5 June 2000 External T.I. 1999-0012315 - Trust - Allocation of Gains

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: Where the trustee of a trust has no right to encroach on the trust's capital for the benefit of the income beneficiary, and the capital beneficiary's interest in the trust is a residual interest, can realized taxable capital gains of the trust be allocated to the capital beneficiary and thus excluded from the trust's income? (The capital beneficiary is a charitable organization.)

Position: No.

Reasons: Trusts allocate "net taxable capital gains" pursuant to subsection 104(21), and any allocation requires that the amount must have been payable to the beneficiary under subsection 104(13) (subsection 104(14) and section 105 are irrelevant to this scenario). According to subsection 104(24), an amount is not payable unless it was paid in the year or the beneficiary was entitled in the year to enforce payment of the amount.

XXXXXXXXXX 1999-001231
J. D. Brooks
(613) 957-2103
Attention: XXXXXXXXXX

June 5, 2000

Dear Sirs:

This is in reply to your letter of July 6, 1999 in which you requested our views on the taxability of capital gains realized in a trust. You presented a fact scenario and queried whether capital gains realized by the inter vivos trust could be allocated to the beneficiary holding a residual capital interest in the trust, deducting such allocation from the trust's income. We apologize for the delay in replying.

Our Comments

The situation outlined in your letter appears to relate to an actual situation. Confirmation of the tax implications of proposed transactions is given only in reply to an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular situation relates to transactions that have been completed, the enquiry should be directed to the local tax services office where the taxpayer's returns are filed. While we are unable to comment on the particular situation described in your letter, the following general comments may be of assistance to you.

Our comments relate to the following generalized hypothetical situation. An individual has a life interest in the income of a trust while a registered charitable organization has a residual capital interest in the trust. The trustee of the trust is not entitled to encroach on the trust's capital for the benefit of either the individual who holds the income interest or the charitable organization which holds the residual capital interest. The trust disposes of some of its property in the current year, realizing a capital gain. The trust is not terminated in the current year.

The Income Tax Act provides that a trust may, within stated confines, allocate income to its beneficiaries and thus exclude amounts from its income and not be taxed thereon. More specifically, subsection 104(6) of the Act enables a trust to deduct from its income certain amounts that would otherwise be its income for a year and that become payable in the year to a beneficiary in accordance with the terms of the trust agreement. Subsection 104(24) states that for purposes of subsection 104(6), an amount shall be deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of the amount. While taxable capital gains are included in a recipient's hands as income, such gains are, for trust purposes, on capital account. Since the trustee does not have power to encroach on capital for the benefit of either the income beneficiary or the capital beneficiary, capital gains earned by the trust remain in the trust and form part of the capital of the trust that will be eventually paid out to the capital beneficiary, which is the charitable organization. Despite the fact that the charitable organization will eventually receive the trust's property, no amount will be payable to the charitable organization until the income beneficiary's interest terminates and thus a deduction pursuant to subsection 104(6) will not be available to the trust with respect to its taxable capital gains realized in the current year.

Yours truly,

T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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