6 July 2004 External T.I. 2004-0077331E5 - allocation of income of estate to heirs

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.

Principal Issues: Can an estate allocate income to the beneficiaries of the estate where the income is not payable to the beneficiaries?

Position: Assuming that none of the beneficiaries are preferred beneficiaries within the meaning of 108(1), no.

Reasons: A deduction under 104(6) is only available in respect of amounts payable to the beneficiaries, or in respect of an amount of the accumulating income that has been designated by the trustee and the preferred beneficiary in a preferred beneficary election. Other conditions may further restrict the amount of the 104(6) deduction.

XXXXXXXXXX 						2004-007733
							Annemarie Humenuk
July 6, 2004

Dear XXXXXXXXXX:

Re: Rental Income Earned by an Estate

This is in reply to your letter of May 19, 2004, in which you ask for clarification of whether rental income earned by the estate can be allocated to the beneficiaries or heirs of the estate.

You describe the situation in which an individual died in XXXXXXXXXX, leaving farmland to her XXXXXXXXXX children who were also the co-executors of the estate. The terms of the will were ambiguous with respect to the distribution of the land and the matter was referred to the Court. In XXXXXXXXXX, the Court interpreted the provision of the will that was in dispute and the land was then distributed to the XXXXXXXXXX children in accordance with the Court's determination. The income earned on the land from the period XXXXXXXXXX has not yet been paid to the beneficiaries and has been reported on the T3 Trust returns filed on behalf of the estate for the years XXXXXXXXXX. One of the co-executors is questioning whether this is the correct manner in which to report the rental income, based on the comments on page 33 of the T3 Trust Guide, which states that the income of the estate can be allocated to the beneficiaries according to the terms of the will.

The circumstances outlined in your letter relate to a specific fact situation. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. This Information Circular can be obtained from the Canada Revenue Agency ("CRA") website at www.ccra-adrc.gc.ca. As the transactions in question are not proposed transactions, we cannot provide a ruling on the specific situation. However, we are prepared to offer the following general comments which will hopefully clarify our position with respect to the allocation of income to the beneficiaries of an estate.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

The T3 Guide states that income can be allocated to the beneficiaries in accordance with the terms of the will or other document governing the estate or trust. The term "allocate" is further explained in the glossary found at the beginning of the T3 Guide. An amount of income earned by an estate or trust in a particular taxation year can be allocated to a beneficiary if:

• it is paid to the beneficiary in that year;
• the beneficiary is entitled to enforce payment of that income in that year; or
• the estate or trust makes a preferred beneficiary election in respect of a beneficiary.

Subsection 104(6) provides that an estate or trust may, within stated confines, deduct from its income such portion of its income as became payable to beneficiaries in the year such that the estate does not pay the tax on such amounts. Subsection 104(24) states that, for purposes of subsection 104(6), an amount shall be deemed not to have become payable to a beneficiary 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. As the rental income described in your scenario was not actually paid to the beneficiaries in the year in which it was earned, the amount would only be deductible in computing the trust's income if the beneficiaries were entitled to enforce the payment of such income in the year in which it was earned. As the distribution of the estate was before the Court during the period in question, it seems clear that the beneficiaries were not entitled to enforce payment of the rental income in any of the relevant years.

Subsection 104(14) permits a trust and a preferred beneficiary, as that term is defined in subsection 108(1), to make an election in respect of the accumulating income of the trust. Generally speaking, the accumulating income is the income that is not otherwise payable to any of the beneficiaries in the year. Since 1996, one of the conditions that must be met in order to be a preferred beneficiary is that the beneficiary must be an individual who is entitled to claim a disability amount under section 118.3 for the year (or who would have been entitled to make such a claim if no claim for medical expenses had been made for nursing home care or for care by an attendant, or who is 18 years or older and for whom another individual would have been able to claim a disability amount under the same conditions). See IT-394R2, Preferred Beneficiary Election, for further details concerning this election. Assuming that none of the heirs qualify as a preferred beneficiary, it would appear that none of the rental income earned prior to the Court's determination would be eligible to be allocated to the beneficiaries of the estate.

Please note that paragraph 6 of IT-286R2 only applies to the executor's year. That is to say, where the only reason that an amount of income is not payable to the beneficiaries is that it was earned in the initial 12 months of the estate, the income can be considered payable to the beneficiaries provided that all beneficiaries agree to such treatment. This would not apply to the situation where the amount was not payable to the beneficiaries because the interpretation of the will was before the Court.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5, Advance Income Tax Ruling.

We trust our comments have clarified our position in this matter.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch