27 September 1993 Income Tax Severed Letter 9314856 - Segregated Fund—Non-capital Losses

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. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

                                       September 27, 1993

     Assessment of Returns 
        Directorate                    Rulings Directorate
     T2 and T3 Programs Division       B.G. Dodd
     T3 Programs Section               957-3495

     Attention: G. Le Sage
                                       931485

XXXXXXXXXX

This is in reply to your memorandum dated May 19, 1993 with which you forwarded a copy of a letter dated May 18, 1993 from XXXXXXXXXX requesting the Department's views on tax reporting on T3 Supplementaries in respect of negative income arising on segregated funds. We apologize for the delay.

All references to statute are to the Income Tax Act.

XXXXXXXXXX letter states:

                  XXXXXXXXXX

XXXXXXXXXX is concerned with whether such negative interest income from one policy can be reported so that the taxpayer can apply it against positive interest income from the other policy. Where there is no positive interest income, XXXXXXXXXX suggests the negative amount should not be lost and thus enquires whether it is possible to carry forward the negative amount and if so, for what period.

Our comments are based on the assumption that XXXXXXXXXX reference to "segregated fund(s)" is such that section 138.1 is applicable and that the policies are "segregated fund policies" as described in paragraph 138.1(1)(a).

In respect of a segregated fund, for the purposes of Part I (and XIII), of the Act

- paragraph 138.1(1)(a) deems the creation of an inter vivos trust (the "related segregated fund trust"), and

- paragraph 138.1(1)(b) deems the property allocated to the segregated fund, and any income accrued thereon, to be the property and income of such trust (and not that of the insurer).

As a result, the provisions governing the taxation of trusts and their beneficiaries (ie. subdivision k of Division B) are applicable so that, for example, a related segregated fund trust is treated as an individual with respect to the trust property and any income or loss in respect of the segregated fund property is thus determined at the trust level (subsection 104(2)).

Paragraph 104(6)(b) provides that where a trust's income for the year (such income being determined before applying this provision) becomes payable in the year to a beneficiary, it may be deducted by the trust in computing its income (such amounts will be included in the beneficiary's income under subsection 104(13)). Note that for the purposes of these particular provisions, paragraph 138.1(1)(f) deems the income of a related segregated fund trust to be an amount that has become payable in the year to the beneficiaries under the trust.

Where, however, the trust has no income in a year, for example it has a non-capital loss as in the case described in XXXXXXXXXX letter, there is no amount of trust income which is payable to a beneficiary. Where this situation exists in a particular year, the result is that the related segregated fund trust has a loss for tax purposes—there is no basis for attributing a loss incurred by such a trust to a beneficiary (other than a capital loss as described in subsection 138.1(3)), and therefore nothing to report on T3 Supplementary forms. (We note that this point is made in item 6 on page 31 of the 1992 T3 Guide and Trust Return.) Pursuant to paragraph 111(1)(a), such losses by a trust can be carried forward seven years and back three years by the trust.

There is a mechanism in subsection 104(13.1) which in some circumstances may effectively allow beneficiaries to benefit, in a subsequent year in which there is trust income to be distributed, from losses which have been incurred by a trust in prior years (see paragraph 4 of IT-342R ). However, this does not apply here because pursuant to the definition of "trust" in paragraph 108(1)(j), in certain provisions of the Act, including subsection 104(13.1), a trust does not include a related segregated fund trust.

We hope this will be of assistance to you.

for Director Financial Industries Division Rulings Directorate