This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: In a given situation where a trust has a taxable capital gain of $200,000 and a rental loss of $100,000, whether the trust can deduct by virtue of paragraph 104(6)(b) the amount of $200,000 corresponding to the taxable capital gain paid in the year to a beneficiary?
Position: No. The amount that the trust is eligible to claim by virtue of paragraph 104(6)(b) cannot exceed the amount of its income determined for the year. In the given situation, the maximum amount deductible by the trust would be $100,000. When a trust paid an amount in excess of the amount deductible by virtue of paragraph 104(6)(b), depending on all the facts surrounding the situation and the terms of the trust deed, the application of subsection 105(1) should be considered.
Reasons: Firstly, a trust's income for a taxation year is determined under section 3. The maximum amount that may be deducted under paragraph 104(6)(b) is the trust’s income determined under Part I, before the deductions under paragraphs 104(6) and (12). Subsection 105(1) includes in a taxpayer's income the value of all benefits from or under a trust. The provision extends to benefits received by any taxpayer under the trust other than, among others, an amount otherwise included in the beneficiary’s income or an amount paid as a capital distribution by virtue of the trust deed.
Nathalie Boyer, Advocate, M. Fisc.
April 18, 2019
Subject: Request for technical interpretation on subsection 104(6)
This is in response to your letter of July 27, 2017, on the above subject, in which you asked for our opinion on the application of subsection 104(6) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c. 1 (the "Act") in a particular situation.
Unless otherwise indicated, all legislative references are to the provisions of the Act.
Trust X is a discretionary family trust. The trust deed provides that the distribution of income is at the sole discretion of the trustees. Consequently, they are free to pay or not pay the income of the trust to the beneficiaries in a taxation year.
During the taxation year, Trust X realized a taxable capital gain of $200,000, as well as a rental loss from a building in the amount of $100,000. We understand that there is no other income, expenses or costs.
As at December 31 of the applicable taxation year, all income attributable to the taxable capital gain of $200,000 was allocated and distributed to a beneficiary. The sum of $200,000 was paid by cheque to the beneficiary before December 31 of that taxation year.
1) Can the trust deduct, pursuant to paragraph 104(6)(b), in computing its income, the $200,000 amount attributable to a taxable capital gain realized in the taxation year that became payable to its beneficiary?
2) If so, will the trust realize a non-capital loss of $100,000?
3) How should that distribution of income from the taxable capital gains income be recorded in the trust's tax return?
4) Would the answer to question (1) be the same in the situation where the trust deed requires the annual distribution of taxable capital gains to the beneficiary?
This technical interpretation provides general comments on the provisions of the Act and other related legislation, if applicable. It does not confirm the income tax treatment of a particular taxpayer situation but is intended to assist you in making that determination. Our Directorate only confirms the tax treatment of a particular taxpayer’s particular transactions in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R8, Advance Income Tax Rulings and Technical Interpretations.
Under subsection 104(2), a trust is deemed to be an individual in respect of the trust property, so that a trust must determine its income tax as if it were an individual.
As a first step, in order to determine the income of a trust for a taxation year, it is necessary to turn to the computations provided for in section 3. The result obtained permits a determination of the income (or, if applicable, the loss) of the trust for the taxation year. For that purpose, a taxable capital gain realized by a trust is included in computing the income of the trust.
As a second step, paragraph 104(6)(b) may apply. In general, that paragraph provides, inter alia, that a trust may deduct in computing its income for a taxation year the amount claimed by it as a deduction, but not exceeding the part of its income for the year, determined without reference to subsections 104(6) and (12), that became payable to a beneficiary (footnote 1). It should be noted that a capital gain realized by a trust is generally considered to be capital for trust law purposes.
Where the trust may deduct an amount payable to a beneficiary under paragraph 104(6)(b), the beneficiary must include that amount in computing the beneficiary’s income by virtue of paragraph 104(13)(a).
Furthermore, in order to preserve the nature of taxable capital gains, subsection 104(21) allows a trust to allocate its net taxable capital gains (footnote 2) to its beneficiaries where all conditions are satisfied. One of these conditions, in subparagraph 104(21)(a)(ii), provides that the presumption in subsection 104(21) applies, in respect of the beneficiary of a trust, only to the portion of the net taxable capital gains of the trust that may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust) to be part of the amount that, because of paragraph (13)(a), subsection (14) or section 105, was included in computing the income of the recipient to whom the amount is allocated.
In the situation presented, the income from the trust determined under section 3 is $100,000. Provided that subsection 104(24) is satisfied, the maximum amount deductible in computing the income of the trust, pursuant to paragraph 104(6)(b), for the taxation year, is $100,000.
As for the T3 Statement of Trust Income Allocations and Designations, the total income of the trust, computed in accordance with section 3, would be $100,000. An amount of $100,000, equal to the amount allocated to the beneficiary, could be deducted from the income of $100,000, which would result in the trust's net income being $0.
Finally, where an amount paid to a beneficiary exceeds the maximum amount deductible in computing the income of the trust pursuant to paragraph 104(6)(b), it will be necessary to determine whether the excess paid is a distribution of capital or income to a beneficiary, which is a question of fact and law that can only be resolved after a complete examination of all the facts, circumstances and documents surrounding the situation.
Depending on the circumstances and terms of the trust deed, where an amount paid to a beneficiary exceeds the trust's taxable income for the year and does not represent a distribution of property as capital by virtue of the trust deed, the excess could be a benefit conferred by the trust to be included in computing the income of the beneficiary under subsection 105(1).
We hope that our comments will be of assistance.
Louise J. Roy, CPA, CGA
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Pursuant to subsection 104(24), an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.
2 Within the meaning of subsection 104(21.3).
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