23 October 1989 Ruling 58531 F - Tax Implications where Personal Trust Residing in U.K. Pays an Amount to a Canadian Beneficiary

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.

October 23, 1989

Dear Sirs:

This is in reply to your letter of August 14, 1989.

You ask for our views with respect to the income tax implications inherent in a situation where a personal trust resident in the U.K. pays an amount to a beneficiary resident in Canada.  The trust is subject to tax in the U.K. on its current income before distributions to its beneficiaries. The "after-tax" income is then distributed to the beneficiaries.

A review of the particular trust document(s) is necessary in order to determine the income tax implications inherent therein. Such a review would be made by your local district taxation office in respect of an existing situation, or by this office where a transaction is proposed and is the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R.  We nevertheless offer the following general comments.

Pursuant to the provisions of paragraphs 12(1)(m) and 104(13)(c) of the Income Tax Act (the "Act"), a person resident in Canada and beneficiary of a non-resident trust is taxable in a particular year on all amounts that "became payable in that year" to him in respect of his interest in the trust, otherwise than

(a)     as proceeds of disposition of the beneficiary's interest or part thereof, or

(b)     an amount paid as a distribution of capital by a personal trust.

As indicated in Interpretation Bulletin IT-342, an amount is "payable in a taxation year" if it is paid in the year or if the person to whom it is payable is entitled in the year to enforce payment thereof.  Thus, an amount paid to a beneficiary resident in Canada by a non-resident trust is taxable in the beneficiary's hands, whether paid out of pre-tax or post-tax income of the trust, unless the exception in either of (a) or (b) above applies.

We note your suggestion that the exception in (a) above may apply to the type of situation described above.  Since your letter refers simply to trust income being paid by the trust to an income beneficiary, we fail to see how the exception in (a) above could apply.  We refer you to Interpretation Bulletin IT-385R for an indication of the type of transaction that generates proceeds of disposition of a beneficiary's interest in a trust.

With respect to the exception in (b) above, this exception will apply only where the distribution constitutes a distribution of capital by the personal trust.  As a general rule, where

(c)     section 94 of the Act is not applicable,

(d)     foreign tax has been paid by the trust in respect of its income for a particular taxation year, and

(e)     no income tax is withheld from the portion of this "after-tax income" paid to the resident beneficiary in a year subsequent to the particular taxation year,

we would be inclined to accept the argument that such a payment would constitute a distribution of capital to the resident beneficiary.

These opinions reflect our interpretation of the law as it applies generally. They may not, however, always be appropriate in the circumstances of a particular case and, as stated in paragraph 24 of Information Circular 70-6R, they are not binding on the Department.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate