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: Discussion of making payments or making amounts payable to or on behalf of a minor from a trust & the application of 75(2)
Position: No change in previous positions
Reasons: Appears to be actual fact situation, so general comments given
Lena Holloway, CA
March 4, 2013
Re: Trust for Minor
This is in reply to your email communication dated November 18, 2011 requesting our comments on the application of subsection 104(18) of the Income Tax Act (the "Act"). Your correspondence reproduced a provision contained in a civil law trust agreement and therefore appears to relate to a factual situation, involving a specific taxpayer. Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. We are, however, prepared to offer the following general comments, which may be of assistance.
Subsection 104(18) of the Act provides that certain income of a Canadian resident trust which is not actually distributable in the year to a minor is nevertheless deemed to be payable to him. Subsection 104(18) applies where the following conditions are met: (a) the income (including taxable capital gains) has not become payable in the year; (b) the individual is less than 21 years of age at the end of the year; (c) the individual's right to the income (including taxable capital gains) is vested by the end of the year otherwise than because of the exercise or the non-exercise of a discretionary power; and (d) the individual's right is not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).
While this Directorate does not provide legal advice or opinions on the interpretation or application of common law, civil law or provincial legislation it appears that your questions concern a trust to which subsection 104(18) does not apply and therefore the trustees exercise their discretionary power in order to allocate an amount of income or taxable capital gain to a minor child beneficiary. The amount is paid by issuing a non-interest bearing promissory note while the funds representing the income or taxable capital gain are left in the trust and reinvested but the "capital" and connected income notionally belong to the child. Specifically you have asked the following questions relating to this scenario:
i) If the funds are left in the trust but belong to the child, is it necessary to have a separate bank account for these funds?
ii) If the funds are left in the trust but are reinvested and notionally belong to the child, does the Canada Revenue Agency (CRA) consider that subsection 75(2) of the Act applies to such funds because the minor child may be considered to be a contributor?
iii) If the funds are paid by the issuance of a non-interest bearing promissory note, does the CRA consider that the amount was "payable" and is thus deductible in the calculation of the income of the trust and added to the income of the minor child? Does it matter if the note bears interest?
With respect to your first question on whether separate bank accounts need to be maintained you will note that there is no specific requirement under the Act that separate bank accounts be maintained in order to track a beneficiary's entitlement under the terms of a trust. Section 230 of the Act, however requires taxpayers to keep "records and books of account (including an annual inventory kept in prescribed manner) at the person's place of business or residence in Canada or at such other place as may be designated by the Minister, in such form and containing such information as will enable the taxes payable under this Act or the taxes or other amounts that should have been deducted, withheld or collected to be determined." The records should support whatever the taxpayer is claiming for tax purposes. Whether provincial trust law or the civil code in the case of the province of Quebec requires the maintenance of separate bank accounts in order to track the entitlement of each beneficiary is beyond the scope of this reply and the responsibility of the CRA.
Secondly you asked if funds are left in the trust, "but are reinvested and notionally belong to the child, does the Canada Revenue Agency consider that subsection 75(2) of the Act applies to such funds because the minor child may be considered to be a contributor." We are unsure by what you mean by the funds "notionally" belonging to the child. The relevant income amounts are either paid or made payable if, according to the terms of the trust, the trustees exercise their discretion to pay or make an amount payable to the child. In this regard, we do not believe that the income may be said to be paid or payable in a year where it "notionally" belongs to the child but remains in the trust. Subsection 104(24) of the Act provides that an amount of income is not considered payable in a taxation year unless it is paid in the year to the beneficiary or the beneficiary is entitled to enforce payment of the amount in the year. Alternatively, where the trust income is subject to discretionary payment and is not paid or made payable the income would otherwise be taxed in the trust and the accumulated funds would become part of the capital of the trust. Where an amount is in fact made payable, any debt forgiven by the beneficiary may be subject to the debt forgiveness rules in section 80. Note that it has been the CRA's longstanding position that subsection 75(2) may apply to a person (i.e. a beneficiary) other than the settlor where property is transferred to a trust under the condition that the property may revert back to the transferor. Therefore, where a debt owing to a beneficiary of a trust has been paid by the trust and the beneficiary contributes that same amount back to the trust, subsection 75(2) may apply where the property so contributed may revert to the transferor.
Your last question concerns the issuance of a promissory note as payment of an amount that is owing or payable to a minor beneficiary by virtue of a trustee exercising a discretionary power. This issue was previously addressed at the 2010 Society of Estate and Trust Practitioners (STEP) Conference (see rulings document number 2010-0363071C6). Question 2 of this Round Table Discussion is reproduced as follows":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."
Our response noted that":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.)" emphasis mine
I trust you will find these comments helpful.
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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