9 March 1993 Income Tax Severed Letter 9235275 - Trusts—Preferred Beneficiary Election—Capital Gain

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.

                               5-923527
XXXXXXXXXX                     Franklyn S. Gillman
                               (613) 957-8953

Attention: XXXXXXXXXX March 9, 1993 Dear Sirs:

Re: Subsection 104(15) of the Income Tax Act (the "Act") Preferred Beneficiary Election

This is in reply to your letter dated November 25, 1992 wherein you requested the Department's opinion regarding the understanding of the above-mentioned subsection of the Act.

The example that you provide is quite specific and it appears that it may relate to a particular contemplated transaction or transactions. Assurances as to the tax consequences of contemplated transactions can only be given in response to a request for an advance income tax ruling. The procedure for requesting an advance income tax ruling is outlined in Information Circular 70-6R2. If you wish to obtain any binding commitment with respect to actual cases with facts similar to your example, an advance income tax ruling application should be submitted.

Although we can not provide confirmation with respect to the tax consequences of specific proposed transactions in response to a request for an opinion, we have set out below our general comments on certain issues you have raised.

The comments below pertain to the following fact scenario:

There exists a discretionary trust where under the trust indenture it specifies that a capital gain earned in the trust is to be considered income for trust purposes. The trust is one to which paragraph 104(15)(c) of the Act would apply. There exist both capital and income beneficiaries.

1. A capital beneficiary (who is not also an income beneficiary) will not be able to share in the accumulating income of the trust since no part of the accumulating income will be considered capital for trust purposes.

2. When a preferred beneficiary election is made, the calculation of the income beneficiaries' share in the accumulating income of the trust under paragraph 2800(3)(f) of the Income Tax Regulations (the "Regulations") would not take into account the number of capital beneficiaries that are not also income beneficiaries named in the trust indenture.

3. The fact that the trustees have encroached upon the capital of the trust in favour of one or all the capital beneficiaries will have no effect upon making a preferred beneficiary election.

Under a scenario where the indenture agreement of a discretionary trust does not specify that a capital gain earned by the trust is income and permits the trustees to encroach on capital for the benefit of the capital beneficiaries, then a capital gain earned by the trust will be considered capital for trust purposes. When making a preferred beneficiary's election, the calculation in determining each preferred beneficiaries' share under paragraph 2800(3)(f) of the Regulations, will always include the capital beneficiaries even when a capital gain is not included in the accumulating income of the trust, since the capital beneficiaries may be entitled to share in the accumulating income of the trust.

We trust these comments will be of assistance.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate