25 April 1990 Internal T.I. 7900407 F - Amounts Designated by Trust Deemed not Paid to 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.

Subject: Subsection 104(13.1) Designations

This is in reply to your memorandum of April 11, 1990 concerning designations by a trust under subsection 104(13.1) of the Act.

Your particular concern relates to the following question raised by a "local study group" with whom you intend to meet in mid-May:

     "Subsection 104(13.1) allows a trust/estate to designate a portion of its taxable income as not being paid to beneficiaries pursuant to a specific calculation. This was recently enacted to allow trusts/estates to claim non-capital loss carry-forwards which, under certain circumstances, they may never otherwise have had the opportunity to claim.

     It appears that many trust/estates are utilizing this subsection to enjoy the use of lower marginal tax rates for both the testamentary trust and the beneficiary. Is there any indication that this apparent misuse will be restricted?"

Our Comments

It is our view that there is nothing in subsection 104(13.1) (or any other provision of the Act) that would allow the Department to restrict the use of subsection 104(13.1) designations to situations where the reason for the designation is to allow the trust to claim non-capital loss carry forwards. Thus, any such restriction would have to come by way of amending legislation.

21(1)(b)

What may be of interest to both you and the "local study group" is a position recently adopted by the Department where the trust's liability arising out of the subsection 104(13.1) designation is paid by the income beneficiary. The issue arose as a result of a number of enquiries from trust companies and/or their representatives asking if the payment by the beneficiary of the trust's tax liability would affect the status of a testamentary trust. That is, would the beneficiary's payment represent a contribution to the trust such that the requirement in subparagraph 108(1)(i)(ii) of the Act would be met. Our reply has generally been as follows:

     "Where an income beneficiary has agreed to bear the burden of a trust's tax liability arising out of a subsection 104(13.1) designation, it is our view that the payment of the taxes by the beneficiary will not in and of itself result in either a contribution to the trust for the purpose of subparagraph 108(1)(i)(ii) of the Act or a gift to the trust for the purpose of paragraph 122(2)(d) of the Act. The amount paid by the beneficiary must equal the taxes payable by the trust or income deemed not to have been paid or payable to the beneficiary by virtue of the designation. The payment may be made by

     (a) reimbursing the trustee,

     (b) providing a cheque made payable to the taxing authority, or

     (c) receiving a net amount from the trustee reflecting the beneficiary's share of the income of the trust less the relevant taxes payable by the trust."

for DirectorFinancial Industries DivisionRulings Directorate