25 January 1993 Income Tax Severed Letter 9238787 - Minister's Discretion 104(2)

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.

                                       January 25, 1993

TORONTO DISTRICT OFFICE                HEAD OFFICE
                                       Rulings Directorate
    Attention: Mr. R. Bolingbroke      Marc Vanasse
               Chief of Business Audit (613) 957-8953
                                       923878

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This is in reply to your memorandum dated December 18, 1992 wherein you request an interpretation with respect to the Minister's discretion pursuant to subsection 104(2) of the Income Tax Act (hereinafter, the "Act").

The Facts

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Taxpayers' Request

5. The representative is now requesting on behalf of his clients that the Director of Taxation exercise the Minister's discretion pursuant to subsection 104(2) of the Act

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In his view all the conditions as well as the intent of subsection 104(2) of the Act have been met.

District Office's Opinion

6. It is your view that although the intent of subsection 104(2) appears not to cover situations of this nature, the legislation leaves room for interpretation. The strongest argument against granting the request would be that the trusts did not operate concurrently and that the trustees and beneficiaries were not precisely the same.

Our Comments

7. A trust, as defined in Underhill's Law of Trusts and Trustees, quoted in J.A. Meade v. MNR

63 DTC 997-33, is

        "an equitable obligation, binding a person (who
        is called a trustee) to deal with property over
        which he has control (which is called the trust
        property), for the benefit of persons (who are
        called the beneficiaries or cestuis que trust),
        of whom he may himself be one, and any of whom may
        enforce the obligation."

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8. As stated by Mr. Lloyd F. Raphaël in Canadian Income Taxation of Trusts (published by CCH in 1982; hereinafter, "Raphaël"), at page 173, the apparent purpose of subsection 104(2) of the Act is to prevent a settlor from splitting potential income of a trust for a beneficiary by the creation of several trusts each with smaller income for the same beneficiary. According to Raphaël, the main problem in the interpretation of this provision is to determine

        "whether or not a class (of beneficiaries)
        is ascertainable, open or closed, and
        within the rules against perpetuity and
        remoteness.  Other than the clear purpose
        apparent in the wording of the provision,
        there is no hint therein from which it can
        be inferred that there should be a
        characteristic or affinity common to all
        the beneficiaries of the trusts in order to
        make a group or class, other than the fact
        that they are objects of the same settlor's
        bounty." (at p.173)

Commenting on the Tax Appeal Board decision in Mitchell v. M.N.R. 56 DTC 521, Raphaël continues at page 175:

        "If the beneficiary of each trust is so
        related by blood as to constitute a group
        of related beneficiaries, it would be
        disrespectful unreasoning to say that the
        paragraph does not apply because they are
        different beneficiaries, as if the
        expression "same beneficiary" was a
        substitute for the expression "group or
        class of beneficiaries" and to hold the
        latter expression does not extend the scope
        of the paragraph.  Furthermore, if the
        original trust property received by the
        trusts from the settlor is substituted for
        other property whether by sale or exchange,
        it would appear that the Minister could
        make the designation after the substitution
        or that the designation could be made
        retroactively to the date of the creation
        of the trusts, seeing that the wording of
        the subsection is not limited to the
        trusts' income of any year."

Based on the preceding comments, it would appear that it is not essential that the two trusts operate concurrently, neither that the trustee be the same for the Minister to exercise his discretion.

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In essence, it was held in the Mitchell decision that the provision of subsection 63(2) of the Act (as it existed then, now subsection 104(2) of the Act) does not apply to the situation where there are a number of trusts and each trust has a different beneficiary.

9. The intent of the subsection 104(2) of the Act is to prevent tax avoidance. This is evidenced by the precise wording of the provision which states in part:

        "(...) such of the trustees as the Minister
        may designate shall, for the purposes of
        this Act, be deemed to be in respect of all
        the trusts an individual whose
        property is the property of all the trusts
        and whose income is the income of all the
        trusts."

Therefore, any designation by the Minister under subsection 104(2) of the Act would only be applicable in respect of property of all the trusts and income of all the trusts (including gains on trust property), and, as such, this provision would not be applicable with respect to losses incurred by the trusts. The word income does not normally include the word loss unless a contrary intention is evident. This is evidenced, for example, by the wording of sections 3 and 4 and subsection 9(2) of the Act.

As a result, it is our opinion that the prior years non-capital losses that may be deductible in computing taxable income are not subject to the Minister's discretion under subsection 104(2) of the Act.

10.

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We trust that the above comments will be of assistance to you. Acting Section Chief Manufacturing Industries, Partnerships and Trusts Section Manufacturing Industries, Partnerships and Trusts Division Rulings Directorate Legislative and Intergovernmental Affairs Branch