4 June 2024 STEP Roundtable Q. 10, 2024-1010241C6 - Update on trust / estate issues

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: Can CRA provide an update on any recent trust or estate issues that may be of interest to the STEP audience?

Position: Discussed the views of the Tax Court in its unreported decision in the case of Maurice Kissel Family Trust and His Majesty the King.

Reasons: See below.

2024 STEP CRA Roundtable – June 4, 2024

QUESTION 10. Update on recent trust and estate issues

Can the CRA provide an update on any recent trust or estate issues that may be of interest to the STEP audience?

CRA Response

There is a recent unreported decision of the Tax Court of Canada which dealt with the question of whether an amount had been made payable for the purpose of paragraph 104(6)(b) of the Income Tax Act (the “Act”) which we would like to bring to your attention. The case, which was heard on March 27, 2023, is Tax Court file 2019-4092(IT)G between Maurice Kissel Family Trust (as appellant) and His Majesty the King (as respondent).

Based on the Transcript of the Oral Reasons for Judgment delivered on March 30, 2023, the relevant facts which the Tax Court considered can generally be summarized as follows:

The trust in question was a personal family trust the beneficiaries of which included two minor children who were under the age of 18.

The declaration of trust specifically provided that no minor beneficiary shall receive or otherwise obtain the use of any of the income or capital of the trust while being a “designated person” (footnote 1) under the Act in respect of their father, who was also the trustee of the trust.

In spite of the above-noted specific prohibition in the terms of the trust, when the trust realized a substantial capital gain on the disposition of shares of a small business corporation, it paid $100,000 to each of the two minor beneficiaries that same taxation year, and claimed a deduction pursuant to paragraph 104(6)(b) in respect of those payments when it filed its trust return.

Tax returns were also filed in respect of the two minors purporting to include the payment amounts in their income under subsection 104(13) of the Act and claiming the capital gains deduction on their behalf.

The CRA reassessed the trust to deny the deduction claimed by the trust in respect of the payments to the two minors on the basis that the conditions in paragraph 104(6)(b) were not met. The CRA also considered the amounts which the two minors received as having been included in their respective incomes pursuant to subsection 105(1) of the Act rather than subsection 104(13) of the Act.

The basis on which the CRA denied the deduction to the trust was that, in its view, the amount had not become payable in the year, as is required by paragraph 104(6)(b). This was the issue on which the Tax Court had to rule, while noting that both appellant and respondent had acknowledged that the term “payable” is not defined in the Act.

The appellant’s position:

The appellant suggested that the term “payable” is broad enough to include an amount paid to a beneficiary in violation of the trust terms.

In support of its view it raised an argument that as a general principle, parties are subjected to tax on amounts received or earned illegally. However, the Tax Court rejected this argument, noting that proceeds of crime are subjected to tax because the terms “business” and “profit” have been widely construed, both in the common law and under taxing statutes.

The appellant raised five decisions that it argued as support for its view that the word “payable” should not be construed to exclude a payment to a beneficiary that is prohibited under the terms of a trust. However, in rendering his decision, Justice Hogan concluded that none of the cases cited by the appellant were relevant to the determination of the meaning of the word “payable” in paragraph 104(6)(b) of the Act.

The appellant also argued that the scheme of the Act allows a trust to be treated as a flow-through in respect of income that becomes payable to a beneficiary each year. The Tax Court agreed with this general proposition, but noted that flow-through status requires that the conditions in paragraph 104(6)(b) and subsections 104(13) and 104(24) are satisfied.

The decision in the case:

In rendering its decision, the Tax Court concluded that if an amount cannot be paid under the terms of a trust, it cannot be considered to be payable. The timeframe in which an appeal of the decision could be filed for this case has passed and it is our understanding that the taxpayer did not seek an appeal.

The CRA is of the view that the Tax Court conclusion in this case is consistent with our longstanding views as to how the word “payable” is to be interpreted in the context of the provisions of the Act in respect of trusts. For example, internal technical interpretation 2005-0159081I7 provides a thorough discussion as to whether an amount has become payable for the purposes of subsections 104(6) and 104(13) and the views expressed therein are, in our view, supported by the conclusion of the Tax Court in this case.

The important point to take from this decision is that trustees, in deciding on allocations of income to beneficiaries where a deduction pursuant to paragraph 104(6)(b) is desired in computing the trust’s income, should consider the analytical framework for determining whether the amount will be considered to be payable to the beneficiary as noted in document 2005-0159081I7.

Phil Kohnen
2024-101024

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 Pursuant to paragraph 74.5(5)(b) of the Act, a "designated person" in respect of an individual includes a person who is under 18 years of age and does not deal at arm's length with the individual. Pursuant to paragraph 251(1)(a), related persons are deemed not to deal with each other at arm’s length. Accordingly, the two minor beneficiaries were designated persons in respect of their father.