6 July 2005 External T.I. 2005-0125271E5 - Wilthholding of income tax

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: Does the trustee have to deduct or withhold an amount of income tax from the payment of the income payable to a Canadian resident by a trust?

Position: No.

Reasons: There is nothing in the Income Tax Act nor in the Income Tax Regulations providing for such a deduction or withholding.

XXXXXXXXXX 						2005-012527

July 6, 2005

Dear XXXXXXXXXX:

Re: Income from the Estate of XXXXXXXXXX

We are writing in response to your letter of January 23, 2005 wherein you requested information concerning the withholding or the deduction of income tax on the income you received from the estate of XXXXXXXXXX (hereinafter the "Trust").

Your letter was forwarded to us for reply by the Problem Resolution Unit of the Toronto North Tax Services Office (Seventh Floor, #63, 471-1), through the Problem Resolution Program Section of NOR-Ottawa (Bernice Stratton).

The only document attached to your letter was the Minutes of settlement of XXXXXXXXXX (hereinafter the "Agreement"). According to the Agreement, the trustee of the Trust is XXXXXXXXXX. In your letter, you wrote that XXXXXXXXXX was deducting income tax from your entitlement from the Trust. We did not find anything in your file supporting the fact XXXXXXXXXX is withholding income taxes from an amount of income received by you. For the purposes of our comments, we will presume that XXXXXXXXXX remains the trustee of the Trust and that your request involves the withholding of income taxes by the trustee.

Our understanding of the Agreement is that you are a beneficiary of the Trust and you have the right to receive a part of the annual income of the Trust. According to the Agreement, that part of the Trust income is equal to XXXXXXXXXX per cent of the annual net income of XXXXXXXXXX and XXXXXXXXXX and "net income" means, for the purposes of the Agreement, the net income of the said corporations after income taxes, as set out in the financial statements for the said corporations, without allowance for any capital gains or losses.

It is outside this Directorate's mandate to provide a legal opinion regarding the interpretation of the dispositions of the Agreement. However, it would appear that the part of the annual income of the Trust to which you are entitled is computed by using, inter alia, the amount of the net income of the said corporations obtained after the deduction of the income taxes of the corporation. If your request concerns this deduction of the income taxes of the said corporations or if it concerns the part of the annual income of the Trust to which you are entitled, we cannot help you because it regards the interpretation of the dispositions of the Agreement. You may wish to consult with a legal firm if you want to ascertain the meaning of the Agreement regarding the part of annual income of the Trust to which you are entitled.

The income of the Trust payable to you is subject to income tax. If an election (a designation) is not made under subsection 104(13.1) of the Income tax Act, the part of the annual income of the Trust payable to you will be included in your income and you will be subject to income tax on that income.

According to the Agreement, the trustee shall consider continuing the practice of the Trust of electing to tax such income in the Trust, in accordance with section 104(13) of the Income Tax Act. The reference to section 104(13) in the Agreement may have been intended to be a reference to subsection 104(13.1) of the Income Tax Act. If this is correct and such an election or designation is made, the part of the annual income of the Trust payable to you will not be included in your income and will not be deducted from the income of the Trust in the computation of its income, and the Trust would be subject to income tax on that income.

Whether or not an election is made under subsection 104(13.1) of the Income Tax Act, the trustee is not required to deduct or withhold from the payment of the income payable to you by the trust an amount of income tax and to remit it to the Receiver General. According to our files, XXXXXXXXXX did not withhold and remit to the Receiver General any amount of income tax regarding your income from the Trust in XXXXXXXXXX.

We trust the above has been of some assistance.

Yours truly,

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

c.c.: Bernice Stratton
Problem Resolution & Operations Support Section