6 March 1997 Internal T.I. 9606227 - amount payable to a beneficiary of a discretionary 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:

1)Creation of an amount payable to a beneficiary by a discretionary trust (pursuant to subsection 104(24)) and payment of that amount by cheque or demand promissory note.

2)Payment in respect of an amount payable to a minor beneficiary.

Position:

1)Legal entitlement of a beneficiary to enforce payment of an amount of the trust's income in the year is established by a) the trustees exercising their discretion in the year and b) the trustees giving notification of that exercise to the beneficiary in the year. Payment of that amount by a) a cheque cashable on the date of issue or b) a demand promissory note payable on demand without restriction should be made by the trust once the amount is known.

2)Payment in respect of an amount payable to a minor beneficiary may delivered to the child's legal guardian where permitted under the trust indenture.

Reasons:

1)These steps must be undertaken in order to create a beneficiary's legal right to enforce payment of the amount.

2)This arrangement is permitted in view of legal and practical problems created by a minor's legal incapacity.

								March 6, 1997

	Belleville TSO					Trusts Section
	A/Assistant Director of VECR			C.R. Bowen
	John Daly						(613) 957-8585
	Attention:  Roy S. King
			  Audit Division
								960622

Amount Payable under Subsection 104(24)

We are writing in response to a memorandum from Mr. King sent by facsimile on October 8, 1995 to Audit Directorate, and subsequently forwarded to us for reply on February 14, 1996. We advised Mr. King in a voice mail message left on February 28 that the issues raised in his letter concerning amounts payable to a beneficiary of a trust for the purposes of subsections 104(6), (13) and (24) of the Income Tax Act (the "Act") were under review and it would be some time before they would be resolved. We apologize for the long delay in providing our response.

Our Comments

Pursuant to subsection 104(24) of the Act, an amount will be considered payable to the beneficiary of a trust in a taxation year where either 1) it is paid in the year to the beneficiary, or 2) the beneficiary was entitled in the year to enforce payment of the amount. In order for the income of a discretionary trust to become payable in a taxation year to the beneficiaries of the trust, the trustees are required to exercise their discretion before the end of the trust's taxation year and the exercise of discretion must be irrevocable with no conditions attached to the beneficiaries' entitlement to enforce payment of the amount in the year. The apportionment of the trust's income to each beneficiary (e.g., all the income, a fixed percentage of the income, or a set amount) must also be established. Furthermore, the beneficiaries must be advised before the end of the trust's taxation year of the trustees' decision, including the apportionment of the trust's income to which the beneficiary is entitled in the year to enforce payment of (even if the actual amount is not known). Where the beneficiary is a minor, the trustees may advise the legal guardian of the child's property of this right. Although legal rights may exist without being in writing, in our opinion, the trustees' exercise of discretion and notification given to the beneficiaries of their decision should be in writing (e.g., a resolution signed by the trustees, minutes of the trustees' meeting). Failure to do so will result in the trustees and the beneficiaries having to provide our Department with other satisfactory evidence to support their claim that amounts became payable to the beneficiaries in the year.

The fact that the actual amount of the income of a trust in a year can not be ascertained until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information will not, in and by itself, result in an amount apportioned to a beneficiary in the year based on that income not being payable to the beneficiary in the year (as supported by the case Ginsburg vs M.N.R., 92 D.T.C. 1774, (T.C.C.)). However, where the income of a trust is not ascertainable at the year end because the amount of such income is dependent on some contingency or event occurring after that time, then based on our response to Question 55 of the Revenue Canada Round Table in the 1981 Conference Report, it is our view that, depending on the circumstances, a beneficiary may not have an enforceable right to demand payment of such an amount in that year.

Once the trustees have exercised their discretion and advised the beneficiaries of their decision, payment by the trust in respect of an amount payable to each beneficiary may be made by issuing a cheque to the beneficiary. That cheque must not have any conditions attached to it, such as, postdating or an arrangement that it is not to be cashed for a specific time. Where the actual amount to be paid to a beneficiary is known before the end of the trust's taxation year, a cheque for that amount should be delivered to the beneficiary before the end of the year. However, where it is not possible to determine the actual amount to be paid to a beneficiary until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information, a cheque should be delivered to the beneficiary once the amount is quantified.

Where the beneficiary is a minor and the trust indenture so permits, the cheque may be delivered to the legal guardian of the minor's property. Due to the fact that the beneficiary is a minor, the cheque may be deposited into an account at a financial institution held in the name of the legal guardian "in trust" for the minor. In such case, the legal guardian would be considered to hold the funds in a fiduciary capacity for the benefit of the child (unless there is evidence to the contrary to support the creation of a trust under such an arrangement (i.e., the three certainties of a trust exist)).

In some situations, payment by a trust in respect of an amount payable to each beneficiary may be made by issuing a promissory note to the beneficiary rather than a cheque. A promissory note is ordinarily given and received as acknowledgement of the existence of and/or the conditional payment of a debt and does not create the debt. It should only be issued by a trust where the trust indenture (or relevant provincial legislation where the indenture is silent on the issue) so permits. Although a promissory note issued in respect of an amount payable to a beneficiary may be non-interest bearing, it must be payable on demand without restriction. Where the actual amount that is payable to a beneficiary is known before the end of the trust's taxation year, the promissory note should also be delivered to the beneficiary before the end of the year. However, where it is not possible to determine the actual amount that is payable to a beneficiary until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information, the promissory note should be delivered to the beneficiary as soon as the amount is quantified. Where the beneficiary is a minor and the trust indenture so permits, the promissory note may be delivered to the legal guardian of the minor's property.

As indicated above, the exercise of discretion by the trustees of a discretionary trust must be irrevocable with no conditions attached to a beneficiary's entitlement to enforce payment of an amount in the year. Conversely, where the discretion exercised is revocable or there are conditions attached to the beneficiary's entitlement to enforce payment of an amount in the year, the amount will not be considered payable in the year to the beneficiary. Where such is the case and subsection 104(14) of the Act does not apply, the amount must be reported in the trust's income for that year since there will be no deduction from the trust's income available under subsection 104(6) of the Act in respect of the amount. If the amount is paid to the beneficiary in a subsequent year, it would not be included in the beneficiary's income in that year since the amount has already been included in the trust's income in a prior year.

We trust that our comments will be of assistance.

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch