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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Paragraph 104(15)(c) of the Income Tax Act (the "Act")
This is in reply to your letter of March 23, 1993 in which you requested our opinion on the allocation of accumulating income to preferred beneficiaries. We apologize for the delay in responding to your letter.
In general, we agree with your analysis of the relevant provisions which can be summarized as follows. The accumulating income of a trust, which is defined in paragraph 108(1)(a) of the Act, includes amounts deductible pursuant to subsection 104(12) of the Act. Where a preferred beneficiary is an individual described in paragraph 104(15)(c) of the Act, his or her share of the accumulating income of the trust is determined pursuant to paragraph 2800(3)(f) of the Income Tax Regulations (the "Regulations"). However, you are uncertain as to the application of the regulation where the trust has both income beneficiaries and capital beneficiaries.
In our opinion, where the trust indenture of a discretionary trust does not specify that capital gains realized by the trust are income, then capital gains realized by the trust will be considered capital under trust law. Nevertheless, the taxable portion of the capital gain is income for tax purposes and forms part of the accumulating income of the trust. If the trustee of the trust has the power to encroach on capital for any beneficiary, then for income tax purposes the capital beneficiaries will also be income beneficiaries with respect to taxable capital gains realized by the trust. As such, they "may be entitled to share in the accumulating income of the trust". Therefore, the divisor in the formula prescribed by paragraph 2800(3)(f) of the Regulations will include the capital beneficiaries even when no capital gain is realized in a particular taxation year.
Where the trust indenture of a discretionary trust specifies that a capital gain earned in the trust is to be considered income for trust purposes, a capital beneficiary can never share in the accumulating income of the trust. As a result, the calculation of the income beneficiaries' share in the accumulating income of the trust under paragraph 2800(3)(f) of the Regulations would not include any capital beneficiaries who were not also income beneficiaries.
These comments represent our general views with respect to the subject matter of your letter. They are provided in accordance with the guidelines set out in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990.
We trust these comments will be of assistance.
Yours truly,
for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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