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.
Whether exercise of discretion by 4 trustees to direct income to beneficiary spouse of 1 trustee invokes either 56(2) or 74.1(1) where trustees are also beneficiaries.
The trustee did not transfer property or concur in transfer of property which would otherwise have led to an income inclusion if not transferred - trustee had no right to the income but was only 1 of a class of discretionary beneficiaries.
October 29, 1996
Re: Indirect Payment or Transfer of Property Through Exercise of Trustee's Discretion
This is in reply to your letter of September 4, 1996, in which you describe a testamentary trust with four trustees who are siblings; the trustees are also beneficiaries along with their spouses and children. You ask whether the exercise of the trustees' discretion to distribute income to one of the beneficiaries who is the spouse of one of the trustees will invoke the application of either subsection 56(2) or 74.1(1) of the Income Tax Act (the "Act").
The question you ask relates to the tax consequences which will attend a proposed transaction or, perhaps, a transaction that has already been completed. We can only respond with respect to a proposed transaction in the context of an advance income tax ruling. Confirmation of the tax consequences of a completed transaction must be obtained from your local taxation services office.
We therefore are unable to provide an opinion which will bind the Department but can offer the following general comments.
Subsection 56(2) will apply in the circumstances where the individual directs or concurs with the transfer of property to another and the other conditions in the provision are satisfied. As stated in Interpretation Bulletin IT-335R in paragraph 3, subsection 56(2) can apply to an individual (such as a contingent beneficiary prior to an exercise of a discretion in favour of the beneficiary) who is not legally entitled to the property transferred. Generally, however, we would not take the position that a trustee who is not the settlor, who is also one of a group of contingent beneficiaries and who exercises a discretion in accordance with the trust document has directed or concurred in the transfer of a property to another within the meaning of subsection 56(2) of the Act.
If subsection 74.1(1) of the Act is to apply, the transfer of property (which would be the right to income under the trust in this case) must be made by the trustee. Where the trustee does not cause the spouse to acquire the right to income, subsection 74.1(1) of the Act does not apply. For a good overview of the legal principles and a fact situation supporting the application of subsection 74.1(1) in a trust situation, you may wish to refer to Murphy v. The Queen 79 DTC 785 (Tax Review Board) as affirmed by 80 DTC 6314 (Federal Court, Trial Division).
We trust our comments will be of assistance to you.
Financial Industries Division
Income Tax Rulings and
Policy and Legislation Branch
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