30 June 1995 Internal T.I. 9514457 - special purpose trust & taxable benefit from a 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. How is a Special Purpose Trust set up to benefit an ill or disabled person taxed ?

2. Would payments made to the parent or guardian of a minor for trust approved expenses (for health, welfare, security & education) be taxable to the parent/guardian under 105(1)?

Position:

1. As an inter vivos trust
2. Question of fact

Reasons:

1. Depending on the nature of the governing document, & if not set up to benefit public at large, it would not qualify as either a charity or NPO.

June 30, 1995

Client Assistance Division Trusts Section

St. John's Tax Services

Sir Humphrey Gilbert Building L. Holloway
Newfoundland (613) 957-2104

Attention: Judy Moores
951445

Trust Fund for XXXXXXXXXX

This is in reply to your telephone enquiry and further to the trust document sent to us on May 18, 1995 concerning the tax treatment of disbursements made from the XXXXXXXXXX Fund. In particular you had asked whether payments from the fund to the parents of XXXXXXXXXX would be included in their income under subsection 105(1) of the Income Tax Act.

All references herein to sections or components thereof are references to the Income Tax Act.

The fund as described by the trust document would not in our opinion qualify as either a charitable or a not-for-profit non-taxable entity. Therefore, the XXXXXXXXXX Fund would be taxed as an inter vivos trust on any income earned by the trust to the extent that this income was not paid out to a beneficiary or was otherwise deductible under subsection 104(6).

XXXXXXXXXX are discretionary income and capital beneficiaries of the trust. Disbursements made from the XXXXXXXXXX Fund for the "health, welfare, security and education of XXXXXXXXXX and for the approved expenses or expenditures of

XXXXXXXXXX related thereto" may be made from the income or the capital of the trust. The decision to pay amounts from trust income as opposed to trust capital would be made by the trustees.

Disbursements made for the health, welfare, security and education of XXXXXXXXXX from the income of the XXXXXXXXXX Fund would be included in XXXXXXXXXX income under subsection 104(13) and deductible in computing the trust's income under subsection 104(6). Disbursements for the approved expenses or expenditures of XXXXXXXXXX from the income of the XXXXXXXXXX Fund that were not made solely for the benefit of XXXXXXXXXX health, welfare, security and education would not be benefits under subsection 105(1), but rather would be included in the recipient's income under subsection 104(13). Such disbursements solely for the benefit of XXXXXXXXXX would be included in his income under subsection 104(13).

Payments from the capital of the XXXXXXXXXX Fund would not be deductible by the trust under subsection 104(6) and would not be included in a recipient's income by virtue of either the effect of paragraphs 107(1)(a) and 107(2)(c), if the payments are in satisfaction of a capital interest, or subsections 106(2) and 106(3), if the payments are in satisfaction of an income interest.

In the Canadian Tax Foundation's 1993 Conference Report, John H. Saunders raised the issue of whether a subsection 105(1) benefit would be assessable to a parent where a trust pays the expenses of a child beneficiary normally considered to be parental obligations (i.e. food, shelter, clothing, etc; see pages 37:51 through 37:54). An assessment under 105(1) would impose a penalty of double taxation. We have currently received a request for an opinion on a situation similar to the one described in the 1993 Conference Report. Consequently, the issue is under study and we cannot comment on the applicability of 105(1) to a parent where a trust is set up to provide for a child's "necessaries of life" at this time. We will send you a copy of our opinion upon resolution of this issue.

We trust our comments are of assistance to you. If you have any further questions please contact Lena Holloway.

A/Section Chief
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch