12 October 1999 External T.I. 9910925 - CHILD SUPPORT & AMT PAID TO CHILD FROM 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: whether payments out of a trust to a custodial parent can be considered income of the child on whose behalf property was contributed by the non-custodial parent

Position: no

Reasons: attribution would apply to any amount that is otherwise considered to be income of the child but only those amounts paid by the trust to the custodial parent that relate to a specific expenditure on behalf of the child can be considered income of child which is attributed to the non-custodial parent

XXXXXXXXXX 991092
A. Humenuk
Attention: XXXXXXXXXX

October 12, 1999

Dear Sirs:

Re: Child Support and the Payment of Income on Behalf of a Child Beneficiary

This is in reply to your letter of April 9, 1999, in which you ask for our views on payments made by a discretionary trust to a third party for the benefit of a child beneficiary when the trust was set up to ensure the welfare of the child following the breakdown of a marriage. We apologize for the delay in our response.

In the situation you describe, shares of a wholly-owned corporation are contributed to a trust by the parent of a child (the “non-custodial parent") following the breakdown of the marriage with the intent that the dividends payable on such shares be used by the trust to provide for the child's necessities of life. You note that such a contribution may be made to a trust set up for this purpose or may be made to an existing trust which was set up by a person other than the parents of the child. Assuming that the terms of the trust provide that the child is entitled to receive the income of the trust, you ask whether amounts distributed by the trust to the parent who has custody of the child (the "custodial parent") on account of the non-custodial parent's obligation to provide child support can be considered to have been paid to the child for the purposes of subsections 104(6), (13) and (24) of the Income Tax Act (the "Act")

Your request appears to relate to either a proposed or completed situation involving specific taxpayers. Our policy concerning advance income tax rulings is set out in Information Circular IC 70-6R3 "Advance Income Tax Rulings" dated December 30, 1996. As outlined in that circular, we are unable to issue an advance income tax ruling in respect of matters in which the determination is primarily one of fact and the pertinent facts cannot be established at the time of the ruling request or when the series of transactions are significantly advanced or completed. In such a case, you should submit the facts to the local tax services office for their reply. Nevertheless, we are prepared to offer the following comments.

Revenue Canada's position with respect to payments made by a trust for the benefit of a child beneficiary is set out in Income Tax Technical Newsletter #11 issued September 30, 1997, a copy of which is available on the Department's website, www.rc.gc.ca. The fact that a trust was set up, or the contribution was made, for the purpose of ensuring that funds were made available to the child in lieu of child support payable to the custodial parent does not alter the requirement that records be kept to support the fact that any payment made by the trust to a third party was made in respect of a particular expenditure for the child's benefit.

Please note however, that assuming subsection 75(2) of the Act does not apply, subsection 74.3(1) of the Act would likely apply in the scenario you describe to attribute any amount allocated to the child that would otherwise be included in the child's income to the parent who transferred the property to the trust. Refer to Interpretation Bulletin IT-510 "Transfers and Loans of Property made after May 22, 1985 to a Related Minor" for further detail. A copy of this bulletin is also available on the Department's website.

We also direct your attention to the draft legislative proposals on income-splitting with minors released in September, 1999.

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