6 February 1995 External T.I. 9428155 - DEFINITION OF ACCUMULATING INCOME & SPOUSAL TRUST

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.

		942815
XXXXXXXXXX		L. Holloway
(613) 657-8953

Attention: XXXXXXXXXX

February 6, 1995

Dear Sirs/Mesdames:

Re: Definition of "Accumulating Income"

This is in reply to your letter dated October 21, 1994 requesting an explanation of the application of subsection 108(3) of the Income Tax Act (the "Act") to a hypothetical situation. The facts of this situation follow:

(i) The trust in question qualifies under subsection 70(6) of the Act.

(ii)The surviving spouse is the sole income beneficiary during her lifetime and no capital may be distributed to her or anyone else during her lifetime.

(iii)The trust indenture does not define capital gains to be income.

In particular you have asked whether the surviving spouse can make a preferred beneficiary election together with the trust under subsection 104(14) of the Act in respect of a capital gain realized by the trust in the year, and for an explanation of the application of subsection 108(3) of the Act to accumulating income.

Our Comments

All references to sections or components thereof are references to the Act unless otherwise indicated.

Under subsection 108(3), the computation of income without reference to the provisions of the Act (subject to certain adjustments) is for certain purposes and does not extend to all provisions of the Act. Relative to the various provisions of the Act concerning "spousal trusts", it sets out the income the spouse must be entitled to receive during his or her lifetime in order for those provisions to be met.

Accumulating income of a trust for a taxation year is defined in subsection 108(1) as the amount that would be the trust's income for the year if the Act were read without reference to, inter alia:

(i)subsection 104(12), and

(ii)where the trust

(A)is a pre-1972 spousal trust,

(B)is a trust described in paragraph 104(4)(a), or

(C) elected under subsection 104(5.3) for a preceding taxation year,

subsections 104(4), (5), (5.2) and 107(4).

Accordingly, with the exception of (ii) above, taxable capital gains are included in accumulating income and allowable capital losses are deducted to the extent of such taxable capital gains.

Pursuant to paragraph 104(15)(a), where the trust is a pre-1972 spousal trust or a trust described in paragraph 104(4)(a) and the spouse is alive at the end of the year, it is only that spouse that could avail him or herself of the preferred beneficiary election with respect to net taxable capital gains realized by the trust that form part of the accumulating income.

With the various "spousal trusts", the income as computed under subsection 108(3) is the amount payable under subsection 104(24). As such, it may be deducted by the trust in computing its income for a taxation year and is included in computing the income of the spouse for a taxation year as and to the extent provided for in subsections 104(6) and 104(13) respectively. Hence, the amount payable would not form part of the accumulating income of the trust.

The above comments represent our opinion of the law as it applies generally. This opinion is not an advance income tax ruling and, consequently, it is not binding on Revenue Canada.

We trust these comments will be of assistance to you.

Yours truly,

T. Murphy
Section Chief
Trusts Section
Rulings Directorate
Policy and Legislation Branch