1 August 1996 External T.I. 9604555 - AMOUNT PAYABLE SUBSECTION 104(24)

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:

Would a delay in obtaining the information from an MFT (ie: calculation of income not normally made until after the year-end) cause the Department to conclude that the trustees of a trust could never make an allocation of the trust's income to its beneficiaries for a year and deduct the amount so allocated under subsection 104(6) of the Act. This would be due to the fact that at the end of the trust's taxation year the specific amount of the trust's income for that year may not be known at that time and any "amount" so allocated may not meet the definition of "amount payable" in subsection 104(24) of the Act.

Position:

Depends on facts but generally, where the terms of a trust provides the beneficiary(s) with the legal right to enforce payment in that year of an amount made payable to them that would otherwise be income of the trust for that year, the fact that the specific amount of income of the trust may not be known at year-end because of a delay in obtaining the information required to determine the trust's income will not, by itself, cause us to conclude that a beneficiary of such a trust could never have an enforceable right to demand payment of that amount in that year.

Reasons: See above

M. Cooke
XXXXXXXXXX 960455

Attention: XXXXXXXXXX

August 1, 1996

Dear Sirs:

Re: Application of Subsection 104(24)

This is in reply to your facsimile letter dated February 1, 1996, wherein you requested our comments as to whether an amount becomes payable to a beneficiary of a trust in a taxation year pursuant to subsection 104(24) of the Income Tax Act (the "Act") in what you describe as being a fairly typical situation. We apologize for the length of the delay in our response.

A discretionary inter-vivos family trust (the "trust") owns units of a mutual fund trust ("MFT"). The trust's only assets are the units of the MFT and the trust agreement contains a provision which states that capital gains are considered to be income for the purposes of the trust. Under the Act a trust's taxation year, other than testamentary trust, is based on a calender year (ie: year end is December 31).

Pursuant to the terms of the MFT's trust agreement the MFT is required to allocate and "pay" all its income for a year to its beneficiaries ("unitholders") by issuing additional units to such unitholders no later than December 31 of that same year. The trust as a beneficiary of the MFT, is required to include in its income for that year its pro-rata share of the income so allocated by the MFT ("allocated income"). Notwithstanding the fact that the additional units of the MFT are to be issued no later than December 31, the actual delivery of such units may not take place until sometime after that time. Accordingly, in order to compute the income of the trust for the year, the amount of allocated income will generally not be known until the MFT provides this information sometime shortly after December 31 of that year. Your question is would the above noted delay in obtaining the information from the MFT cause the Department to conclude that the trustees of the trust could never make a full allocation of the trust's income to its beneficiaries for a year and deduct the amount so allocated under subsection 104(6) of the Act. This would be due to the fact that at the end of the trust's taxation year the specific amount of the trust's income for that year may not be known at that time, therefore, any "amount" so allocated may not meet the definition of "amount payable" in subsection 104(24) of the Act. You indicate that a promissory note, or a cheque, would be issued to the beneficiary of the trust as soon as the specific amount payable to him is known.

The determination as to whether a beneficiary of a trust is entitled in the year to enforce payment of an amount allocated and payable to him cannot be made without a review of all the pertinent facts of the situation, including the particular agreements of both the trust and the MFT. However, we can offer the following general comments.

Subsection 104(24) of the Act states, "For the purposes of subparagraph 53(2)(h)(i.1) and subsections (6), (7), (13) and (20), an amount shall be deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount." (emphasis added).

Generally, where the terms of a trust provides the beneficiary(s) with the legal right to enforce payment in that year of an amount made payable to him that would otherwise be income of the trust for that year, the fact that the specific amount of income of the trust may not be known at year-end because of the reason described above will not, by itself, cause us to conclude that a beneficiary of such a trust could never have an enforceable right to demand payment of that amount in that year. For example, if pursuant to the terms of a trust the trustees' are required to allocate and pay the trust's income annually (ie: non-discretionary), the fact that the amount required to be allocated and paid is not actually paid at year-end because of the reason described above, does not change the fact that the beneficiary is generally otherwise entitled to legally enforce payment of the amount at that time.

Moreover, where pursuant to the terms of a trust the trustees are not required to allocate or pay the trust's income annually (ie: discretionary), it is our view that the trustees must actually exercise their discretionary power before the trust's year-end in order to make an amount payable in that year. For example, where the trustees pass a written irrevocable resolution before the trust's year-end to pay out all the income of the trust to the beneficiary, this will usually be sufficient to establish that the beneficiary has become entitled to legally enforce payment of an amount at that time even though the trustee is not able at that time to specify the amount in the resolution.

However, where the income of a trust is not ascertainable at 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 Roundtable in the 1981 Conference Report, it is our view that depending on the circumstances a beneficiary of such a trust may not have an enforceable right to demand payment of such an amount in that year.

Lastly, 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 itself create the debt. Where the trustee allocates the income of the trust to the beneficiary, as described above, then it is our view that the beneficiary will become entitled to legally enforce payment of the amount at that time under subsection 104(24) of the Act only where the promissory note is made payable on demand.

While we trust the foregoing comments are useful they are given in accordance with the practice referred to in paragraph 21 of IC 70-6R2 dated September 28, 1990 and are not binding on the Department.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate