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: How should a T3 return be prepared when the property in the trust is subject to subsection 75(2)?
Position: A T3 Return must be filed reporting the income and issuing a T3 slip to the contributor reporting any attributed income.
Reasons: Prior positions.
2019 STEP CRA Roundtable – June 7, 2019
QUESTION 12. Attribution under subsection 75(2)
Income attribution rules, generally speaking, operate so that income of one person (the actual recipient of the income) is attributed to and becomes income of another person (the transferor). Section 74.1(and other provisions) use this type of language. However, subsection 75(2) does not employ this language. Under subsection 75(2), income is considered to be the income of another taxpayer (the contributor of property to the trust) without explicitly stating that the income is removed from the trust itself.
Whether or not income which is subject to subsection 75(2) is first and foremost income of the trust itself can be significant for the following reasons:
i. How the trust return is prepared; or
ii. Whether or not a liability for alternative minimum tax could arise (if the income is removed from the trust by way of deduction at line 471 of the T3 Return)
The treatment of income where subsection 75(2) applies was considered in the case of Fiducie Financiere Satoma v Canada (“Satoma”; 2018 DTC 5052, Federal Court of Appeal “FCA”). There it was concluded that the dividend income attributed under subsection 75(2) was not income of the trust.
In light of the comments made in the judgment concerning how subsection 75(2) operates, does CRA now accept that income (and capital gains) subject to subsection 75(2) is never income of the trust in the first place? If so, would it be appropriate to simply omit from the trust return the income which is subject to subsection 75(2)? Further, does the CRA now agree that there would be no need to prepare a T3 slip for the attributed income as the CRA’s administrative position currently requires?
Firstly, we note that the Satoma case involved a situation in which the CRA reassessed the trust under the GAAR where a series of transactions led to an abuse of subsections 75(2) and 112(1) of the Act. A series of transactions was undertaken to ensure that subsection 75(2) would apply to the trust such that the dividend income received by the trust would be attributed to a corporation (referred to in the case as “9134”). The corporation was able to claim a deduction under subsection 112(1) and as a result, the income was not taxed in either the trust or in the corporation. The Federal Court of Appeal affirmed the decision of the Tax Court of Canada (“TCC”) and upheld the CRA’s GAAR reassessment.
It appears that your comment in respect of Satoma is based on paragraphs 33 to 37 and 53 of the FCA decision. In paragraph 35, Justice Noel referred to the TCC decision and whether the wording of subsection 75(2) supported the exclusion of the dividends from the Satoma Trust’s income in comparison to the wording of other attribution rules (for example section 74.1) which specifically provide that when income is deemed to be the income of a taxpayer, it is deemed not to be income of another person. Noel C.J., noted that subsection 75(2) is silent in regard to the exclusion provided in other attribution provisions. However, he opined that those kinds of express exclusions are inserted for greater certainty. He also noted that in respect of dividend income, subsection 82(2) further provides that where a dividend is attributed to another person pursuant to subsection 75(2), that person is also deemed to receive it. Noel C.J. concluded by noting that the same dividend cannot be received by two persons at once.
While we acknowledge the comments in Satoma, we note that the comments are not specifically aimed at the trust return reporting requirements. As such, we must emphasize, as in previous roundtable responses, that the T3 Return is an information return in addition to being a return of income. The T3 return serves to report information about the trust itself along with information that affects the taxation of persons who have some connection to the trust.
The longstanding CRA position for trusts holding property subject to subsection 75(2) is that section 204 of the Regulations imposes a requirement to file a T3 return where the trustee has control of or receives income, gains or profits in the trustee's fiduciary capacity, even if the trustee computes nil income for the trust for tax purposes. This includes circumstances where the trust has no income for tax purposes because subsection 75(2) applies to recognize amounts as another person's income for tax purposes. This is noted in several CRA documents, including CRA Roundtable responses at the 2006, 2016 and 2017 STEP Conferences (documents 2006-0185561C6, 2016-0645811C6, and 2017-0693371C6). The requirement to report income in this manner ensures proper administration of the tax system including the assessment of the tax payable of a settlor or contributor of property to a trust.
Page 45 of the 2018 T4013 - T3 Trust Guide notes that amounts attributed pursuant to subsection 75(2) “are considered to belong to the contributor during the contributor’s life or existence while a resident of Canada. The trust must still report the amount on the trust’s T3 return and issue a T3 slip reporting the amount as that of the contributor of the property”.
Schedule 9, Income Allocations and Designations to Beneficiaries is used to report any income that is being attributed and amounts on Schedule 9 are then transferred to Line 471 on the T3 Return as a deduction from the trust’s income. While this approach may be suitable for the majority of trusts holding property that is subject to subsection 75(2), we will consider whether the approach is appropriate especially in the context of the calculation of minimum tax on the T3 Schedule 12. We will also consider whether the T3 Trust Guide should be revised and any adjustments to the T3 assessing system are required.
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2019
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2019