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: For taxation years ending after 2015, in the year that the primary beneficiary of an alter ego trust dies, can the trust claim a deduction in respect of the income earned by the trust and which became payable to that beneficiary prior to their death?
Position: A deduction may be claimed in respect of amounts which became payable to the primary beneficiary prior to their death; however, no deduction is available in respect of capital gains and other amounts recognized by the trust upon the death of the beneficiary pursuant to subsections 104(4) to 104(5.2) (the “deemed disposition rules”) and subsection 12(10.2).
Reasons: Element B of the formula in paragraph 104(6)(b).
May 2, 2018
Re: Subsection 104(6) deduction by an alter ego trust in year of death of the lifetime beneficiary
We are writing in response to your email correspondence pertaining to the computation of net income for tax purposes of an alter ego trust in the year of death of the lifetime beneficiary (primary beneficiary), where the death occurred in 2016 or a subsequent year. You asked whether a deduction under paragraph 104(6)(b) of the Income Tax Act (the Act) may be taken by the trust for the income which became payable to the primary beneficiary prior to their death, where the trust is subject to the rules in subsection 104(13.4) of the Act.
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations. However, we are prepared to offer the following general comments.
For purposes of our response, we have assumed the trust meets the criteria to be considered an “alter ego trust” as described in the Act; however, we note that the determination of whether the terms of the trust’s indenture meet the conditions in clause 104(4)(a)(iv)(A) of the Act is a question of fact and law.
For the 2016 and subsequent taxation years, paragraph 104(13.4)(a) provides for a deemed year end for an alter ego trust, and certain other trusts upon the death of an individual (primary beneficiary) whose day of death is a day referred to in paragraphs 104(4)(a), (a.1) or (a.4) of the Act. As a result, the trust will have a taxation year end that corresponds to the date of death on the primary beneficiary’s final T1 Income Tax and Benefit Return (T1 Return).
Where an amount of trust income has become payable to the primary beneficiary of an alter ego trust before that beneficiary’s death, paragraph 104(6)(b) will apply to the trust. Paragraph 104(6)(b) calculates the maximum deductible amount as A – B. The description of element A in that formula is the part of the trust’s income for the year that became payable to, or was included under subsection 105(2) of the Act in the income of, a beneficiary. For an alter ego trust, element B of the formula restricts the deduction available to the trust as follows:
- for the trust’s year in which the primary beneficiary dies and prior years, clause (i)(A) of the description of element B ensures that no deduction may be made by the trust for income which became payable to a beneficiary other than the primary beneficiary, and
- for the trust’s year in which the primary beneficiary dies, subclause (i)(B)(I) ensures that no deduction is available to the trust in respect of any amount included in the trust’s income because of the application of subsections 104(4) to (5.2) (the “deemed disposition rules”) or subsection 12(10.2) of the Act.
Based on the information in your email, we agree that the alter ego trust is entitled to a deduction under paragraph 104(6)(b) for the amount of dividend income received by the trust and made payable to the primary beneficiary prior to their death.
We trust our comments will be of assistance.
Steve Fron, CPA, CA
Manager, Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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