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:
Allocation of Part XII.2 tax to a non-designated beneficiary - whether such allocation must be based on the proportion of the beneficiary's share of "designated income" or is it based on the beneficiary's share of all types of income.
Position:
Based on all income.
Reasons:
Wording of subsection 210.2(3).
XXXXXXXXXX 962840
Attention: XXXXXXXXXX
March 24, 1997
Dear Sirs:
We are writing in reply to your facsimile letters of August 13 and August 26, 1996, concerning the application of Part XII.2 tax under the Income Tax Act (the "Act"). We apologize for the delay in responding to your letters.
In your letters you outline a situation where a type of trust to which Part XII.2 of the Act would apply (the "Trust") has only two beneficiaries. Beneficiary A is a Canadian resident and is only entitled to receive income distributions from the Trust ("income beneficiary") while Beneficiary B is a non-resident and is only entitled to receive distributions of capital from the Trust ("capital beneficiary"). Further you indicate that in a taxation year the trust has income from a source that is not considered "designated income" as defined under subsection 210.2(2) of the Act, and a taxable capital gain that would be considered designated income and in that year the trust distributes all the designated income to the capital beneficiary and the "other income" to the income beneficiary.
While the situation described in your letter may or may not relate to a particular fact situation, the Department is unable to provide you with specific comments on the income tax implications inherent in your letter without a complete review of all the relevant facts which would include an examination of the terms of the particular trust agreement. Such a review would be made by your local Tax Services Office if it relates to a completed transaction or by our office where it relates to a specific proposed transactions and is requested in the manner set out in Information Circular 70-6R3 dated December 30, 1996 (the "Circular"). We can however offer the following general comments which we caution may not be applicable to your particular fact situation.
Generally, while capital gains are included in the income of a trust for income tax purposes, under trust law, capital gains are considered to be part of the capital of a trust and their distribution would be prohibited unless under the terms of the particular trust indenture the trustee could make a capital encroachment on behalf of a capital beneficiary.
Where such a capital encroachment power is exercised and property is distributed to a capital beneficiary in the same year that the gain is realized, the capital beneficiary would have an income inclusion under subsection 104(13) of the Act in respect of the taxable capital gain. If the capital beneficiary is a non-resident and the taxable capital gain is designated income, then Part XII.2 tax would apply. For example, if we assume that the total trust income is $200 (before subsection 104(6) and 104(30) deductions) and the income beneficiary (the "non-designated" beneficiary) is allocated $100 of "non-designated" income and the capital beneficiary (the designated beneficiary) is allocated $100 of designated income (being the taxable capital gain), the operation of the formula in subsection 210.2(3) of the Act would appear to allocate 50% of the Part XII.2 tax to the income beneficiary as an amount paid on account of Part I tax, notwithstanding the fact that the income beneficiary was not allocated any designated income.
While we are not certain that such a result was intended, Revenue Canada's responsibility is limited to the interpretation of the Act and matters of tax policy are the responsibility of the Department of Finance ("Finance"). However, we will make Finance aware of this situation.
While we trust that our comments will be of assistance to you as indicated in paragraph 22 of the Circular this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.
Yours truly,
for Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings
and Interpretations Directorate
Policy & Legislation Branch
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