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.
XXXXXXXXXX 940206
Attention: XXXXXXXXXX
March 28, 1994
Dear Sirs/Mesdames:
Re: Preferred Beneficiary Election
This is in reply to your letter of January 24, 1994 concerning the number of preferred beneficiaries who "may be entitled to share in the accumulating income of the trust" pursuant to paragraph 2800(3)(f) of the Income Tax Regulations (the "Regulations").
Your request appears to be a factual situation involving specific clients. As indicated in paragraph 21 of Information Circular 70-6R2, the district offices consider requests for written opinions on completed transactions.
Nevertheless, we offer the following general comments which may be of assistance to you.
Accumulating income of a trust for a taxation year is defined in paragraph 108(1)(a) of the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993, and does not include amounts that became payable in the year to beneficiaries of the trust and deducted by the trust in computing its income under subsection 104(6) of the Act.
In order for a particular preferred beneficiary to be able to elect on a share of the accumulating income of the trust which is greater than nil, that particular beneficiary must be an income beneficiary. The fact that the trust indenture provides that income which has not been distributed to income beneficiaries in a particular year is added to the capital of the trust does not mean that the capital beneficiaries are entitled to the accumulating income.
Paragraph 14 of Interpretation Bulletin IT-394R explains the circumstances in which a capital beneficiary may share in the accumulating income of a trust as an income beneficiary.
The divisor in paragraph 2800(3)(f) of the Regulations will include all income preferred beneficiaries alive at the end of the year. It will also include capital preferred beneficiaries alive at the end of the year where the trust indenture does not specify that capital gains are income for trust purposes. However, if no capital gain were realized in the year, their share in the accumulating income would be nil.
By virtue of paragraph 2800(4) of the Regulations,
contingent income and capital (where the trust indenture
does not specify that capital gains are income for trust
purposes) preferred beneficiaries alive at the end of the
year will also be included in the divisor. However, because
their right to share in the accumulating income is dependent
upon the potential happening of a future event, i.e., the
death of another preferred beneficiary, their share of the
accumulating income will be nil where that preferred
beneficiary is alive at the end of the year (see ATR-30).
Where the trust indenture specifies that capital gains are
income for trust purposes, capital preferred beneficiaries
who are not otherwise income preferred beneficiaries could
never share in the accumulating income of the trust.
Therefore, they would be excluded from the divisor in
paragraph 2800(3)(f) of the Regulations since they could
never be entitled to share in the accumulating income.
This opinion is not an advance income tax ruling. It is
provided in accordance with the comments in paragraph 21 of
Information Circular 70-6R2.
Yours truly,
for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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