12 March 1999 External T.I. 9807495 - TRUSTS FOR MINORS

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. Whether the trustees’ discretion to use the income or capital of the trust for the benefit of the minor beneficiaries would preclude subsection 104(18) of the Act to apply when each beneficiary’s share in the capital is to be determined at the time of the testator’s death? 2. Would we maintain our position if each beneficiary’s share is to be determined by the number of children alive at some future date (distribution date)?

Position: 1. Such a discretionary power would not preclude the application of subsection 104(18) of the Act to the extent that the discretionary power does not affect the apportioning of the trust’s income among the beneficiaries for the year. 2. No. Subsection 104(18) of the Act would not apply.

Reasons: 1. Paragraph 104(18)(c) of the Act would apply and the beneficiaries’ rights to the trust income in the year would have vested before the end of the year if such discretionary power does not affect the apportioning of the trust’s income among the beneficiaries for the year. 2. Paragraph 104(18)(c) would not apply as the beneficiaries’ rights to the trust income would not have vested before the end of the year.

XXXXXXXXXX M. Lemire
5-980749
Attention: XXXXXXXXXX

March 12, 1999

Dear Sirs:

Re: Subsection 104(18) of the Income Tax Act (the “Act”)

This is in reply to your letter of December 23, 1997 in which you request our interpretation on the application of subsection 104(18) of the Act in two different scenarios described in your letter. We apologize for the delay in responding to your letter.

Scenario 1

A trust is resident in Canada, is a “testamentary trust” under subsection 108(1) of the Act and a “personal trust” under subsection 248(1) of the Act. The beneficiaries under the trust are minor children who are the nieces and nephews of the deceased individual. The terms of the trust are as follows: (a) the capital of the trust is to be held in trust until the beneficiaries reach age 25; (b) each beneficiary’s share in the capital is to be determined at the time of the individual’s death (i.e., the number of children alive at that time determine the number of shares in the capital); (c) the income is to be added to the capital of the trust unless the trustees exercise their discretion to use the income (or capital) for the benefit of the beneficiaries; and (d) if a beneficiary dies before attaining age 25, his or her share is divided equally among the surviving beneficiaries.

Scenario 2

Same as in scenario 1 except that the terms of the trust provide that each beneficiary’s share is to be determined by the number of children alive at some future date (e.g., the time of distribution).

We are unable to provide you with any specific comments other than by way of an advance tax ruling. The procedure for requesting an advance tax ruling is laid out in Information Circular 70-6R3 dated December 30, 1996. Nevertheless, we are prepared to provide some general comments.

Our Comments

Subsection 104(18) of the Act generally provides that the income of a trust resident in Canada throughout a taxation year will be considered payable to an individual in the year under subsections 104(6) and (13) of the Act where the following conditions are met: (a) the income has not become payable in the year; (b) the individual is less than 21 years of age at the end of the year; (c) the individual’s right to the income is vested by the end of the year otherwise than because of the exercise or the non-exercise of a discretionary power; and (d) the individual’s right is not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).

To meet the condition in (c) above, the right to income must be vested, i.e., the individual must have an immediate fixed right of present or future possession. It would mean that all individuals who are to have interests in the trust are in existence and ascertained, the size of their interests is ascertained and any conditions precedent are satisfied.

It is generally presumed that a gift to be paid when an individual attains a specified age, with a gift-over to other individuals if the individual dies before attaining the specified age, is vested (subject to divestment should death occur before attaining the specified age). Thus, where the right to income is vested, there can be no discretion in the amount of income that a particular individual is entitled to. Discretionary power relating only to the timing of payment of an individual’s share of income that is fixed under the trust indenture is not relevant.

Condition (d) above permits a vested right to be extinguished if the individual dies before attaining age 40. If the individual dies after age 40 and the trust has not already distributed the amount of vested income, that amount would have to be part of the individual’s estate.

In the first scenario described above, it is our opinion that subsection 104(18) of the Act would apply with respect to the share of income of the beneficiaries who did not attain age 21 before the end of the trust’s taxation year if the trustees’ discretion to use the income (or capital) of the trust for the benefit of the beneficiaries is one relating to the timing of payment of a particular beneficiary’s share of income (or capital) that is fixed under the terms of the trust. In such case, the exercise or the failure to exercise such discretionary power would not, in and by itself, have any impact on the particular beneficiary’s share of the trust’s income or capital.

However, it is our view that any discretionary power that would permit the trustees to pay out amounts of the trust’s income or encroach upon the trust’s capital for the benefit of any one (or more) of the beneficiaries in a way that would affect the apportioning of the trust’s income or capital would preclude the application of subsection 104(18) of the Act.

The fact that a beneficiary’s right under the trust can be extinguished if the beneficiary dies before attaining age 25 would not, in and by itself, preclude the application of subsection 104(18) of the Act.

In the second scenario described above, it is our opinion that subsection 104(18) of the Act would not apply as the beneficiaries and the size of their interests cannot be ascertained until the “distribution date” to be determined at a future time.

Our comments are provided in accordance with paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.

We trust our comments will be of assistance to you.

Yours truly,

Theresa Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch