19 November 1997 External T.I. 9718785 - WHICH BENEFICIARIES ENTITLED TO DIVIDENDS

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:

Is the income or the capital beneficiary taxed on subsection 84(3) deemed dividends?

Position:

Depends on the terms of the trust indenture.

Reasons:

Entitlements set out in trust indenture.

XXXXXXXXXX 						971878
T. Murphy

Attention:  XXXXXXXXXX 

November 19, 1997

Dear Sirs/Mesdames:

Re: Subsections 104(19) and 84(3) of the Income Tax Act (the "Act")

This is in response to your letter of July 7, 1997, wherein you asked what authorities (policies) would tell you who is entitled to, and will be taxed on, deemed dividends arising on a redemption of shares when the trust is permitted to allocate the dividends to either the income or the capital beneficiaries.

We presume that your reference to the trust being permitted to allocate the dividends to either the income or the capital beneficiaries means that the settlor has provided in the trust indenture that amounts received by the trustees may be allocated to income account or capital account regardless of whether such amounts would be characterized as income or capital under "form rule" referred to in your letter. By allocating to either the income or capital account, the trustees add to the ultimate share of either the income beneficiaries or the capital beneficiaries. See, for example, Law of Trusts in Canada, second edition, Waters, D.W.M., pp. 832 - 843, for a discussion of the form rule in determining income and capital with respect to amounts received from corporations, and powers given to trustees to allocate receipts.

Allocation in and by itself does not answer the question of who is subject to tax on the amount of the deemed dividend. Generally, under paragraph 104(6)(b) of the Act a trust resident in Canada is entitled to deduct in computing its income for a taxation year such part of its income as became payable in the year to a beneficiary. The amount payable is included in the beneficiary's income under subsection 104(13) and paragraph 12(1)(m) of the Act. Pursuant to subsection 104(24) of the Act an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount.

Trustees would thus have to review the trust indenture to ascertain whether there is an amount payable to a beneficiary in the particular taxation year under consideration.

We cannot advise you which beneficiaries are entitled to the deemed dividend received by the trust as that entitlement is a matter of trust law and the terms of the particular trust indenture. The question of who will be taxed in a particular taxation year, whether it be the trust or the beneficiaries, will depend on that entitlement and whether an amount of that income is payable in the particular taxation year to a beneficiary.

We trust our comments will be of assistance to you.

Yours truly,

R.S. Biscaro
Director
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch