26 February 1997 Internal T.I. 9529647 - Promissory note-discretionary trust amount payable

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:

Further comments on E9604555 - 1) Can a promissory note, payable on demand without restriction, be issued to the beneficiary of a discretionary trust as evidence of an amount payable by the trust to the beneficiary?

Position:

1)Yes, if the requirements indicated in the memo are met.

Reasons:

							February 26, 1997

	Kitchener-Waterloo TSO		Trusts Section
	Tax Audit Division			C.R. Bowen
	Dick Beech				(613) 957-8585
	Assistant Director Audit
	Attention:  Gary Huenemoeder
							952964

Amount Payable under Subsection 104(24)

We are writing in reply to Mr. Huenemoeder's memorandum of November 8, 1995, wherein he posed a number of questions, one of which was whether the issuance of a non-interest bearing demand promissory note by a discretionary trust to a beneficiary would be considered an amount payable to the beneficiary for the purposes of subsections 104(6), (13) and (24) of the Income Tax Act (the "Act"). Although our comments on that matter had been discussed verbally with him, we had not previously sent a written response due to the delay in addressing the other questions posed in his memorandum. In November, 1996, Mr. Huenemoeder became aware of a letter dated August 1, 1996 #E9604555 (the "Letter") written by our directorate on the subject of the exercise of discretion by trustees of a discretionary trust and the issuance of a demand promissory note to a beneficiary. He verbally expressed his concerns to Ms. Bowen that the Letter did not appear to indicate all the requirements to be met before an amount would be considered payable to a beneficiary. In this regard, he requested that clarification on this matter be sent to him in writing as soon as possible, as well as our comments on an amount payable to a minor beneficiary. Our reply to the other outstanding questions in his memorandum will be sent at a later date. We apologize for the delay in responding to his memorandum.

Our Comments

We agree that the Letter addressed only some of the requirements to be met in order for a discretionary trust to be considered to have created an amount payable to the beneficiary for the purposes of subsections 104(6), (13) and (24) of the Act. Our comments below provide a more complete response concerning that matter.

In order for the income of a discretionary trust to become payable in a taxation year to the beneficiaries of the trust, the trustees are required to exercise their discretion before the end of the trust's taxation year and the exercise of discretion must be irrevocable with no conditions attached to the beneficiaries' entitlement to enforce payment of the amount in the year. The apportionment of the trust's income to each beneficiary (e.g., all the income, a fixed percentage of the income, or a set amount) must also be established. Furthermore, the beneficiaries must be advised before the end of the trust's taxation year of the trustees' decision, including the apportionment of the trust's income to which the beneficiary is entitled in the year to enforce payment of (even if the actual amount is not known). In case of a minor beneficiary, the trustees may advise the legal guardian of the child's property of this right. Although legal rights may exist without being in writing, in our opinion, the trustees' exercise of discretion and notification given to the beneficiaries of their decision should be in writing (e.g., a resolution signed by the trustees, minutes of the trustees' meeting). Failure to do so will result in the trustees and the beneficiaries having to provide our Department with other satisfactory evidence to support their claim that amounts became payable to the beneficiaries in the year.

The fact that the actual amount of the income of a trust in a year can not be ascertained until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information will not, in and by itself, result in an amount apportioned to a beneficiary in the year based on that income not being payable to the beneficiary in the year (as supported by the case Ginsburg vs M.N.R., 92 D.T.C. 1774 (T.C.C.)). However, where the income of a trust is not ascertainable at the year end because the amount of such income is dependent on some contingency or event occurring after that time, then based on our response to Question 55 of the Revenue Canada Round Table in the 1981 Conference Report, it is our view that, depending on the circumstances, a beneficiary may not have an enforceable right to demand payment of such an amount in that year.

Ordinarily, a promissory note is given and received as acknowledgement of the existence of and/or the conditional payment of a debt and does not create the debt. A promissory note should only be issued by a trust to a beneficiary as evidence of an amount payable to the beneficiary where the trust indenture (or relevant provincial legislation where the indenture is silent on the issue) permits the trustees of the trust to do so. Although a promissory note issued by a trust in respect of an amount payable to a beneficiary may be non-interest bearing, it must be payable on demand without restriction. Where the actual amount that is payable to a beneficiary is known before the end of the trust's taxation year, the promissory note should also be delivered to the beneficiary before the end of the year. However, where it is not possible to determine the actual amount that is payable to a beneficiary until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information, the promissory note should be delivered to the beneficiary as soon as the amount is quantified. Where the beneficiary is a minor and the trust indenture so permits, the promissory note may be delivered to the legal guardian of the minor's property.

We trust that our comments will be of assistance.

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch