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. Can a designation under subsection 104(13.1) or (13.2) be made where subsection 104(13.4) applies? 2. Subparagraph 104(13.4)(b)(i) deems the income to have become payable in the year to the individual. However, at that time the individual is deceased. So does the income become that of the individual, or his or her estate?
Position: 1. Yes. 2. Income of the individual.
Reasons: 1. Paragraph 104(13.4)(b) deems the trust's income for that taxation year to have become payable in the year to the individual and not to another beneficiary (notwithstanding subsection (24)). As a result, in that taxation year, an amount may be designated by the trust under subsections 104(13.1) and (13.2) only in respect of the deceased beneficiary. 2. Even though the individual may be deceased at the time at which this provision becomes operative, it functions as if the individual was alive at that instance, i.e., the income is deemed to have been made payable to the individual while still alive. Thus the income in the year of death will be included in the income of the beneficiary pursuant to paragraph 104(13)(a).
STEP CRA Roundtable - June 18 2015
Question 6. Spousal, Alter Ego, Joint Partner Trusts on Death
This question concerns new subsection 104(13.4).
A spousal trust, alter ego trust or joint partner trust are subject respectively to a deemed disposition on the date of death of the spouse, the contributor to the alter ego trust, or the death of the later of the contributor and that person's partner. The deemed disposition arises at the end of the day on which death occurred. Income attribution would not apply because at the time the gain was realized, the person to whom the gain may attribute would be deceased. The consequence of this is that the gain is subject to tax in the trust. Tax planning may be carried out at a later date to potentially create, for example, a capital loss which can be carried back three taxation years to offset the capital gain. Post-mortem planning of this nature was and indeed is regularly carried out.
New subsection 104(13.4) provides for a different result. The trust is deemed to have a year-end at the end of that day, as before, but the income of trust is deemed to have become payable in the year to the individual (whose death caused the deemed disposition).
Our questions concern how this new provision will operate from the perspective of post-mortem tax planning:
a) Does this now preclude a strategy whereby a subsequent capital loss of the trust can be carried back to offset the capital gain, as might have been done in the past?
b) Subparagraph 104(13.4)(b)(i) states that the trust's income is deemed to have become payable in the year to the individual. However, at the time at which this rule becomes operative, the individual is deceased. So how does the income actually become that of the individual, or does it become that of his or her estate? What is the actual mechanism by which the amount becomes income (is it paragraph 12(1)(m)), and does the income preserve its nature (if so, how)?
CRA Response
a) For 2016 and subsequent taxation years, if the individual whose death is the death determined in respect of a particular trust under paragraph 104(4)(a), (a.1) or (a.4), as applicable, the trust's taxation year is deemed to end at the end of the day of the death pursuant to paragraph 104(13.4)(a). Paragraph 104(13.4)(b) deems the trust's income for that taxation year to have become payable in the year to the individual and not to another beneficiary (notwithstanding subsection 104(24)).
As a result, in that taxation year, an amount may be designated by the trust under subsections 104(13.1) and (13.2) only in respect of the deceased beneficiary. The Income Tax Act does not specifically provide for the late-filing of such designations. However, as was noted in document 2009-0330181C6 at the 2009 APFF Roundtable, "The CRA would accept a late-filed subsection 104(13.1) designation where the trustee can demonstrate that an honest mistake was made or where the designation is made to carry-back a non-capital loss. However, we will not reassess to reduce the beneficiary's income when a corresponding adjustment to the trust's income tax return cannot be made because the years are statute-barred. Similarly, we will not accept a late-filed designation in cases of retroactive tax planning other than loss carry-back".
In our view, we would expect that CRA would generally accept a late-filed designation under subsection 104(13.2), subject to the same caveats as noted above in respect of a subsection 104(13.1) designation.
b) Paragraph 104(13.4)(b) is a deeming provision. As was noted by the Supreme Court in its decision in The Queen v Verrette, [1978] 2 S.C.R. 838, "A deeming provision is a statutory fiction; as a rule it implicitly admits that a thing is not what it is deemed to be but decrees that for some particular purpose it shall be taken as if it were that thing although it is not or there is doubt as to whether it is". Accordingly, in the given instance, even though the individual may be deceased at the time at which this provision becomes operative, it functions as if the individual was alive at that instance, i.e., the income is deemed to have been made payable to the individual while still alive. Thus the income in the year of death will be included in the income of the beneficiary pursuant to paragraph 104(13)(a).
The Department of Finance Explanatory Notes for subsection 104(13.4) state that "no amounts may be designated by the trust for the particular year under subsections 104(13.1), (13.2) and (19) to (22) in respect of any beneficiary other than the particular beneficiary". The designations under subsections 104(19) to (22) allow the income to retain its character when included in the income of the beneficiary.
Vy Srikanth
2015-057212
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