20 February 1990 Ministerial Correspondence 59414 F - Deduction in Computing Income of Trust

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.

February 20, 1990

Dear Sirs:

This is in reply to your letter of January 15, 1990 concerning the computation of income and losses of a trust described in paragraph 104(4)(a) of the Income Tax Act (the "Act").

You refer to the fact that paragraph 104(6)(b) of the Act precludes a paragraph 104(4)(a) trust from deducting capital gains or income arising from the deemed dispositions under subsections 104(4), 104(5) and 104(5.2) of the Act.  As a result, the trust itself is taxable on any income or taxable capital gains resulting from those deemed dispositions.  Where the deemed distributions occur as a result of the spouse beneficiary's death and the terms of the trust provide that on the spouse's death the trust property is to be distributed to remaindermen, there will nevertheless be a period of time that will elapse between the date of the spouse's death and the ultimate distribution of the property the "subsequent period"). During this subsequent period, you state that transactions with respect to the trust property can give rise to capital losses and/or income deductions and losses.  With respect thereto, you ask if Revenue Canada considers that deductions and losses during the subsequent period may be utilized within the trust to offset the income or taxable capital gains arising from the deemed dispositions referred to above.

Our Comments

We would first point out that the income or taxable capital gains resulting from the deemed dispositions referred to above will also be included in the income of the remaining beneficiaries (beneficiary) if the income or gain is payable to the beneficiaries (beneficiary) in the year of disposition under the terms of the trust.  In this regard, we refer you to paragraph 8 of Interpretation Bulletin IT-381R.  A designation under subsection 104(13.1) of the Act, or 104(13.2) depending on the circumstances, is available to eliminate this duplication.

A trust's income for a taxation year is determined under section 3 of the Act.  As indicated in section 3, allowable capital losses for the year (whenever incurred in the year) are deductible from taxable capital gains for the year, including taxable  capital gains resulting form the deemed dispositions referred to above.  However, such losses are not deductible in computing other income.  The amount by which the allowable capital losses exceeds taxable capital gains is a net capital loss deductible in computing the taxable income of other years to the extent provided in subsections 111(1.1) and 111(3) of the Act.  As indicated in subsection 111(1.1), where there is a nil amount determined under paragraph 3(b) of the Act fro the year in which the spouse beneficiary dies, no portion of a net capital loss of post 1985 taxation years will be deductible in computing the taxable income of the trust for that year.

Where an expense incurred in the subsequent period is deductible for income tax purposes and the deduction creates a loss for the year from a business or property, such loss is deducible form other income for that year by virtue of paragraph 3(d) of the Act.  Pages 10 and 11 of the 1989 "T3 Guide and Trust Return" provide examples of deductible expenditures and cites the general rule that "any amount claimed must be expended to earn the income of the trust and not be outlays that pertain to the capital assets of the trust or to personal expenditures of the beneficiaries or trustees".  Where an expense incurred in the following taxation year created a loss for that year from a business or property, such loss will be deductible in computing the taxable income for the previous year to the extent provided in paragraph 111(1)(a) and subsection 111(3) of the Act.  If you have a particular expenditure in mind and wish to know whether or not it represents a deductible expense, we suggest you contact officials in the Ottawa District Taxation Office.

Note that a spouse trust resident in Canada may claim a capital gains deduction under section 110.6 of the Act in the year that the spouse dies, as stated on page 16 of the 1989 "T3 Guide and Trust Return".

The above comments are an expression of opinion only and are not binding on the Department, as stated in paragraph 24 of Information Circular 70-6R.  We trust however that they are of assistance to you.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate