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 the position in ITTN 11 regarding payments made by a trust for the benefit of a minor beneficiary still valid?
Position: Perhaps not.
Reasons: The Directorate intends to review the administrative position in ITTN 11 to determine whether it is still valid and may update it as appropriate.
STEP CRA Roundtable – June 13, 2017
QUESTION 10. Application of 104(6), (13) and (24)
Where a trust pays an expense for the benefit of a beneficiary, is the beneficiary required to direct and concur with the payment of the disbursement on the beneficiary’s behalf in order for the payment to be deductible to the trust pursuant to subsections 104(6) and (24), and included in the beneficiary’s income pursuant to subsection 104(13)? For example, a father who is the trustee of a discretionary family trust takes his children (who are beneficiaries of the trust) out for dinner. The father itemizes his children’s expenses, reimburses himself out of the trust funds for the meal expense incurred on behalf of the trust beneficiaries, and issues T3 slips to each child.
According to the CRA’s comments in ITTN 11, Payments Made by a Trust for the Benefit of a Minor Beneficiary, (September 30, 1997), this arrangement is acceptable for expenses paid on behalf of minor children. However, we are aware of similar situations which the CRA have recently audited and proposed to reassess because a beneficiary did not direct and concur with such payments incurred on their behalf. Can the CRA advise as to whether there has been a change in policy from ITTN 11?
All previously archived Income Tax Technical News, including ITTN 11, were cancelled and removed from the CRA website effective September 30, 2012. The technical content on the website in ITTNs and tax interpretation bulletins is being replaced by income tax folios.
ITTN 11 stated that with respect to indirect payments, where an amount of income is not paid directly to the individual so entitled, but is paid to another person for the benefit of the individual pursuant to the individual’s direction or concurrence, that amount will be included in the individual’s income. In the case of a child, the person with the legal authority to consent to and direct such payments on behalf of the child will usually be the legal guardian of the child’s property.
Paragraph (c) of the ITTN requires that for such a payment to be deductible from the trust’s income as an amount paid to the child in the year and included in the child’s income in the year, pursuant to subsections 104(6) and (13), it must be reasonable to consider that the payment was made in respect of an expenditure for the child’s benefit (and provided the other requirements outlined in ITTN 11 are met).
Our Directorate cannot comment on a particular audit situation involving a specific taxpayer; however, we have the following general comments. In the example described in the question, we would not necessarily conclude that the trust meets the requirements of ITTN 11 with respect to expenses paid on behalf of minor children absent a complete review of all the relevant facts including the terms of the trust indenture. In this regard, where a trustee seeks to deduct an amount from the income of a trust and to include that amount in the income of the beneficiary as described above, the onus of proof is ordinarily presumed to lie with the taxpayer.
In Degrace Family Trust v The Queen, 1 CTC 2807, (TCC), (“Degrace”), the CRA disallowed amounts paid by the trustee for various household expenses as amounts deductible from the trust and expenditures on behalf of the trustee’s children who were beneficiaries of the trust. Justice Bonner commented at paragraph 5 of the decision:
Assuming, without deciding, that payment of trust funds to a trustee and expenditure of such funds by the trustee for the benefit of a beneficiary may constitute payment to a beneficiary within the meaning of subsection 104(24) of the Act, the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of beneficiary.
The Directorate applied the principles from Degrace in internal technical interpretation E 1999-0013107 which considered the guidelines in ITTN 11 and the level of documentation required in order to have third party payments made by a discretionary trust on behalf of a child beneficiary. The document stated that in the case of a payment from a discretionary trust to a parent representing a reimbursement of household expenditures, the onus of proving that the payment is for the child’s benefit has not been met where household expenditures are totalled and divided by the number of family members to approximate the child’s share of the expenditures. Moreover, when it comes to household expenditures, it will be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.
The document stated that the comments with respect to household expenditures would also apply with regard to any other type of expenditure by the trustee. In all cases the trustee must substantiate that the expenditures are unequivocally for the child’s benefit.
The commentary in ITTN 11 with respect to trusts and payments to minor beneficiaries was written 20 years ago. We would expect that the number of family trusts, the manners in which they are used, and their demographics have likely changed considerably in the intervening period. Accordingly, the Directorate intends to review this position to evaluate its continued validity and may update it as deemed appropriate.
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