18 April 2019 External T.I. 2017-0716451E5 F - Deduction in computing income of a trust

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3, 104(2), 104(6), 104(13), 104(21), 104(24), 105(1), 107(2)

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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.

XXXXXXXXXX                          2017-071645
                                    Nathalie Boyer, Advocate, M. Fisc.
April 18, 2019

XXXXXXXXXX,

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.

Particular Situation

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.

Questions

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?

Our Comments

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.

Best regards,

Louise J. Roy, CPA, CGA
Manager
for the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

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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Text of Severed Letter

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.

Principales Questions: 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 Adoptée: 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.

Raisons: 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.

XXXXXXXXXX                          2017-071645
                                    Nathalie Boyer, avocate, M. Fisc.
Le 18 avril 2019

XXXXXXXXXX,

Objet: Demande d’interprétation technique sur le paragraphe 104(6)

La présente fait suite à votre lettre du 27 juillet 2017 concernant le sujet mentionné en objet, dans laquelle vous avez demandé notre opinion concernant l’application du paragraphe 104(6) de la Loi de l’impôt sur le revenu, L.R.C. 1985, c. 1 (5e suppl.) (« Loi ») dans une situation donnée.

À moins d’indication contraire, tous les renvois législatifs sont des renvois aux dispositions de la Loi.

Situation donnée

Fiducie X est une fiducie familiale discrétionnaire. L’acte de fiducie prévoit que l’attribution de revenus est à l’entière discrétion des fiduciaires. Par conséquent, ces derniers sont libres de verser ou non, aux bénéficiaires, les revenus de la fiducie lors d’une année d’imposition.

Au courant de l’année d’imposition, Fiducie X a réalisé un gain en capital imposable de 200 000 $, ainsi qu’une perte locative provenant d’un immeuble d’un montant de 100 000 $. Nous comprenons qu’il n’y a aucun autre revenu, frais ou dépense.

Au 31 décembre de l’année d’imposition visée, la totalité du revenu attribuable au gain en capital imposable de 200 000 $ est attribué à un bénéficiaire. La somme de 200 000 $ est payée par chèque au bénéficiaire avant le 31 décembre de cette année d’imposition.

Questions

1) Est-ce que la fiducie peut déduire dans le calcul de son revenu la somme de 200 000 $ attribuable à un gain en capital imposable réalisé dans l’année d’imposition devenue à payer à son bénéficiaire en application de l’alinéa 104(6)b)?

2) Dans l’affirmative, est-ce que la fiducie réalisera une perte autre qu’en capital de 100 000 $?

3) Comment est-ce que cette attribution de revenu de gain en capital imposable doit-elle être comptabilisée dans la déclaration de revenus de la fiducie?

4) La réponse à la question 1) serait-elle la même advenant la situation où l’acte de fiducie oblige l’attribution des gains en capital imposables annuellement en faveur du bénéficiaire?

Nos commentaires

La présente interprétation technique offre des commentaires généraux sur des dispositions contenues dans la Loi et d’autres lois connexes, le cas échéant. Elle n’a pas comme but de confirmer le traitement fiscal relativement à une situation donnée mettant en cause un contribuable en particulier, mais plutôt de vous aider à le déterminer. Notre direction ne confirme le traitement fiscal relatif aux opérations données d’un contribuable en particulier que dans le cadre d’une demande de décision anticipée en impôt présentée de la façon décrite dans la circulaire d’information IC 70-6R8, Décisions anticipées et interprétations techniques en impôt.

Aux termes du paragraphe 104(2), une fiducie est réputée être un particulier relativement aux biens de la fiducie, de sorte qu’une fiducie doit établir son impôt sur le revenu comme si elle était un particulier.

Dans un premier temps, pour déterminer le revenu d’une fiducie pour une année d’imposition, il faut s’en remettre aux calculs prévus à l’article 3. Le résultat obtenu permet d’obtenir le revenu (ou, s’il y a lieu, la perte) de la fiducie pour l’année d’imposition. À cette fin, un gain en capital imposable réalisé par une fiducie est inclus dans le calcul du revenu de la fiducie.

Dans un deuxième temps, l’alinéa 104(6)b) peut s’appliquer. De façon générale, cet alinéa prévoit, entre autres, qu’une fiducie peut déduire dans le calcul de son revenu pour une année d’imposition le montant dont la fiducie demande la déduction, mais sans dépasser la partie de son revenu pour l’année, calculée non compte tenu des paragraphes 104(6) et (12), qui est devenue payable à un bénéficiaire (footnote 1). Il est à noter que le gain en capital réalisé par une fiducie est généralement considéré comme étant du capital aux fins du droit des fiducies.

Lorsque la fiducie peut déduire des sommes devenues à payer à son bénéficiaire en application de l’alinéa 104(6)b), le bénéficiaire doit inclure ce montant dans le calcul de son revenu en vertu de l’alinéa 104(13)a).

Par ailleurs, afin de conserver la nature des gains en capital imposables, le paragraphe 104(21) permet à une fiducie d’attribuer ses gains en capital imposables nets (footnote 2) à ses bénéficiaires lorsque toutes les conditions sont réunies. L’une de ces conditions prévoit, au sous-alinéa 104(21)a)(ii), que la présomption énoncée au paragraphe 104(21) s’applique, en ce qui a trait au bénéficiaire d’une fiducie, seulement à la partie des gains en capital imposables nets de la fiducie qu’il est raisonnable de considérer (compte tenu de toutes les circonstances, y compris les modalités de l’acte de fiducie) comme faisant partie de la somme qui, par l’effet de l’alinéa 104(13)a), du paragraphe 104(14) ou de l’article 105, a été incluse dans le calcul du revenu du bénéficiaire auquel la somme est attribuée.

Selon la situation présentée, le revenu de la fiducie établi selon l’article 3 serait de 100 000 $. En autant que le paragraphe 104(24) soit respecté, le montant maximum déductible dans le calcul du revenu de la fiducie, aux termes de l’alinéa 104(6)b), pour l’année d’imposition visée serait de 100 000 $.

Au niveau de la T3 Déclaration de renseignements et de revenus des fiducies, le revenu total de la fiducie, calculé conformément à l’application de l’article 3, serait de 100 000 $. Un montant de 100 000 $, correspondant au montant réparti au bénéficiaire, pourrait être déduit du revenu de 100 000 $ ce qui établirait le revenu net de la fiducie à 0 $.

Finalement, lorsqu’un montant payé à un bénéficiaire excède le montant maximal déductible dans le calcul du revenu de la fiducie aux termes de l’alinéa 104(6)b), il sera nécessaire de déterminer si l’excédent payé constitue une distribution de capital ou de revenu en faveur d’un bénéficiaire, ce qui est une question de faits et de droit qui ne peut être résolue qu’après un examen complet de tous les faits, les circonstances et les documents entourant la situation.

Selon les circonstances et les modalités de l’acte de fiducie, lorsqu’un montant versé au bénéficiaire excède le revenu fiscal de la fiducie pour l’année et qu’il ne représente pas une distribution de biens au titre du capital selon l’acte de fiducie l’excédent pourrait constituer un avantage conféré par la fiducie à inclure dans le calcul du revenu du bénéficiaire en application du paragraphe 105(1).

Nous espérons que nos commentaires vous seront utiles.

Veuillez agréer, Madame, mes salutations distinguées.

Louise J. Roy, CPA, CGA
Gestionnaire
Pour le Directeur
Division des industries financières et des fiducies
Direction des décisions en impôt
Direction générale de la politique législative et des affaires réglementaires

FOOTNOTES

En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous :

1 Au sens du paragraphe 104(24), un montant ne sera réputé être devenu payable à un bénéficiaire au cours d’une année d’imposition que si la fiducie lui a payé au cours de l’année ou que ce bénéficiaire avait le droit d’en exiger le paiement.

2 Au sens du paragraphe 104(21.3).

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 105 - Subsection 105(1)

a distribution by a discretionary trust of a taxable capital gain in excess of the trust’s income could be a s. 105(1) benefit

CRA rejected the suggestion that the trust could take a s. 104(6)(b) deduction for $200,000, thereby generating a $100,000 loss.

Respecting the status of the distribution in excess of the trust income of $100,000, CRA stated:

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).

Summary Under

Tax Topics - Income Tax Act - Section 104 - Subsection 104(6) - Paragraph 104(6)(b)

s. 104(6)(b) deduction cannot exceed net income

A discretionary family trust realized a taxable capital gain of $200,000, as well as a rental loss from a building of $100,000, with no other items of income or expenses for that year. The trust distributed the $200,000 taxable capital gain to a beneficiary at year end in cash. Can the trust deduct, pursuant to s. 104(6)(b), the $200,000 amount in computing its income and if so, will it realize a non-capital loss of $100,000?

CRA stated:

[T]he 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.

CRA went on to state:

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).

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18 April 2019 External T.I. 2017-0716451E5 F - Deduction in computing income of a trust

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