19 August 2016 External T.I. 2015-0585471E5 - Thin cap rules and trusts

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: What is meant by the words, “average of all amounts each of which is the total amount of all equity contributions to the trust made before a calendar month that ends in the year” in clause (b)(i)(A) of the definition of “equity amount” (of a trust) in subsection 18(5)?

Position: For each of the calendar months that end in the relevant taxation year, the trust would calculate the total applicable contributions to the trust from its creation to immediately before that calendar month. The trust would then calculate the average of these monthly totals.

Reasons: This meaning is based on a textual analysis of the words in the definition. This interpretation is consistent with the calculation of the average contributed surplus and paid up capital of a corporation in paragraph (a) of the definition.

XXXXXXXXXX
									2015-058547
									Terry Young, CPA, CA
August 19, 2016

Dear XXXXXXXXXX:

Re: Equity amount of a trust

We are writing in reply to your letter of March 30, 2015, requesting our comments regarding the interpretation of paragraph (b) of the definition of “equity amount” in subsection 18(5) of the Income Tax Act (the “Act”). We also acknowledge our conversations of August 5, 2016 (Young / XXXXXXXXXX) and August 15, 2016 (Judith Harris / XXXXXXXXXX). We apologize for the delay in responding.

In your inquiry, you asked us to clarify the meaning of the words in clause (b)(i)(A) of that definition, which states:

(A) the average of all amounts each of which is the total amount of all equity contributions to the trust made before a calendar month that ends in the year, to the extent that the contributions were made by a specified non-resident beneficiary of the trust, and (emphasis added)

You have submitted that the meaning of the words is unclear and have asked us to clarify. As well, you have asked us for comments concerning the determination of the fair market value of a beneficiary’s interest in a discretionary trust.

Our comments

This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation, but is intended to assist you in making that determination. The income tax treatment of transactions will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC-70-6R7, Advance Income Tax Rulings and Technical Interpretations.

We agree that the meaning of the provision may not be readily apparent. Therefore, breaking the relevant text down into its components can be helpful. This results in the following:

“the average of all amounts each of which is the total amount of all equity contributions to the trust made before a calendar month that ends in the year”

Thus, the provision requires the calculation of an average of certain amounts. Each of these amounts consists of the total of all equity contributions to the trust before a certain time. Each of these times is a calendar month that ends in the (taxation) year. Therefore, for each of the calendar months that end in the relevant taxation year, the trust would calculate the total contributions to the trust (by the specified non-resident beneficiary) from the trust’s creation to immediately before that calendar month. The trust would then calculate the average of these monthly totals.

Using the example of a calendar 2015 taxation year, this means calculating the total contributions for each of the twelve months of 2015 (i.e., the twelve calendar months that end in the year). For each of those months, the total contributions from a specified non-resident beneficiary from the creation of the trust until the end of the calendar month immediately prior to the calendar month in question would be used. Therefore, for January 2015, the total contributions would be calculated from the creation of the trust until the end of December 2014. For February 2015, it would be the contributions from the creation of the trust until the end of January 2015, and so on. The average of the twelve totals would then be calculated.

In our view, this result is consistent with paragraph (a) of the definition. In effect, clause (b)(i)(A) of the definition of “equity amount” is calculating the opening balance of contributions to the trust for each calendar month of the taxation year. It is similar to the combination of subparagraphs (a)(ii) and (iii) of the definition as it applies to corporations, which are the opening contributed surplus and paid-up capital, respectively, for each calendar month of the taxation year.

With respect to your question concerning the fair market value of a beneficiary’s interest in a discretionary trust, as discussed in our conversation of August 15, we have commented on this topic in the past – see for example documents 2003-0181465 and 2001-0111303.

We trust these comments will be of assistance.

Yours truly,

Terry Young, CPA, CA
Manager, International Section I
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch