4 November 2008 External T.I. 2008-0264181E5 - Income recognition and ACB - trust units

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.

Principal Issues: 1- When must income amounts paid by a trust to a corporate beneficiary be included in computing the beneficiary's income?

2- After receiving an income distribution from a trust in its 2007 taxation year, a corporation disposes of all its trust units before the end of that year. Is the ACB of the trust units reduced by the amounts paid as income distributions for purposes of computing the gain or loss on the disposition of the trust units?

Position: 1. The income amounts payable in a trust's taxation year must be recognized by the beneficiary in the beneficiary's taxation year in which the relevant trust taxation year ends.

2. The amounts paid by a trust that are included in the taxpayer's income by virtue of subsection 104(13) would be included in the 2008 taxation year. The corporation would have to reduce in its 2007 taxation year the ACB of its units by virtue of subparagraph 53(2)(h)(i.1), increasing the gain computed pursuant to section 40 of the Act by an amount equal to the amount eventually included in the corporation's income by subsection 104(13) of the Act. The exception in clause 53(2)(h)(i.1)(A) is not applicable.

However, subsection 39(1) of the Act provides that a gain that is otherwise included in computing the taxpayer's income for the year or any other taxation year is not a capital gain. Therefore, the part of the gain that would be included in income by virtue of subsection 104(13) in the 2008 taxation year would not be considered as a capital gain in 2007 pursuant to subsection 39(1). When filing the 2008 income tax return, the corporation will be able to request an adjustment to its 2007 income tax return to reduce the capital gain consequently.

Reasons: 1. Paragraph 104(13)(a) of the Act.

2. The wording of the subparagraph 53(2)(h)(i.1) allows a reduction of the ACB because the amounts paid that are included in the taxpayer's income by virtue of subsection 104(13) of the Act after the date of the ACB computation. However, an adjustment to reduce the capital gain included in 2007 may be requested after the inclusion of the amounts in income pursuant to subsection 104(13) in 2008 pursuant to the definition of capital gain in subsection 39(1) of the Act even if the ACB is reduced.

XXXXXXXXXX 								2008-026418
									Sylvie Labarre, CA
November 4, 2008

Dear Sir:

Re: Disposition of trust units held by a corporation

This is in reply to your electronic message of December 31, 2007 in which you requested our opinion regarding the timing of the inclusion of income received by the beneficiary of a trust and the computation of the adjusted cost base (ACB) of trust units.

Situation

The taxpayer is a corporation whose year end is October 31. The taxpayer invested in an income trust from which the taxpayer received distributions in February and March 2007. The taxpayer sold the trust units in April 2007. Based on historical data, all of the trust distributions will be income. The income trust has a December 31 year end. The February and March 2007 distributions are allocated by the trust to be income of the taxpayer on December 31, 2007. The T3 will be issued before March 31, 2008.

Questions

Would the February and March 2007 distributions be included in the taxpayer's income in the taxation year ending on October 31, 2008?

Would the ACB of the trust units be reduced by the distributions received in February and March 2007 in calculating the taxpayer's capital gain in its October 31, 2007 taxation year?

Our comments

The particular circumstances outlined in your message seem to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Ruling, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance.

For the purpose of this letter, we assume that the trust does not designate an amount in respect of any beneficiary of the trust under subsection 104(13.1) or 104(13.2) of the Income Tax Act (the "Act").

Pursuant to subsection 104(13) of the Act, the beneficiary's income inclusion is generally that part of the trust's income, calculated prior to any deductions under subsection 104(6) of the Act or subsection 104(12) of the Act, that became payable to the beneficiary in the trust's taxation year that ended in the beneficiary's taxation year. Our position is that, for the purpose of subsection 104(13) of the Act, an amount has become payable in a taxation year to a beneficiary if, in the circumstances, it has been paid in the taxation year to the beneficiary or the beneficiary is entitled in the taxation year to enforce payment. Generally, for the purpose of subsection 104(13) of the Act, we accept that the time at which an amount becomes payable to a beneficiary is the earlier of the time of payment and the time at which the beneficiary is entitled to enforce payment. Assuming that the amounts payable are ultimately determined to be part of the trust's income for its taxation year, the amounts will, under paragraph 104(13)(a) of the Act, be income amounts of the beneficiary. However, paragraph 104(13)(a) of the Act requires the beneficiary to include those income amounts payable only for the beneficiary's taxation year in which the trust's taxation year ends.

In your example, if the amounts paid in February and March 2007 are determined to be part of the trust's income for its 2007 taxation year, the amounts will, under paragraph 104(13)(a) of the Act, be income amounts of the beneficiary. If the recipient unitholder is a corporation with a October 31 year-end, the income inclusion would be part of the corporation's 2008 taxation year end if the income became payable to the corporation in the trust's 2007 taxation year.

If a unitholder disposes of all the trust units held in an income trust, the ACB has to be computed immediately before the disposition. Subparagraph 53(2)((h)(i.1) of the Act provides that the ACB will be reduced by any amount that has become payable by the trust after 1987 and before that time in respect of the interest (otherwise than as proceeds of disposition of the interest and part thereof), except to the extent of the portion thereof described in clause (A), (A.1) or (B). There will be no reduction of the ACB for the portion of the payment that has become payable by the trust before the disposition that is described in clause (A), that is, the portion of the payment that was included in the taxpayer's income by reason of subsection 104(13) of the Act or from which an amount of tax was deducted under Part XIII by reason of paragraph 212(1)(c) of the Act.

In your example, if the amounts paid in February and March 2007 have to be included in income by virtue of subsection 104(13) of the Act, they will not be included in income until October 2008 and therefore, because of the use, in clause 53(2)(h)(i.1)(A), of the past tense in the expression "was included in the taxpayer's income", these amounts are not described in clause (A). In such a case, the corporation would have to reduce the ACB of his units, increasing the gain computed pursuant to section 40 of the Act by an amount equal to the amount eventually included in the corporation's income by subsection 104(13) of the Act.

However, subsection 39(1) of the Act provides that a gain that is otherwise included in computing the taxpayer's income for the year or any other taxation year is not a capital gain. Therefore, the part of the gain that would be included in income by virtue of subsection 104(13) in the 2008 taxation year would not be considered as a capital gain in 2007 pursuant to subsection 39(1). When filing the 2008 income tax return, the corporation will be able to request an adjustment to its 2007 income tax return to reduce the capital gain consequently.

We trust the above comments will be of some assistance.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch