22 January 2003 External T.I. 2002-0143935 - Aggregate Investment Income

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.

Principal Issues: Which types of trust income are excluded from the computation of "aggregate investment income" as defined in ss. 129(4) of the Act.

Position: The income excluded from 129(4)(b)(iv) "aggregate investment income" is income that is property income only because of par. 108(5)(a) of the Act.

Reasons: Par. 108(5)(a) of the Act provides that income included under ss. 104(13) or (14) or s. 105 in computing the income for a taxation year of a beneficiary is deemed to be income from a property that is an interest in the trust and not from any other source. Sp. 129(4)(b)(iv) "aggregate investment income" provides that it includes "the corporation's income for the year from a source that is property, other than [...] income that, but for paragraph 108(5)(a), would not be income from a property".

XXXXXXXXXX 	2002-014393
		Yves Moreno
Attention:  XXXXXXXXXX 

January 22, 2003

Dear Sirs:

Re: Aggregate Investment Income

This is in reply to your letter of June 3, 2002, in which you ask which types of trust income are excluded from the computation of "aggregate investment income" as defined in ss. 129(4) of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1 (the "Act"). We apologize for the delay of our response.

Ss. 129(3) of the Act provides that the refundable dividend tax on hand of a Canadian-controlled private corporation at the end of a taxation year includes 26 2/3% of the corporation's aggregate investment income for the taxation year. Sp. (b)(iv) of the definition of aggregate investment income in ss. 129(4) of the Act provides that it includes "the corporation's income for the year from a source that is property, other than [...] income that, but for paragraph 108(5)(a), would not be income from a property" [Emphasis added]. Par. 108(5)(a) of the Act provides that income included under ss. 104(13) or (14) or s. 105 in computing the income for a taxation year of a beneficiary is deemed to be income from a property that is an interest in the trust and not from any other source.

The conclusions on which you request our agreement are twofold. On the one hand, you have concluded that active business income earned by an income trust and paid or payable to its corporate unitholders is not included in the computation of their aggregate investment income as defined in ss. 129(4) of the Act. On the other hand, you have concluded that property income (interest, royalties) earned by an income trust and paid or payable to its corporate unitholders is included in the computation of their aggregate investment income under ss. 129(4) of the Act.

An income trust traditionally endeavors to ensure that it is a mutual fund trust as defined in ss. 132(6) of the Act. Sp. 132(6)(b)(i) of the Act requires that the trust's only undertaking be the investing of its funds in property (other than real property or an interest in real property). Consequently, it is our opinion that if an income trust is earning active business income, it would not qualify as a mutual fund trust.

Paragraph 15 of interpretation bulletin IT-243R4 "Dividend refund to private corporations" states:

When business income of a trust is included in the income of a corporate beneficiary by virtue of subsection 104(13) or (14) or section 105, such income is not included in the corporate beneficiary's investment income even though paragraph 108(5)(a) may deem such income to be income from property. On the other hand, the types of investment income that retain their character when flowed through a trust to a beneficiary remain Canadian or foreign investment income.

In our opinion, the income excluded from sp. (b)(iv) of the definition of aggregate investment income in ss. 129(4) of the Act is income that is property income only because of par. 108(5)(a) of the Act.

We therefore agree with your conclusions, subject to the application of other rules. For example, should the income from an interest in the unit trust be incident and pertain to an active business carried on by the corporate unitholder or should the later use or hold the trust units principally for the purpose of gaining or producing income from an active business (see par. (b) of the definition of "income or loss" in ss. 129(4) of the Act), the property income would not be included in its aggregate investment income.

You also request our comments on how a corporate unitholder can determine which portion of the income that it receives from the unit trust goes in the computation of its aggregate investment income under ss. 129(4) of the Act. T3 slips must be issued to the resident beneficiaries to whom the trust allocated income during the year (s. 209 of the Income Tax Regulations). The T3 Trust Guide (T4013(E)) requires that amounts such as net rental income, net business income and interest income be disclosed in box 26 as other income. A representative of the corporate unitholder would have to obtain the breakdown from the trustees to make that determination. We are not aware of this presenting any difficulties in the past. We are, however, prepared to consider the matter further should you have an example of a situation where this has been an issue.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

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