6 March 1996 External T.I. 9523885 - 20(11) ON FOREIGN TRUST DISTRIBUTIONS

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.

									952388
XXXXXXXXXX							Tim Kuss

Attention: XXXXXXXXXX

March 6, 1996

Dear Sirs:

Re: Application of Subsection 20(11) to Income from a Non-Resident Trust

This is in reply to your letter dated August 31, 1995 requesting our views on the application of subsection 20(11) to the following hypothetical situation. We apologize for the delay in responding.

• Mr. X is an individual resident in Canada and a citizen of the U.S.
• Mr. X holds an interest in a trust that is resident in the U.S. (the "Trust"). The Trust is not a trust to which any of sections 94, 94.1 or subsection 75(2) apply.
• The Trust's only income is from real property situated in the U.S. The Trust distributes all of its income to its beneficiaries in the year the income is earned. Mr. X is subject to tax in the U.S. on these distributions.

Analysis and Discussion

Pursuant to subsections 104(13) and 108(5), income of the Trust that is payable in the year to Mr. X shall be deemed to be income of Mr. X for the year from a property that is an interest in the Trust and not from any other source. The Act does not generally look to the underlying property of the Trust in determining the character of the amounts included in the beneficiaries' income under subsection 104(13). There are specific exceptions, for example subsection 104(19) and (21), however these exceptions only apply where the trust is resident in Canada throughout the year. Subsection 20(11) will generally apply in respect of all distributions by the Trust to Mr. X that are required to be included in his income. This would also be the case if the underlying source of income of the Trust was capital gains or income from a business carried on by the Trust.

However, in determining the appropriate foreign tax credit to be granted by Canada (and its impact, if any, on the subsection 20(11) deduction) as well as any limitations on the U.S. tax on income distributions to Mr. X, reference should be made to Article XXII of the Canada-U.S. Income Tax Convention (the "Convention"), paragraph 4 of Article XXIV of the Convention as well as the Internal Revenue Code.

We hope our comments are of assistance.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch