19 March 2014 Internal T.I. 2013-0506271I7 - "Working Income" for Working Income Tax Benefit

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 income allocated by a communal organization to a participating member of the congregation, and reported on a T3 slip as "self-employment earnings for CPP" considered working income for the WITB?

Position: No.

Reasons: Except as otherwise provided in Part I of the ITA, subsection 108(5) deems amounts received by a beneficiary from a trust to be income from a property that is an interest in a trust. This treatment is not varied where the income is considered self-employment income for CPP purposes.

March 19, 2014

Program Support and Services Division HEADQUARTERS
Individual Returns Directorate Income Tax Rulings Directorate
Assessment & Benefit Services Branch William King
(905)721-5194

Attention: Karen Baird 2013-050627
Legislation Section

Working Income Tax Benefit and Amounts Allocated from a Communal
Organization to a Member of the Congregation

This memorandum is in response to Tina Cabral's electronic correspondence of September 12, 2013, wherein our comments were requested on whether income allocated from a communal organization to a participating member of the congregation could be considered "working income" for purposes of the Working Income Tax Benefit (WITB). Tina noted that the income allocated to the participating members of the congregation for the 2012 tax year was generated within the communal organization's farming operations.

Subsection 143(1) of the Income Tax Act (the Act) deems a communal organization, if specific conditions are met, to be an inter vivos trust for tax purposes and the members of the congregation are deemed to be the beneficiaries under the trust. Income earned by the congregation or its business agencies is included in computing income at the trust level, with provision to elect the allocation of the modified taxable income to the participating members of the congregation. Where the communal organization files an election to allocate its income, in respect of a tax year, each participating member must include their allocated amount when computing their individual income for tax purposes.

Except as otherwise provided in Part I of the Act, subsection 108(5) deems an amount received by a beneficiary from a trust to be income from property that is an interest in a trust. Subsection 108(5) provides that the nature of income flowing through a trust to a beneficiary is retained only where the Act specifically provides for it; for example, a designation is available under subsection 104(19) for taxable dividends, and under subsection 104(21) for taxable capital gains. The Act does not provide for the flow-through of the characterization of business, farming, or fishing income from a trust to its beneficiaries.

For purposes of the WITB, "working income" is computed on T1 Schedule 6, Working Income Tax Benefit and is defined in subsection 122.7(1) of the Act. "Working income" for a tax year generally includes an individual's income for the year from an office or employment and business carried on by the individual. Amounts received by a beneficiary of a trust would not be included in the determination of "working income" for purposes of the WITB. However, such income is considered "self-employment earnings" for CPP contribution purposes.

The communal organization (trust) has to complete a T3 slip, Statement of Trust Income Allocations and Designations, for each participating member (beneficiary) to whom the trust allocated income in the year. For communal organizations this income is generally reported as "Other Income" in box 26 of the T3 slip. Chapter 4 of Guide T4013, T3 Trust Guide provides information on how to complete the T3 slip. For the enquiry at hand, the farming income allocated to each beneficiary is to be reported in Box 26 – Other Income. The Notes to Box 26 in Chapter 4 of the T3 Guide, direct that where such amounts are allocated, the trustee should;

Enter an asterisk (*) beside the amount in box 26 if it includes business, farming, or fishing income from a communal organization. In the footnote area, enter "self-employment earnings for CPP purposes," and indicate the type of income—business, farming, or fishing—and the amount of the beneficiary's share.

Further guidance is provided in subparagraphs 24(e) and (f) of IC78-5R3, Communal Organizations.

For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases.

We trust our comments will be of assistance.

Steve Fron, CPA, CA
Manager
Trusts Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch