22 September 1997 External T.I. 9725075 - THIRD PARTY PAYTS AND RENT FREE USE OF TRUST PROPERTY

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:

1) Under what circumstances will a payment made by a discretionary trust to third parties for the benefit of a minor beneficiary be considered paid to the child for the purposes of subsections 104(6), (13) and (24)?

2) Will a taxable benefit under subsection 105(1) arise to a parent solely as a consequence of a trust paying the personal and living expenses of that child, including the "necessaries of life"?

3) Will there be a benefit under subsection 105(1) for the rent-free use of personal-use property by a minor beneficiary and the minor's parent where that property owned by the trust is acquired for the benefit of the minor beneficiary?

Position:

1) Where the requirements of our proposed position have been met, amounts paid by a trust to a person other than a minor beneficiary for the benefit of the minor beneficiary will be considered paid to the beneficiary.

2) No.

3) The administrative position expressed in Q#31 and #69 of the Revenue Canada Round Table of the 1988 and 1989 Conference Report, respectively, represents our Department's position.

Reasons: see 970657

September 22, 1997

	Client Assistance Division	 Trusts Section
St. John's Tax Services	      C.R. Bowen
	Sir Humphrey Building	      (613) 957-8585
	Newfoundland

	Attention:  Judy Moores
		                          972507

Trust Fund for XXXXXXXXXX

Further to our memorandum dated June 30, 1995, our review of the application of subsection 105(1) of the Income Tax Act (the "Act") has recently been completed and our opinion is outlined below. As this review was completed in conjunction with a review of whether payments made by a discretionary trust for the benefit of a minor beneficiary will be considered payments made to the beneficiary for purposes of subsection 104(24) of the Act, we have included our opinion in this regard as well.

1) Payments made by a trust for the benefit of a minor beneficiary

The trustee of a discretionary trust may prefer not to make payments of the trust's income directly to a beneficiary who is a minor (a "child") for variety of reasons and instead may wish to make the payments to:

-the child's parent or legal guardian (the "parent") to reimburse the parent for an expenditure made for the benefit of the child; or

-a person (a "third party") that provided or will provide goods or services for the benefit of the child.

In view of certain obiter dictum in the Langer Family Trust, 92 D.T.C. 1055, (T.C.C.), concern has been expressed that such payments would not be considered an allocation of a trust's income to the child for the purposes of subsections 104(6), (13) and (24) of the Income Tax Act (the "Act") since those provisions refer to amounts that became payable by a trust "to a beneficiary".

With respect to indirect payments, where an amount of income is not paid directly to the individual so entitled, but is paid to another person for the benefit of the individual pursuant to the individual's direction or concurrence, that amount will be included in the individual's income. In the case of a child, the person with the legal authority to consent to and direct such payments on behalf of the child will usually be the legal guardian of the child's property. For the purposes of paragraphs (a) and (b) below, we have assumed that the person with such authority is the parent.

The trustee of a discretionary trust may decide to allocate trust income for the benefit of a beneficiary who is a minor by making a payment to a third party or to the parent as a reimbursement for an expenditure. Alternatively, the parent may seek the trustee's agreement to make such a payment and, at the same time, provide direction to pay the amount to the appropriate person (i.e., the third party or the parent). The Department will consider such a payment to be deductible from the trust's income as an amount paid to the child in the year (pursuant to subsection 104(6) of the Act) and included in the child's income in the year (pursuant to subsection 104(13) of the Act) where:

a)the trustee exercised his or her discretion pursuant to the terms of the trust indenture or will to make the amount of the trust's income payable to the child in the year before the payment was made;

b)where the trustee initiated the steps to make the payment, the trustee notified the parent of the exercise of discretion and the parent directed the trustee to pay the amount to the appropriate person before the payment was made; or where the payment was made pursuant to the parent's request and direction, the parent was advised of the exercise of discretion and payment of the amount either before or after the payment was made; and

c)it is reasonable to consider that the payment was made in respect of an expenditure for the child's benefit; i.e., amounts paid for the support, maintenance, care, education, enjoyment and advancement of the child, including the child's necessaries of life.

The above comments assume that the attribution rules do not apply. Where the actions taken by the trustee and parent described in (a) and (b) above are not evidenced in writing, the trustee and parent should be prepared to provide other satisfactory evidence that the requirements were met. Records kept by the trustee to support that a payment was made in respect of an expenditure for the child's benefit should include the receipt issued by the third party, or where the parent was reimbursed for the expenditure, the receipt obtained by the parent for that expenditure.

Where an expenditure (or a portion thereof) is not for the benefit of the child, the Department will not consider the payment (or a portion thereof) made by the trust as an amount paid to the child. Consequently, the amount will not be deductible from the trust's income and will not be included in the child's income. However, that amount will be included in the income of the person who received or enjoyed the benefit of the payment pursuant to subsection 105(1) of the Act.

It is our opinion that a taxable benefit under subsection 105(1) of the Act will not arise to the parent as a consequence of the trust (in accordance with the terms of the trust indenture or will) paying for the expenditures described in (c) above for the benefit of the child, including those that the parent would otherwise have been legally obligated to incur for the support, maintenance, etc., of the child pursuant to applicable provincial and/or federal statutes. However, payments made by the trust which meet the requirements outlined above will be included in the child's income.

2) Taxable Benefit for Use of Personal-use Property

We have received numerous requests on whether a taxable benefit arises under subsection 105(1) of the Act from the rent-free use of personal-use property owned by a trust. Our position on whether a taxable benefit arises from the rent-free use of personal-use property owned by a trust remains as indicated in the responses to questions 69 and 31 of the Revenue Canada Round Tables of the 1988 and 1989, respectively, Conference Reports of the Canadian Tax Foundation. In summary, those responses state that although it is the Department's position that the use of trust property by a beneficiary of the trust constitutes a benefit for the purposes of subsection 105(1) of the Act, in the case of personal-use property owned by a trust, the Department will generally not assess a benefit for the use of that property. In this regard, personal-use property of a trust will, in accordance with the definition in section 54 of the Act, include property (such as homes, cottages, boats, cars, etc.) owned primarily for the personal use or enjoyment of a beneficiary of the trust or any person related to the beneficiary.

Consequently, where, pursuant to the terms of the trust indenture or will, a trust owns personal-use property for the benefit, enjoyment or personal use of a beneficiary who is a minor, our position is that a taxable benefit under subsection 105(1) of the Act will generally not be assessed to that child for the rent-free use of the property by the child. Where the child's parent (who may or may not be a beneficiary of the trust) also uses that property, a taxable benefit will generally not be assessed to the parent.

However, a benefit in respect of the upkeep, maintenance, or taxes for such property may arise pursuant to subsection 105(2).

We trust that our comments will be of assistance.

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