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.
PRINCIPAL ISSUES:
Can the provisions of section 259 apply to a trust where a dollar allocation method is used to define interests in a trust.
POSITION TAKEN:
The use of units to describe interests in a trust is integral to the operation of the provision.
REASONS FOR POSITION TAKEN:
Specific wording of the proposed draft legislation released in August 1993.
LEGAL: NA
FINANCE OPINION:
NA
JURISPRUDENCE:
NA
RCT PUBLICATIONS:
NA
HAA NUMBER:
HAA 7234-1
TAX EXECUTIVES INSTITUTE, INC.
QUESTION 24,259 - PROPORTIONAL HOLDING ELECTION
A trust as well as beneficiaries that are registered pension plans may be subject to Part XI tax in respect of investments by the trust in foreign property. If the trust is a "qualified trust," an election is available under section 259 that, if made, will cause the trust to be exempt from Part XI Tax and treat each beneficiary as though holding a proportionate share of each trust asset. The proposed amendments to section 259 and accompanying Technical Notes contained in the December 21, 1992, draft legislation appear to assume (or require) that each beneficiary's interest in a qualified trust be described in the trust agreement by reference to "units."
Trust agreements commonly describe each beneficiary's percentage interest in a trust under a dollar-allocation method rather than a unit method basis. Under a dollar-allocation method, each respective beneficiary's proportionate interest in the trust (and the resulting proportionate share of the trusts income is calculated based on the actual dollar amount contributed to the trust by all beneficiaries.
Typically, the percentage interest is determined on a cumulative basis at the end of every month. As a result, the term "unit" will not appear anywhere in a trust agreement employing the dollar-allocation method. The method will produce the same allocation of the trust's income as a unit basis method, but the resulting calculations are easier to determine.
Will the section 259 election be available to a trust where the trust agreement employs the dollar-allocation method and the trust agreement:
(1) does not include the word "unit;" (2) defines "dollar" as the unit of measurement; or (3) states that the percentage interest represents the proportion of unit held by the beneficiary?
Department's Position
The proposed amendments to section 259 issued in December 1992 were replaced by draft legislation released in August 1993. The current proposal to amend the definition of a "qualified trust" is contained in proposed subsection 259(5) and at paragraph (b) of the definition it states:
"all of the interests of the beneficiaries thereunder at that time are described by reference to units of the trust all of which are at that time identical to each other."
The purpose of this provision is to ensure that the section only applies to trusts where all of the interests of all of the beneficiaries of the trust are identical in every respect except to the extent the beneficiaries hold different proportionate interests in the trust.
While section 259 does not define a unit it is operative with respect to a particular unit in a qualified trust. In this regard an integral part of the definition of "qualified trust" is the characterization of all of the interests of the beneficiaries thereunder as "units" as noted in paragraph 259(5)(b) referred to above. It may be possible to define a unit by using the dollar-allocation method, provided that it results in all of the interests of the beneficiaries under the trust being identical to each other, except as to quantum. Given the wording in 259(5)(b), it would appear to be prudent that such interests are described by reference to units in order to avoid any question as to the applicability of this provision in circumstances where the interests are identical except as to quantum.
AUTHOR: WAYNE C. HARDING FILE: E933387 DATE: DECEMBER 7, 1993
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