8 June 2010 STEP Roundtable Q. 2, 2010-0363071C6

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: Is an amount of income only payable to a beneficiary if the trust issues a promissory note to it?

Position: See below

Reasons: CRA's position

2010 STEP Round Table

Q.2 The CRA has recently taken the position that an amount of income is not payable to a beneficiary unless a promissory note is issued by the Trust to the beneficiaries and on this basis has denied or proposed to deny the deduction by the Trust of income payable to the beneficiary. We submit that it is not a requirement that a promissory note must be issued by the Trust in order for an amount to be payable to a beneficiary.

This appears to relate to a live file involving a discretionary trust which we are unable to comment on, except to say that each case must be based on its facts which must provide proof that "the person to whom it is payable is entitled in the year to enforce payment" (absent subsection 104(18)).

The CRA has published some commentary on this question. For example, in Interpretation Bulletin IT-342R, Trusts - Income Payable to Beneficiaries, the CRA explains the meaning of "amount payable" in paragraph 2. It is important to note that pursuant to subsection 104(24), an amount is not considered payable in a taxation year unless it is either paid in the year or the beneficiary is entitled to enforce payment of it in the year.

In Rulings document E9529647, which was issued on February 26, 1997, the CRA made the following comments regarding steps that may be taken to establish that an amount became payable to a beneficiary of a discretionary trust, in the year:

1. With respect to trustees exercising discretion before the end of the year:

i. In order for the income of a discretionary trust to become payable in a taxation year to the beneficiaries of the trust, the trustees are required to exercise their discretion before the end of the trust's taxation year and the exercise of discretion must be irrevocable with no conditions attached to the beneficiaries' entitlement to enforce payment of the amount in the year. The apportionment of the trust's income to each beneficiary (e.g., all the income, a fixed percentage of the income, or a set amount) must also be established.

ii. It is our view that the beneficiaries must be advised before the end of the trust's taxation year of the trustees' decision, including the apportionment of the trust's income to which the beneficiary is entitled in the year to enforce payment, even if the actual amount is not known. (In case of a minor beneficiary, the trustees may advise the legal guardian of the child's property of this right.) Although legal rights may exist without being in writing, in our opinion, the trustees' exercise of discretion and notification given to the beneficiaries of their decision should be in writing (e.g., a resolution signed by the trustees, minutes of the trustees' meeting) as failure to do so would result in the trustees and the beneficiaries having to provide the CRA with other satisfactory evidence to support their claim that amounts became payable to the beneficiaries in the year.

iii. The fact that the actual amount of the income of a trust in a year cannot be ascertained until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information will not, in and by itself, result in an amount apportioned to a beneficiary in the year based on that income not being payable to the beneficiary in the year (as supported by the case Ginsburg v M.N.R., 92 D.T.C. 1774 (T.C.C.)). However, where the income of a trust is not ascertainable at the year end because the amount of such income is dependent on some contingency or event occurring after that time, then based on our response to Question 55 of the Revenue Canada Round Table in the 1981 Conference Report, it is our view that, depending on the circumstances, a beneficiary may not have an enforceable right to demand payment of such an amount in that year.

2. With respect to issuing a promissory note:

a. Ordinarily, a promissory note is given and received as acknowledgement of the existence of and/or the conditional payment of a debt and does not create the debt.

b. A promissory note should only be issued by a trust to a beneficiary as evidence of an amount payable to the beneficiary where the trust indenture (or relevant provincial legislation where the indenture is silent on the issue) permits the trustees of the trust to do so.

c. Although a promissory note issued by a trust in respect of an amount payable to a beneficiary may be non-interest bearing, it must be payable on demand without restriction. Where the actual amount that is payable to a beneficiary is known before the end of the trust's taxation year, the promissory note should also be delivered to the beneficiary before the end of the year.

d. However, where it is not possible to determine the actual amount that is payable to a beneficiary until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information, the promissory note should be delivered to the beneficiary as soon as the amount is quantified. (Where the beneficiary is a minor and the trust indenture so permits, the promissory note may be delivered to the legal guardian of the minor's property.)

Katharine Skulski
2010-036307
(613) 957-8976
June 8, 2010