14 June 1999 Internal T.I. 9903747 - MINIMUM TAX AND HEALTH AND WELFARE TRUST

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: Are the minimum tax provisions applicable to a Health and Welfare trust?

Position: YES

Reasons: 127.53(1) does not provide a basic exemption

							June 14, 1999

	TORONTO CENTRE TSO			HEADQUARTERS
	Appeals Division				C. Tremblay
	1213 430-2-3				957-2139

	Attention:  Shaheena Kharal
							990374

XXXXXXXXXX (the "Trust")

We are writing in reply to your memorandum of February 8, 1999, regarding the application of the alternative minimum tax in Division E.1 of the Income Tax Act (the "Act") to the Trust.

The Trust is a Health and Welfare Trust that earned capital gains in 1995 and 1997 and was charged alternative minimum tax as a portion of the capital gain was included in the minimum tax calculation. The Trust's notices of assessment state that a Health and Welfare Trust is not permitted to claim a non-capital loss as per Interpretation Bulletin IT-85R2, paragraph 12. The representative has filed a notice of objection for both years and argues that in calculating "gross trust income," the non-taxable portion of the capital gains included in the minimum tax calculation should be added, thereby permitting an offsetting deduction and no taxes payable.

In the situation at hand, the Trust was established on XXXXXXXXXX, and does not qualify for the basic minimum tax exemption of $40,000 allowed for trusts in paragraph 127.53(1)(b) of the Act. Accordingly, the exemption is nil under paragraph 127.53(1)(c) of the Act.

Our Comments

In our view, 1/3 of the taxable capital gain is subject to the minimum tax rules by virtue of subparagraph 127.52(1)(g)(ii) of the Act. This is reflected in Part A of Schedule 12 of the Calculation of Minimum Tax. If non-capital losses are incurred in the current year, they may reduce the minimum tax pursuant to paragraph 127.52(1)(h.1) (Schedule 12 shows this under line # 1221). A Health and Welfare trust may realize a non-capital loss if the expenses described in paragraph 12(a) of IT-85R2 are incurred in earning the investment income of the trust and exceed the gross income of the trust. However, this is not the case for the Trust, as the T-3 trust information shows that the direct investment expenses incurred (those described in paragraph 12(a) of IT-85R2), do not exceed the investment income of the trust. Accordingly, there is no non-capital loss to deduct for minimum tax purposes, and both the 1995 and the 1997 assessments would appear to be correct.

It is our view that a non-capital loss cannot arise as a result of the expenses described in either paragraph 12(b) "...expenses related to the normal operation of the trust including those incurred in the collection of and accounting for contributions to the trust, in reviewing and acquiring insurance plans and other benefits and for fees paid to a management company to administer the trusts..." or 12(c) "...premiums and benefits payable out of trust income of the current year pursuant to paragraph 104(6)(b) of the Act..." The expenses described in paragraph 12(b) are not incurred for the purpose of earning income from business or property, and the expenses described in paragraph 12(c) are limited by subsection 104(6) of the Act.

The taxpayer's representative has suggested that we interpret the term "gross trust income" to include the portion of the capital gain that is included in income when calculating the alternative minimum tax payable by the Trust such that the additional expenses would only be permitted for purposes of calculating the alternative minimum tax, and thus not create a non-capital loss for the overall purposes of the Act. In our review, the provisions of subsection 127.52 of the Act, do not support this interpretation.

J. F. Oulton, CA
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch