must satisfy a number of conditions including the following:

The fee must be:

20(1)(bb)... an amount other than a commission paid by the taxpayer in the year to a person...

...

(ii) for services in respect of the administration or management of shares or securities of the taxpayer...

... if that person's principal business includes

...

(iv) the provision of services in respect of the administration or management of shares or securities.

(our emphasis added)

It is significant that the preamble to paragraph 20(1)(bb) refers to "... an amount other than a commission paid by the taxpayer in the year". Absent a reference to an amount "payable" this deduction applies exclusively to the taxation year in which the payment is actually made. However, it does not impose any limitation as to the time period in which the services were provided and for which the amount is paid.

In addition to the above test, the care and management fee levied by a trustee must meet the additional test imposed by the preamble to subsection 20(1) of the Act which provides that:

..there may be deducted such of the following amounts as are wholly applicable to that source or such part of the following amounts as may reasonably be regarded as applicable thereto

The wording of this portion of subsection 20(1) suggests that there must be a clear connection between the amount sought to be deducted and the source of the borrowing. As such, the care and management fee levied by a trustee must be wholly applicable to services in respect of the administration or management of shares or securities of the testamentary trust and not be only consequential to the testamentary trust. That is, there must be a clear connection between the amount for which the deduction is sought and the administration or management of shares or securities services provided to the testamentary trust.

Jurisprudence

There is no jurisprudence with respect to 20(1)(bb) on point with the case at hand. However, the Courts have considered the issue of the deductibility of amounts paid by a taxpayer in a taxation year where the amounts were in respect of services received by the taxpayer in earlier taxation years.

In Premium Iron Ores Limited v. MNR 66 DTC 5280 (SCC) the taxpayer paid legal expenses in the years 1951 and 1952 for legal services obtained in the preparation for the appeal of a possible unfavorable tax assessment relating to earnings of the appellant during the years 1943 to 1950 inclusively, and thus was considered an expense to protect profits earned in years prior to the years in which the disbursements were made as well as the income of those and subsequent years. The Minister disallowed the deduction. The Supreme Court found that the expense was deductible. The issue centered on paragraph 12(1)(a) [now 18(1)(a)]. In this regard Mr. Justice Hall states at page 5292 as follows.

To limit the expenditure, if it is to qualify as a deductible, to the income of the particular year in which it was made requires writing into s. 12(1)(a) of the Income Tax Act words which Parliament did not put there. The only qualification which Parliament imposed was that the outlay or expense be "made or incurred by the taxpayer for the purpose of gaining or producing income from the property or business of the taxpayer". No limitation as to time can be found in the section in question.

(our emphasis added)

See also The Reader's Digest Association (Canada) Ltd. v. MNR 66 DTC 5416 (Exch Ct) and Gladys Evans v. Minister of National Revenue 60 DTC 1047 (SCC).

It should be noted that the reference to "computing the income of a taxpayer from a business or property" as it appears in subsection 18(1) is similar to the words in subsection 20(1) "in computing a taxpayer's income for a taxation year from a business or property. Moreover, similar to subsection 18(1) and paragraph 18(1)(a), there is no limitation as to time that can be found in either subsection 20(1) or paragraph 20(1)(bb) of the Act.

In Lily Cups Limited v. MNR 77 DTC 149 (TRB) the Court considered whether amounts paid by Lily Cups Limited to its parent company were deductible in 1968 although the amounts were all related to services received by Lily Cups Limited from its parent company in 1965 and 1966. Relying in part on the Premium Iron Ores Limited decision Justice Cardin wrote [at pages 149 and 150] as follows.

A considerable amount of rather loose discussion took place at the hearing on the accounting principle of matching income and expenses, and as to whether or not the accepted accounting practices are binding on the courts.

As I see it, the Board need not make a finding on those two points in the circumstances of this appeal, because the principal issue is whether the amounts claimed as deductible by the appellant were incurred for the purpose of gaining or producing income, and, in my opinion, the conditions of paragraph 12(1)(a) of the Income Tax Act have been met. On the basis of Mr. Justice Hall's decision in the Premium Iron Ores Limited case, there being no limit as to time in paragraph 12(1)(a), it is, in my opinion, immaterial for the purposes of taxation how the appellant in this appeal chose to record the transactions in his books.

(our emphasis added)

Justice Cardin concluded that the amounts claimed:

(i) related to services received in 1965 and 1966;

(ii) were business expenses incurred for the purpose of gaining or producing income;

(iii) were expenses that were paid in 1968 and were deductible from the appellant's income in that year; and

(iv) that the deduction of these amounts does not unduly or artificially reduce the appellant's income within the meaning of subsection 137(1) of the Act.

CCRA's published position

IT-238R2 sets out CCRA's interpretative position with respect to fees paid, inter alia, for the administration or management of a trust. In this regard paragraphs 2, 3 and 5 of IT-238R2 states the following:

2. Provided that the amounts are reasonable, the total fees paid [for advice on buying or selling a specific share or security by the taxpayer or for the administration or the management of the shares or securities of the taxpayer] will be deductible even though, in the case of a trust administering shares or securities, part or all of the fees may have been charged to the capital account of the trust. ... In determining whether a fee is reasonable, the amount of time spent and the type of work done by the person providing the advice or service will be taken into consideration.

3. Fees paid for other types of advice such as general financial counselling or planning are not within the provisions of paragraph 20(1)(bb) even though the principal business of the advisor or counsellor otherwise qualifies. ...

5. The deduction by virtue of paragraph 20(1)(bb) applies only to fees paid on account of capital. Fees chargeable against income are allowable as a deduction under subsection 9(1) where they meet the usual criteria necessary for deduction in the computation of income from business or property, viz "made or incurred for the purpose of gaining or producing income from the business or property."

(our emphasis added)

On the basis of the above, it is our view that there is no time limit in paragraph 20(1)(bb) such that any portion of the Fee (other than a commission) that is attributable to the administration or management of shares or securities of the Estate (which amount can only be determined following a careful examination of all the relevant documents and a review of the pertinent facts) would be deductible under paragraph 20(1)(bb).

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. 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 electronic library version, or they may request a severed copy using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

We hope our comments will be of assistance to you. If you have any questions concerning this matter please feel free to contact us.

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch