12 February 1993 Income Tax Severed Letter 9234176 - Meaning of \"Beneficially Interested in a 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Appeals Branch Rulings
Directorate
Appeals and Referrals Division Olli Laurikainen
(613)957-2116

Attention: Dave Turner

923417

Subsection 94(7) of the Income Tax Act This is in reply to your memorandum dated November 12, 1992 and further to our telephone conversation (Turner - Laurikainen) November 26, 1992 concerning the interpretation of the term "beneficially interested in a trust".

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The position taken by this Directorate in our memo to the Toronto District Office March 24, 1986, that the coming into force of subsection 94(7) broadened the meaning of the term "a person beneficially interested in a trust" was not solely based on a Rulings officer's interpretation of the explanatory notes accompanying the amendments to section 94 of the Act as you apparently have surmised.

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The coming into force of subsection 94(7) did broaden the meaning of the term "beneficially interested" but it did not, in our view extend the application of subsection 94(1) of the Act to discretionary beneficiaries of non-resident trusts. It is our view that a beneficiary in a discretionary trust would have been "a person beneficially interested in the trust" even before the coming into force of subsection 94(7) of the Act for it is precisely such arrangements that paragraph 94(1)(c) of the Act is directed at. If one were to take the alternate view, what one would in effect be saying is that paragraph 94(1)(c) of the Act was meaningless prior to the coming into force of subsection 94(7) of the Act. Such an interpretation would of course be absurd.

In interpreting paragraph subsection 94(1) of the Act in the XXXXXXXXXX case you have placed some reliance on the decision in the Supreme Court case of the Minister of Revenue (Ontario) v. McCreath (1977) 1 S.C.R. 2 ("McCreath"). McCreath dealt with whether a beneficiary in a discretionary trust had an interest in a trust property. The analogy to paragraph 94(1)(a) apparently being that if a person can be considered to have an interest in the trust property, then he should also be considered "a person beneficially interested in the trust". We agree with this connection. However, we would not consider a finding that a person did not have an interest in the property of a trust as determinative of whether that person is a person beneficially interested in the trust. This is significant because in the context of the Act, the findings in McCreath have been judicially analyzed and have been found to have limited application.

The Court in McCreath found that a particular person did have an interest in the property of the trust and therefore her interest was "property passing" on her death for the purposes of the particular legislation involved. In his analysis of McCreath in the case of Harold J. Sachs v. Her Majesty The Queen, [[1980] C.T.C. 358] 80 DTC (F.C.A.) ("Sachs") (a case involving a very similar issue in the interpretation of the former subsection 75(1)), Mr. Justice Heald commented at 6297:

• "In my view, the McCreath case supra is distinguishable from the case at bar because of significant differences in the terms of the trust deed. As noted supra from the terms of Clause 1(a) of the trust deed and as observed by Dickson J., collectively the settlor and her children were entitled to all of the income. The obligation of the trustee by clause 1(a) is "...to pay or apply the whole net income of the trust fund in each year to or for the benefit of the Settlor, and her issue...". In the case at bar, the trustee's obligation until December 1, 1991 is to keep the trust estate invested but there is no requirement to pay any of the income or corpus to or for the benefit of any of the beneficiaries. Even after December 1, 1991, there is no vesting of any of the shares of the trust in any of the beneficiaries until they attain the full age of 25 years. Thus, the terms of the two trust deeds are quite different and since in this case collectively the beneficiaries had no entitlement to the income, it seems to me that the rationale in the McCreath case supra would not apply to the case at bar...".

It appears that Mr. Justice Heald views the terms of the trust deed and in particular whether such terms specify when distributions are to be made, as distinguishing whether one would be considered to have an interest in the trust property: a question of fact. However, a finding to the effect that a discretionary beneficiary does not have an interest in the property of a trust is not in our view necessarily fatal to the argument that the same beneficiary is a person beneficially interested in the trust. Accordingly, while McCreath and Sachs may be helpful in some circumstances in interpreting the term "a person beneficially interested in a trust", they in our view do not represent absolute authority in that area.

We note that the draft amendments to the Act introduced in December 1991 propose to repeal subsections 94(7) and 74.5(10) (which define the term only for the purposes of the sections specified therein) in favour of a definition in subsection 248(25) which will apply for the purposes of the whole Act.

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch