16 September 2003 Internal T.I. 2003-0034237 - Dist. of TCG from NRT to Can res Beneficiary

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

								September 16, 2003

Mr. John Crowley						Annemarie Humenuk
	Manager							957-8585
	Income Tax Appeals

	Attention:  Ken Berini
									2003-003423

XXXXXXXXXX
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This is in response to your memorandum of August 8, 2003, concerning the distribution of the proceeds of disposition from the sale of a non-resident trust's property in 1999 by the

non-resident trust to a Canadian resident beneficiary. The issue is whether any portion of the distribution should be included in the Canadian resident beneficiary's income under paragraph 104(13)(c).

All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Paragraph 104(13)(c) as it applied prior to 2000 required a Canadian resident beneficiary to include in income any amount received from a non-resident trust other than an amount received as the proceeds of disposition of the Canadian resident beneficiary's interest in the trust or as a distribution of capital from a personal trust. Our position, as stated in various CCRA documents, including 9822685, is that the distribution of the taxable portion of a capital gain from a trust is a distribution of income, and not capital, for the purpose of subsection 104(13). Thus the taxable portion of any capital gain distributed to a Canadian resident beneficiary from a non-resident trust should be included in the Canadian resident beneficiary's income under subsection 104(13). The part of the distribution that relates to the portion of the capital gain that would not be taxable in Canada if the trust were resident in Canada is treated as a distribution of capital and is not in dispute. XXXXXXXXXX. You asked for our comments.

Except for the purposes set out in subsection 108(3), the income of a trust for the purposes of the Act is its income computed under the Act. As subsection 104(13) is not one of the provisions for which the definition of "income of the trust" in subsection 108(3) applies, the income of a non-resident trust for the purpose of subsection 104(13) includes the portion of the trust's capital gains that would be taxable in Canada if the trust were resident in Canada. This position was clarified by the introduction of section 250.1, which is applicable after December 17, 1999 and would apply to the assessments under dispute. The Department of Finance technical notes, which accompanied the introduction to section 250.1 confirm that this provision was enacted to clarify the existing tax policy with respect to references to the income of a non-resident.

Similarly, the stated purpose of the amendment to subsection 104(13), which was also enacted by S.C. 2001, c.17, was to resolve any uncertainty that may have existed with respect to the distribution of amounts to a Canadian resident beneficiary from a non-resident trust. Based on our understanding that the amendment did not change the existing law with respect to such distributions but merely clarified it, the distribution of the portion of proceeds that represents the amount that would be the taxable capital gain of the trust if it had been resident in Canada is treated as a distribution of income for the purpose of subsection 104(13), and not as a distribution of capital.

The classification of the distribution by the non-resident trust to a Canadian resident beneficiary of the taxable portion of the capital gain realized by the trust as a distribution of income rather than as a distribution of capital is further supported by the manner in which the distribution to the beneficiary is treated for tax purposes in the relevant foreign jurisdiction. The information provided suggests that the distribution in question is a treated as a distribution of income under the Internal Revenue Code of the U.S. and that the Canadian resident beneficiary does not dispute such a finding since she included the distribution in her income for U.S. tax purposes. It is our understanding that a distribution of capital from a trust is not taxable to the beneficiary under U.S. tax law since the relevant provisions of the Internal Revenue Code of the U.S., such as sections 61(a)(15), 861(a)(5) and 652, only require allocations of income to be included in a beneficiary's income.

Note that a foreign tax credit would be available to the Canadian resident beneficiary in respect of the U.S. tax payable by her under the Internal Revenue Code of the U.S. as limited by article XXII and paragraph 4 of article XXIV of the Canada-U.S. Income Tax Convention.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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