23 May 2006 External T.I. 2004-0107751E5 - Income recognition -income Trust Beneficiary

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: 1. Timing of Income Recognition by Income Trust beneficiary

Position: 1. Depends on facts but guided by previous positions taken by the Agency

Reasons: 2. see IT133 & IT342R

XXXXXXXXXX 							2004-010775
 								Lena Holloway, CA
May 23, 2006

Dear Sir:

Re: Technical Interpretation Request: Income Trusts

This letter is in reply to your fax of December 10, 2004, regarding the above-noted subject. Your enquiries concern income payable from an income trust. Specifically, your questions relate to the entitlement of a unitholder to distributions and the timing of income and capital inclusions. 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").

You had asked at what point is revenue recognized for reporting on the unitholder's income tax return and requested that we quote specific sections of the Act that support the relevant revenue recognition date. Your letter described several dates that would be relevant to a unitholder such as the Declaration Date, the Ex-Distribution Date, the Record Date and the Payment Date. You had asked which dates were relevant for purposes of the Act where a person sells their entire income trust holding after the Ex-Distribution Date, for settlement after the Record Date but prior to the Payment Date. Your letter presented the following example for our consideration:

Income Trust ABC distributes $1.00 per unit held ($.60 per unit is Other Income and $.40 is Return of Capital). Declaration Date- December 1, 2004, Ex-Distribution Date- December 22, 2004, Record Date December 29, 2004 and Payment Date January 14, 2005. If a holder of 1,000 units sells their position on December 23, 2004 for settlement December 30, 2004; how would the taxpayer record the income and return of capital?

Our Comments

When must income paid by an income trust be included in computing the beneficiary/unitholder's income for income tax purposes? Subsection 104(13), together with subsections 104(13.1), 104(13.2), 104(14) and 104(21) govern the amounts which are to be included in the income of beneficiaries of a trust. Generally, the beneficiary's income inclusion is that part of the trust's income, calculated prior to any deductions under subsection 104(6) or subsection 104(12), that became payable to the beneficiary in the trust's taxation year that ended in the beneficiary's taxation year. While subsection 104(24) provides a rule to deem an amount that is otherwise payable to be not payable for certain provisions of the Act, our administrative practice has been to accept that an amount has become payable in a taxation year to a beneficiary if, in the circumstances, it has been paid in the taxation year to the beneficiary or the beneficiary is entitled in the taxation year to enforce payment.

Each of subparagraph 53(2)(h)(i.1) and subsections 104(6), 104(7), 104(13), and 104(20) of the Act requires a determination of when an amount has became payable. Subparagraph 53(2)(h)(i.1) refers to amounts that have become payable before the time at which the beneficiary is computing the adjusted cost base to it of its capital interest in the trust. (Subparagraph 53(2)(h)(i.1) provides that all distributions by a trust to a beneficiary will reduce the adjusted cost base of the beneficiary's capital interest, unless the amount is proceeds of disposition of the interest or is included in the beneficiary's income). Subsections 104(6), 104(7), 104(13), and 104(20) refer to amounts that have become payable to a beneficiary of a trust in a taxation year of the trust.

As noted above, the Agency's position is that, for purposes of the identified provisions, an amount has become payable to a beneficiary if, in the circumstances, it has been paid to the beneficiary or the beneficiary is entitled to enforce its payment. Accordingly, in circumstances where an amount is at a given time paid to the beneficiary, or - for example because of an action taken by the trustee as outlined in the trust agreement- the beneficiary becomes, at an identifiable time, entitled to enforce its payment, we would generally take the position that, for purposes of the identified provisions, the time at which an amount becomes payable to a beneficiary is the earlier of the time of payment and the time at which the beneficiary became entitled to enforce payment.

While the determination of whether a unitholder is entitled to enforce payment of an amount is a question of fact, generally a trust agreement will provide that the trustee will determine a record date for the allocation of net income and net realized capital gains to the unitholders of the Fund. Frequently the record date selected will not be later than the last day of the calendar year in which the taxation year of the Fund ends. The net income and net realized capital gains of a Fund are allocated pro rata to unitholders on the record date. The pro rata allocation is based upon the number of units the unitholder owns on the record date relative to the number of units issued and outstanding.

Often the agreement will continue to provide that the unitholder shall have a legal right on the record date to enforce payment of any amount of net income or net realized capital gains which is allocated to the unitholder. In such a case it is the record date that would determine the entitlement to income regardless of the fact that the declaration date may precede this date and the payment date will follow this date.

The four critical dates mentioned in your example are briefly described as follows:

i) Declaration Date - This is the date on which the Trustees declare a distribution to be payable and announce to the unitholders and the market that the Trust will make a distribution

ii) Ex-date or Ex-dividend date (Ex-distribution date in the case of mutual fund )- On or after this date the security trades without its dividend or income distribution. For example if you buy a dividend paying security one day before the ex-dividend date you will get the dividend, but if you buy the security on the ex-dividend date, you won't get the dividend. Conversely, if you want to sell a stock and still receive a dividend that has been declared you need to sell on (or after) the ex-dividend day. The ex-date is the second business day after the day of record.

iii) Date of record - This is the date on which the company (mutual fund trust) looks at its records to see who the shareholders (unitholders) of the company (trust) are. An investor must be listed as a holder of record to ensure the right to a dividend payout (an income distribution).

iv) Date of payment (payable date) - This is the date the company (mutual fund trust) mails out the dividend (distribution) to the holder of record. This date is generally a week or more after the date of record so that the company (trust) has time to pay all those who are entitled.

Your example questioned which dates were relevant for purposes of the Act where a person sells their entire income trust holding after the Ex-Distribution Date, for settlement after the Record Date but prior to the Payment Date. Paragraph 2 of IT-133 entitled Stock Exchange Transactions Date of Disposition of Shares provides the following guidance with respect to the date of disposition where shares are concerned:

For the usual transactions on a Stock Exchange there is a disposition and acquisition of shares traded on a Stock Exchange, by the vendor and purchaser, respectively, on the settlement date which is the time designated by the Stock Exchange, usually two or three days subsequent to the trade date, on or before which the vendor is required to deliver the share certificates and the purchaser is required to make payment therefore.

The same conclusion can be made with respect to mutual fund or income trust units, that is, the settlement date will generally be the date of disposition for tax purposes. In your example we shall assume that the trust agreement provides (as most do) that the unitholder has a legal right on the record date to enforce payment of any amount of net income or net realized capital gains which is allocated to the unitholder. Therefore, as the unitholder is a unitholder of record on December 29, 2004 and the settlement date or date of disposition is December 30, 2004, the unitholder in your example would be entitled to the distribution of both income and capital declared on December 1, 2004.

The T3 slip will report both the taxable and non-taxable income components of distributions. The tax deferred, or return of capital component of distributions reduces the unitholder's adjusted cost base ("acb") of trust units and again the date of record date is the relevant date for acb adjustments. As stated above the settlement date will generally be the date of disposition for tax purposes and in your example as the unitholder is a unitholder of record on December 29, 2004 and the settlement date or date of disposition is December 30, 2004, the unitholder in your example would be entitled to the distribution of both income and capital declared on December 1, 2004. As adjustments to the cost base of a unit are done under paragraph 53(2)(h) where a unit is held as capital property of the unitholder (i.e. on the date of record) amounts payable would require an adjustment to the adjusted cost base of the unit despite the fact that the return of capital is actually received after the date of disposition.

As for the timing of the income inclusion paragraph 104(13)(a) requires the beneficiary to include an income amount (as defined above) in computing the beneficiary's income for a particular taxation year of the beneficiary only if the income amount became payable in a taxation year of the trust that ends in that particular taxation year of the beneficiary. Paragraph 6 of Interpretation Bulletin IT-342R "Trusts - Income Payable to Beneficiaries" (March 21, 1990) comments on the timing of an income inclusion as follows:

The amounts required to be included in computing the income of a beneficiary for a taxation year under subsections 104(13) and 105(2) are considered to have been earned by the beneficiary on the last day of the taxation year of the trust and are thus in respect of the taxation year or years of the trust which ended in the taxation year of the beneficiary. [...].

Based on the current provisions of the Act, the comments in paragraph 6 of IT-342R should be read as applying only where the factual circumstances do not otherwise allow for a determination of when exactly an amount becomes payable. The comments in paragraph 6 of IT-342R do not apply where the timing of when an amount became payable is otherwise known. In your example despite the comments in paragraph 6 of IT-342R, the date the amount became payable is December 29, 2004, the date of Record. Paragraph 104(13)(a) then requires the beneficiary to include the income amounts only for the beneficiary's taxation year in which the trust's taxation year ends. The taxation year-end of an individual and an inter vivos trust is December 31 (except for a mutual fund trust that elects to have a December 15 year-end). The taxation year-end of a corporation or a testamentary trust may be, but does not have to be, December 31. Therefore in the case of a unitholder who is an individual or a trust with a December 31 year-end, the timing of the income inclusion is self evident for that year ending December 31, regardless of the fact that the payment is made in January of the following year. Where, however a unitholder is a corporation or a trust with a non-calendar year-end, the income inclusion will be in the year that includes the year-end of the distributing trust. In your example if the recipient unitholder is a corporation with for example a January 31 year-end, the income inclusion and capital adjustment would be part of the corporations' 2005 taxation year end.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

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