26 November 2020 STEP Roundtable Q. 11, 2020-0839891C6 - Subsection 104(19)

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: Various questions involving subsection 104(19).

Position: General comments only.

Reasons: See below.

2020 STEP CRA Roundtable – November 26, 2020

QUESTION 11. Taxable dividends from a trust

Where a Canadian resident inter vivos trust receives a taxable dividend from a Canadian corporation, it may designate such dividend to be a taxable dividend received by a Canadian resident beneficiary pursuant to the provisions of subsection 104(19). CRA has said that the designation cannot be made until the end of the year.

Consider the following situation. A Canadian resident personal trust receives a dividend from a taxable Canadian corporation (A Co.) Suppose another taxable Canadian corporation (B Co.) is a beneficiary of the trust. At the time the dividend is paid to the trust by A Co., and then distributed to the beneficiary, B Co., the two corporations are connected for Part IV tax purposes. However they are not connected at December 31 (the year-end of the trust). Would Part IV tax apply?

If a beneficiary receives an amount to be designated as a taxable dividend, but does not exist at the year-end of the trust (for example, an individual dies), what is the nature of the income?

CRA Response

A trust that is resident in Canada throughout a particular taxation year in which it receives a taxable dividend on a share of the capital stock of a taxable Canadian corporation may, pursuant to the requirements of subsection 104(19), designate in respect of a taxpayer (who is a beneficiary), a portion of the taxable dividend. The amount equal to that portion of the dividend designated is:

• for the purposes of paragraphs 82(1)(b), 107(1)(c), and 107(1)(d) and section 112, deemed not to have been received by the trust, and
• for the purposes of the Act other than Part XIII, deemed to be a taxable dividend on the share received by the beneficiary in the beneficiary’s taxation year in which the particular taxation year of the trust ends.

However, the deeming rules described above do not apply unless a number of conditions are met, including that:

• The amount is designated by the trust, in respect of the beneficiary, in the trust’s return of income under Part I for the particular taxation year;
• The amount 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 was included in computing the income for that taxation year of the beneficiary because of:

o an amount payable under paragraph 104(13)(a),

o an amount upon which the trust and the beneficiary have made a preferred beneficiary election under subsection 104(14), or

o a benefit under section 105 conferred upon a beneficiary by the trust;

• The taxpayer is in the particular taxation year a beneficiary under the trust;
• The trust is, throughout the particular taxation year, resident in Canada; and
• The total of all amounts each of which is an amount designated, under subsection 104(19), by the trust in respect of a beneficiary under the trust in the trust’s return of income under Part I for the particular taxation year is not greater than the total of all amounts each of which is the amount of a taxable dividend, received by the trust in the particular taxation year, on a share of the capital stock of a taxable Canadian corporation.

It is CRA’s opinion that a taxable dividend designated in favour of a particular beneficiary pursuant to subsection 104(19) will be deemed to have been received by the beneficiary at the time that is the end of the particular taxation year of the trust in which the trust received the dividend. This position is based on the fact that the designation under subsection 104(19) could only occur at the end of the taxation year of a trust, since among others, paragraphs 104(19)(a) and (d) require that the designation is made in the income tax return of a trust. Also, it is only at the end of its taxation year that a trust will know its income for the year and that all the conditions set out in subsection 104(19) will be met.

Part IV tax

Paragraph 8 of Interpretation Bulletin IT-269R4, Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation [archived] provides that the determination of whether an assessable dividend was received from a “connected” corporation must be made at the time that the dividend was received by the recipient corporation. If the assessable dividend was received from the payer corporation at a time when that corporation was not connected to the recipient corporation, then the dividend is subject to Part IV tax, notwithstanding that the payer corporation may have been connected to, or might subsequently become connected to, the recipient corporation at some other time during the taxation year.

Accordingly, in the hypothetical situation provided, if the requirements of subsection 104(19) were met and a valid designation was made in respect of the taxable dividend received by the trust, B Co. would be deemed to have received the taxable dividend on the shares of A Co. on December 31st, the taxation year end of the trust. At that date, A Co. and B Co. are not connected. Therefore, B Co. would be subject to Part IV tax on the taxable dividend received from the trust for which a designation was made under subsection 104(19).

When an individual beneficiary dies before the trust’s year end

Pursuant to subsection 104(13), a beneficiary of a trust must include in income for a given taxation year, the portion of the income of the trust in respect of the trust’s taxation year that ends in that given year, as became payable to the beneficiary. The taxation year of an individual is defined in subsection 249(1) as being a calendar year. There is no provision in the Act that shortens a taxpayer’s taxation year in his or her year of death so as to cause it to end as at the taxpayer’s date of death.

As such, assuming all the conditions of subsection 104(19) are met, a trust would not be prohibited from designating an amount, in respect of an individual beneficiary, in the trust’s return of income under Part I for the particular taxation year. The designated amount would be deemed to be a taxable dividend on the share received by the beneficiary in the beneficiary’s taxation year in which the particular taxation year of the trust ends. Accordingly, the taxable dividend deemed to be received would need to be reported in the individual’s final personal income tax and benefit return.

Katie Robinson
2020-083989