10 May 1993 Internal T.I. 9228357 F - Income From a United Kingdom Trust (4093-U4-100-20)

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.

Ottawa District OfficeRulings Directorate

Attention:  Mr. Gaston Lalonde E & OE

Income from a United Kingdom Trust

This is in response to the telephone conversation with Gaston Lalonde and the writer on September 28, 1992 wherein we requested you forward a copy of the form R185E(1990) which was discussed on the phone.

We understand that the U.K. tax system continues to be that the trustees are liable to the basic rate of tax on income arising during the administration of the trust and presumably the form R185E(1990) is the documentation forwarded by the U.K. trustee to the taxpayer. After the trustees have paid the tax and administration expenses, the balance in the trust belongs to the income beneficiaries as income liable to tax in their hands. The amount received by the beneficiary is grossed up at the basic rate of tax paid by the trustees (i.e. 25% except where the amount is received from a trust which has discretionary powers the rate is 35%). As indicated on form R185(1990), the trustee of a trust is required to file form R185 where payments are made to a beneficiary of a trust at the trustee's discretion (discretionary trust).

Under the U.K. system, where a trust which does not have discretionary powers is in receipt of income of 100 pounds the trustee is required to pay a tax of 25 pounds. Assume the trustee has administrative costs of 10 pounds and pays the remaining 65 pounds to the beneficiary. The beneficiary in this case would be required to report grossed-up income of 86.66 pounds (65/.75) and he would be entitled to a tax credit against his U.K. taxes up to 21.66 pounds (86.66-65). This as an amount equal to the tax paid by the trustee on the grossed-up income.

Where the income, in the above example, was received by a beneficiary from a discretionary trust, the trustee would have been required to pay a tax of 35 pounds and the trustee could distribute the remaining 55 pounds to the beneficiary. In this case the beneficiary would be required to include 84.61 pounds (55/.65) in income and would be entitled to claim a credit against his tax up to 29.61 pounds (84.61-55). Where the trustees have paid the tax and administration expenses, the balance is income of the beneficiaries. The amount of income received by the beneficiary is grossed-up at the appropriate rate to take into account the tax paid by the trustees. It should be noted that the grossed income of the beneficiaries will not be the same as the trustees's income in situations where the trustee is entitled to deduct administration or other costs.

Canadian Beneficiary

Where a Canadian beneficiary receives income from a U.K. trust he is not entitled to a credit as such for the tax borne by the trustees. However, it is our understanding that the Inland Revenue will "look through" the trust income to the underlying component parts of that income. The purpose of looking through the trust is to permit the recipient of the income to claim any relief that would have been available under U.K. domestic law had the income come directly to the beneficiary instead of through the trustees.

In addition, where the beneficiary is resident in a country with which the U.K. has a double taxation agreement, as in the case of Canada, further relief from domestic withholding rates under the looking through principle may be available (e.g. interest 10% of the gross amount, dividends 15% on the gross amount etc.). It is our understanding that the beneficiary would be entitled to make a claim for relief (i.e. the tax is considered to be paid by the beneficiaries) to the United Kingdom for the amount of tax paid by the trustees in excess of the withholding rates provided under the Canada-U.K. Income Tax Convention (the "Convention") on each particular source of income.

The Canadian beneficiary should present his formal claim for relief, supported by either form R185 or R185E(1990) which is supplied by the trustees, detailing the beneficiary's gross income/payment, the United Kingdom tax borne and the net income/payment. Revenue is responsible for the breakdown of the beneficiary's trust income into its component parts by reference to the underlying sources of trust income. The taxpayers should write to Revenue Claims Branch International Division St. Johns House Merton Road Bootle Merseyside L69 9BB to get a breakdown of the trust income and to obtain any relief under the Convention (e.g. interest - tax in excess of 10% of the grossed-up amount should be refunded by the U.K. authorities). He is required to include the grossed-up amount of the interest in his income for the year for Canadian tax purposes. It should be noted that any U.K. tax paid in excess of the rate in the Convention must be refunded by the U.K. Authorities and Canada will permit the beneficiary to claim a foreign tax credit up to the amount of the tax that should have been withheld by the United Kingdom (i.e. 10% in case of interest).

We trust the above is adequate for your purposes.

Section Chief Foreign Section Reorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch