7 September 1994 Internal T.I. 9406256 - FIRST AND LAST TAXATION YEAR OF A TESTAMENTARY 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. XXXXXXXXXX

2. In the year a testamentary trust is wound up, is its final taxation year shortened to the date of wind-up of the trust.

Position TAKEN:

1. XXXXXXXXXX

2. In the year a testamentary trust is wound up, its final taxation year is shortened to the date of wind-up of the trust.

Reasons FOR POSITION TAKEN:

1. Interpretation of the meaning of accepted

2. All entities that choose their taxation year or fiscal period (i.e., corporations, partnerships and proprietorships) all have that period shortened to the date they cease to exist in the year they are wound up.

				September 7, 1994

	Assessment of Returns Directorate	Rulings Directorate
	T2 and T3 Programs Division		C.R. Bowen
	T3 Programs Section		957-8953
	Chief
W. A. Mizuik

	Attention: V. Lesiuk
				940625

Taxation Year End of Testamentary Trusts

We are writing in reply your memorandum dated March 9, 1994 (HAD 9586-1), wherein you requested our comments on issues relating to the first and last taxation year of testamentary trusts. We apologize for the delay in responding to your memorandum.

Concept of Taxation Year

We agree with your comment that the proper term for the period created for a testamentary trust to report its income is its taxation year and not its fiscal period as is sometimes used for the sake of convenience and familiarity in departmental literature and other tax literature.

First Taxation Year

Background

Paragraph 104(23)(a) of the Income Tax Act (the "Act") indicates, in part, that "the taxation year of the trust is ... in the absence of an established practice, the period adopted by the trust for that purpose" (referring back to "for purposes of assessment under the Act"). On the matter of changing a taxation year, that paragraph states that "a change in a usual and accepted period may not be made for the purposes of this Act without the concurrence of the Minister".

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Our Comments

The issues you have raised do not appear to have been addressed in our research files or by the courts. While not directly on point, the court case which came the closest to dealing with the issue of when permission to change a fiscal period was required is Leon Szczupak, 59 DTC 119, (TAB). In that case, the court found that once an individual partner's income tax return had been assessed (based on the first fiscal period of the partnership reported in that return), the permission of the Minister was required before a change to that fiscal period could be made.

As the words, accept and adopt are not defined in the Act, it is necessary to review the ordinary meaning of those words. According to Black's Law Dictionary, the word "adopt" means to accept, choose or select and put into effective operation, to make that one's own (property or act) which was not so originally, while the word "accept" is defined to mean something more than to receive - to receive with the intent to keep and retain.

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Final Taxation Year

Background

The T3 Guide and Trust Return ("T3 Guide") encourages trustees, when a trust is wound up, to file the final return before the end of the trust's normal year end. The opening sentences in paragraph 5 of IT-179R state: "Requests for a change in fiscal period are not required where the fiscal period is revised by operation of law. The following events can result in a change to the current fiscal period." An estate or trust that is wound up is listed as an example of such an event.

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Our Comments

As is the case with proprietorships, partnerships and corporations, a testamentary trust can choose the period for which its accounts will ordinarily be made up and that period becomes its taxation year. There are no specific provisions in the Act which cause the fiscal period or taxation year of any of those entities to cease when they are wound up. However, it can be argued that since the period for which the accounts of those entities are prepared ceases at the time those entities cease to exist, then the entity's taxation year or fiscal period, as is applicable, must also end as at that date. In addition, it is generally held that by operation of law, the final taxation year or fiscal period, as applicable, of corporations, proprietors and partnerships ceases at the time the entity ceases to exist.

In this regard, paragraph 5 of IT-172R dealing with proprietors states "where an individual sells or otherwise disposes of his business on the last day of its usual fiscal period, or where the earlier disposal of a business automatically brings the fiscal period to an end...". Similarly, paragraph 2 of IT-358 and paragraph 15 of IT-488R2, respectively, state:

"If the affairs of a partnership are wound up at any time during its usual fiscal period and all the partnership property is distributed prior to, or concurrently with, the winding-up so that 98(1) and 99(1) do not apply, the winding-up of a partnership automatically brings the fiscal period to an end."

"The commencement of a winding-up and the distribution of property on a winding-up will not cause the subsidiary's taxation year to end. The subsidiary will continue to have taxation years ending on the date such years normally end until the corporation ceases to exist, with the last taxation year ending at that time."

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In the 1990 T3 Guide, the wording dealing with filing the final trust return was as follows:

"On the winding up (discontinuance) of a trust, the taxation year of the trust will end on the date of final distribution of the assets. The final return covering this usually shortened taxation year must be filed and payment of taxes owing to the Receiver General must be paid within 90 days of the date of winding-up the trust."

The wording in the 1993 T3 Guide dealing with this issue states:

"If a trust is wound up (discontinued) during a taxation year, you may want to file a final return before the end of the trust's usual taxation year."

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Position Taken

Based on the above comments, it is our opinion, that the final taxation year of a testamentary trust winding-up will end on the date of final distribution of its assets and not at its normal taxation year end. This date may or may not coincide with the expected wind-up date indicated on the final return. In other words, the comments quoted above from the 1990 T3 Guide would have been correct had they referred specifically to a testamentary trust.

For administrative purposes, it is our understanding that the Department accepts the date chosen on the request for the final clearance certificate of a testamentary trust as being the effective date of winding-up of that trust, as long as the assets are distributed shortly after the clearance certificate is issued. If no clearance certificate is applied for by a trustee of a particular trust, the wind-up date of that trust would normally be the one recognized under trust law.

Since it is our opinion that the final taxation year of a testamentary trust does not end until such time as the trust is wound up, no permission must be obtained by a trustee to change the final taxation year if that period is extended to include the additional period from the expected date of wind-up to the actual or chosen date of wind-up (assuming the revised period ends on or before its usual taxation year end). However, a testamentary trust should not be permitted to file a second final return covering the period from the first expected wind-up date to its actual or second expected wind-up date.

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We trust that our comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch

c.c. Claude Englehart
General Audit Services
Audit Directorate