3 February 2003 External T.I. 2002-0157725 - 104(18)

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: Whether ss. 104(18) ITA applies to allocate the income of a trust to its beneficiary where the trust accrues the income for the payment of post-secondary education and the residue is paid when the individual reaches XXXXXXXXXX years of age.

Position: 104(18) would apply.

Reasons: Wording of the Act.

XXXXXXXXXX 2002-015772

Attention: XXXXXXXXXX

February 3, 2003

Dear Sirs:

Re: Subsection 104(18) of the Income Tax Act (the "Act")

This is in reply to a letter of March 21, 2002, in which we are asked whether the income of a trust can be allocated to its beneficiary in the scenario described hereafter. We apologize for the delay in responding to your letter.

Mrs. X passed away, leaving her husband, her son and her daughter. Her son is now XXXXXXXXXX years old. Friends and colleagues of Mrs. X donated money to a Canadian resident trust fund created for the son's post-secondary education. The Public Trustee Office administers and invests the funds and reinvests any unused net income on his behalf. When the son reaches age XXXXXXXXXX, he will be entitled to receive 100% of the trust fund at that time for his post-secondary education and the net annual income derived from the trust fund shall be used to reimburse the son for his educational expenses. When the son reaches age XXXXXXXXXX, the balance of the fund will be paid to him. Should he pass away before age XXXXXXXXXX, the balance of the trust fund will be paid to his sister's trust fund.

The particular circumstances outlined in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, it is not our practice to comment on transactions involving a specific taxpayer, except by way of an advance income tax ruling. When the transaction related to the enquiry is completed, the enquiry should be addressed to the relevant tax services office. In addition, it should be noted that the tax consequences relating to a trust cannot be determined without a complete review of all the relevant facts, including the entire trust document. As a result, we are unable to comment on the tax effect of partial excerpts from a particular trust document. Nevertheless, we offer the following general comments which may be of assistance to you.

Provided some conditions are met, subsection 104(18) of the Act deems that the income of a trust is payable in the year to a beneficiary who did not attain 21 years of age before the end of the year. If so, the amount that is deemed to have become payable may be deducted in computing the income of the trust and shall be included in computing the income of the beneficiary.

The conditions that must be met in order for 104(18) of the Act to be applicable are: (a) the trust resides in Canada throughout the taxation year; (b) the income (including taxable capital gains) is not payable in the year; (c) the individual for which the trust holds the income is less than 21 years old at the end of the year; (d) the individual's right to the income (including taxable capital gains) is vested by the end of the year otherwise than because of the exercise or the non-exercise of a discretionary power; and (e) the individual's right to the income is not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).

In light of the above mentioned description of the trust fund, conditions (a) to (c) and (e) are met. With respect to condition (d), the following guidelines were provided in a technical interpretation dated February 12, 1999 (9901375):

To meet the condition in [d] above, the right to income must be vested, i.e., the individual must have an immediate fixed right of present or future possession. It would mean that all individuals who are to have interests in the trust are in existence and ascertained, the size of their interests is ascertained and any conditions precedent are satisfied.

It is generally presumed that a gift to be paid when an individual attains a specified age, with a gift-over to other individuals if the individual dies before attaining the specified age, is vested (subject to divestment should death occur before attaining the specified age). Thus, where the right to income is vested, there can be no discretion in the amount of income that a particular individual is entitled to. Discretionary power relating only to the timing of payment of an individual's share of income that is fixed under the trust indenture is not relevant.

Before age XXXXXXXXXX, the son is only entitled to receive payments from the trust to the extent of his educational needs. However, the trust fund will ultimately be paid to him, either as a reimbursement of educational expenses or as a distribution when he reaches age XXXXXXXXXX. It thus appears that it is only the timing of the payment of income that has some discretionary aspect and not the son's right to the income at the end of each year.

While we are not in a position to provide a definitive response to your query, we believe that the above comments will be of assistance to you.

Yours truly,

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