17 March 1995 External T.I. 9502445 - PREFERRED BENEFICIARY ELECTION

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.

Principal Issues:

Determination of the number of preferred beneficiaries who may be entitled to share in accumulating income for purposes of paragraph 2800(3)(f) of the Regulations in a situation where the trust indenture defines capital gains to be included in income of the trust.

Position TAKEN:

Only income beneficiaries (which would include contingent income beneficiaries) would be included in the divisor for purposes of paragraph 2800(3)(f) of the Regulations where the trust indenture defines capital gains to be included in income of the trust.

Reasons FOR POSITION TAKEN:

Interpretation of the law.

		950244
XXXXXXXXXX	T. Murphy
(613) 957-8953
Attention:  XXXXXXXXXX

March 17, 1995

Dear Sirs:

Re: Preferred Beneficiary Election
Paragraph 2800(3)(f) of the Income Tax Regulations

This is in reply to your letter of January 16, 1995 concerning the preferred beneficiary election. The facts as stated in your letter are:

1.the trust is an inter vivos trust,

2.there are six discretionary income beneficiaries and three discretionary capital beneficiaries,

3.income not distributed within 90 days after the calender year becomes part of the capital of the trust,

4.the trustee has the right to draw on capital of the trust for the benefit of the capital beneficiaries, and

5.capital gains are defined as income for purposes of the calculation of income of the trust.

The situation described above appears to refer to an actual situation involving specific clients. As indicated in paragraph 21 of Information Circular 70-6R2, the local tax services office considers such situations. Nevertheless, we offer the following general comments which may be of assistance to you.

In your letter you refer to a document appearing in Cdn Tax Online Views dated November 1990 concerning the preferred beneficiary election and provide your interpretation of how the statements made therein would apply to the above fact situation. We note, however, that in the situation described in Cdn Tax Online Views, the trust indenture did not define capital gains to be income of the trust. Thus, that situation is not similar to the above fact situation.

In our opinion, where the trust indenture defines capital gains to be income, capital beneficiaries who are not otherwise income beneficiaries could never share in accumulating income. Therefore, they would be excluded from the divisor in paragraph 2800(3)(f) of the Regulations. The effect would be that only the income beneficiaries could be said to be entitled to share in accumulating income. You may wish to refer to ATR-30 as an example of the application of the preferred beneficiary election.

This opinion represents our opinion of the law as it generally applies. It is not an advance income tax ruling and, accordingly, it is not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch