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 paragraph 10 of It-129R is intended to apply to the present case? 2. Should we accept the waivers as filed?
Position: 1. Yes. 2. Waivers must be filed in accordance with paragraph 152(4)(a) of the Act as returns were filed.
Reasons: We should always ensure that we will have the authority under the Act to reassess the eventual recipient or the trust once the dispute is resolved.
February 19, 1999
Individual Returns and Payments Trusts Section
Processing Division M. Lemire
Legislation and Trusts Section (613) 957-4363
Attention: Phil Doucet
We are writing in reply to your memorandum of December 3, 1998 wherein you requested our comments on the application of paragraph 10 of Interpretation Bulletin IT-129R (“IT-129R”) to the funds deposited in trust for XXXXXXXXXX.
Our understanding of the facts is as follows:
(A) Paragraph 10 of IT-129R
The wording in paragraph 10 of IT-129R is as follows:
Where funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court order or settlement establishing their proper disposition, earn income the Department considers such income to be income of a trust and recognizes the beneficial owner is the eventual recipient of the funds. Therefore, conditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined.
The position in paragraph 10 of IT-129R is intended to apply to situations where funds are deposited with lawyers for safekeeping, the beneficiaries are involved in litigation among themselves and there is a possibility that funds will be returned to the payer once the dispute is settled.
The position in this paragraph is that the Department considers the income earned on the funds to be income of a trust. Without the administrative position, the income earned by the trust during a year in which the eventual recipient of the income has not been resolved would be taxed in the trust since the income can not be considered payable in the year to a beneficiary. However, when the necessary waivers are filed, the Department is prepared to, in effect, accept that the arrangement was either one of an agency or ignore the existence of the trust. As a result, the Department is prepared to defer assessment of the T3 return upon receipt of the waivers until the dispute is resolved and the beneficiaries are known.
The wording in paragraph 10 of IT-129R arose as a result of a position taken in an actual fact situation dealt with by the Department. In that case, money was held by a lawyer pending settlement of a dispute of whether a deposit made towards the purchase price of a property should be refunded to the person who agreed to purchase the property when the vendor did not meet certain prerequisites prior to the closing date of the sale. Due to the uncertainty as to whether the lawyer held the funds in a trust or as agent of a principal to be determined, the parties were advised that the Department was prepared to await the outcome of the eventual disposition of the deposit plus interest provided the following conditions were met at all times: 1) both the vendor and purchaser filed waivers for all applicable years under dispute and 2) the trust (i.e., the lawyer as trustee of the trust), which may or may not have been created, properly filed waivers for all applicable years. In addition to extending the normal time frame for assessing returns, the waivers also served to obtain the agreement of the litigants to have the interest income included in the eventual recipient's income retroactively. Otherwise, the eventual recipient could argue that a trust existed during the time of the dispute and consequently, no amount could be included in the recipient’s income. In that case, both the purchaser and the vendor had filed income tax returns for those years.
(B) The current situation
It is our opinion that the position in paragraph 10 of IT-129R is intended to apply to the current situation since funds are deposited with the Trustees for safekeeping, XXXXXXXXXX are involved in litigation among themselves and there is a possibility that funds be returned to the payer pursuant to the terms of the agreement. (In this case, XXXXXXXXXX is considered the “payer” as XXXXXXXXXX was directed by XXXXXXXXXX to deposit the funds in the trust account.)
You are being asked to confirm that the Department accepts the waivers as currently filed for the relevant years and defers assessment of the trust income until the recipient is finally determined in accordance with IT-129R.
For this purpose, you are concerned that the waivers as filed might not be valid since they have been filed with the T3 returns for the relevant years.
As indicated in your memorandum, pursuant to paragraph 152(4)(a) of the Act, waivers are generally valid only if filed after the assessment of the taxpayer’s income tax return and within the normal reassessment period of the taxpayer. Therefore, any waiver filed by a taxpayer with an income tax return before the assessment of the return or filed without any tax return being filed by the taxpayer would be invalid pursuant to this paragraph.
In the present case, we understand that both XXXXXXXXXX have filed corporate income tax returns and have been assessed for the relevant years. We also understand that T3 returns have been filed for the relevant years and have been assessed except for the XXXXXXXXXX taxation year. Finally, we understand that all the waivers for the relevant years were filed with the T3 returns.
As XXXXXXXXXX have been assessed for the relevant years, it is our opinion that the waivers should only be accepted by the Department if they are valid and thus filed in accordance with paragraph 152(4)(a) of the Act (i.e., the waivers must have been filed after the assessment of their respective income tax returns and within their normal reassessment period). The fact that the waivers were filed with the T3 returns is not sufficient in itself for them to be accepted by the Department. As indicated above, the waivers constitute an agreement between the litigants and the Department to have the interest income included in the eventual recipient’s income retroactively even though the interest will presumably be paid in a subsequent year. Otherwise, the eventual recipient could argue that a trust existed during the time of the dispute and consequently, no amount could be included in the recipient’s income. If the waivers are not valid, the Department will not have the authority under the Act to reassess the eventual recipient’s income tax returns once the dispute is resolved. Moreover, it is also our view that any waiver filed by XXXXXXXXXX for any subsequent year should be accepted only if filed pursuant to paragraph 152(4)(a) of the Act.
For the XXXXXXXXXX and subsequent taxation years, although the waivers for the Trust would not be valid pursuant to paragraph 152(4)(a) of the Act if filed with the T3 returns without any notice of assessment being issued, it is our view that such waivers should be accepted by the Department. By simply holding the T3 returns pending resolution of the dispute, the Department will still have the authority to assess the T3 returns, if necessary (i.e., in the event the eventual recipient argues that a trust existed during the time of the dispute and thus no amount could be included in the recipient’s income), as the “normal reassessment period,” defined in subsection 152(3.1) of the Act, will not have commenced.
For your information a copy of this letter will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version or they may request a copy severed using the Privacy Act criteria which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at (613) 957-0682. The severed copy will be sent to you for delivery to the client.
We trust our comments will be of assistance to you.
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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