9 May 1983 Income Tax Severed Letter 5-4729 - [Trust income and Subsection 108(5) of the Income Tax Act ("ITA")]

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.

J.C. Clark Tel. (613) 593-6201

May 9, 1983

Dear Sirs:

Re: Trust income and Subsection 108(5) of the Income Tax Act ("ITA")

This is in reply to your letters of December 23, 1982 and March 21 and April 25, 1983 in which you asked for our comments on the calculation of trust income. We regret our delay in replying.

You correctly concluded in items (1) to (3) of your December letter that subsection 108(5) of the ITA confirms the following:

(1) A trust and not a trust beneficiary would be subject to tax under Division I of the Petroleum and Gas Revenue Tax Act ("PGRT" Act) on production revenue received.

(2) Only the trust would claim the resource allowance in respect of production revenue for PGRT purposes.

(3) Income allocated to a trust beneficiary does not retain its identity.

We also agree with your conclusions in items (4) and (5) that an amount cannot be payable to a trust beneficiary, within the meaning of subsection 104(24) of the ITA, if it has already been paid as a tax.

You concluded in item (6) that where a trust receives resource royalties, net of PGRT withholdings, only the actual cash received would be allocable to beneficiaries for purposes of section 104 of the ITA. We agree that this will result in an inclusion in the taxable income of the trust of an amount equal to the PGRT withheld by the payor of the resource royalty.

In item (7) you mentioned that amendments to previously filed T3 returns would be necessary upon passage of Bill C-139. Any technical or procedural questions concerning requests to amend particular T3's should be addressed to the appropriate District Office. The Department's practice with respect to requests for amendments to previously filed returns is explained in Information Circular 75-7R2, issued by Revenue Canada, Taxation on September 21, 1981.

The following paragraphs relate to the queries raised in your letter dated March 21, 1983.

Subject to treaty provisions, all royalties received directly by a non-resident who is not carrying on a resource-related business in Canada are considered to be resource royalties for PGRT purposes. Subsection 805(1) of the Income Tax Regulations ("ITR") includes in amounts subject to tax under Part XIII of the ITA all amounts not reasonably attributable to a business carried on by a non-resident in Canada. In order to have production royalties a taxpayer must be subject to tax under Part I of the ITA and also subject to a Crown royalty as defined in subsection 79(1) of the PGRT Act. Therefore a royalty received by a non-resident whose royalty income is only subject to Part XIII Tax is a resource royalty, and no resource allowance under paragraph 82(2)(e) of the PGRT Act is claimable. If royalties which are subject to a Crown charge are paid to a resident trust, they will be production royalties and the trust will be entitled to claim a resource allowance for PGRT purposes, whether its beneficiaries are residents or non-residents.

A situation similar to the one described above for PGRT purposes exists for purposes of the resource allowance under paragraph 20(1)(v.1) of the ITA. Royalties are included in resource profits for ITA purposes under paragraph 1204(1)(b.1) of the ITR. Draft regulation 1210(1) and the definition of production royalty in draft regulation 1206(1) require a deduction of production royalties paid in calculating ITA resource profits for purposes of the ITA. If these draft regulations are passed, royalties paid directly to a non-resident, who is not carrying on a resource business in Canada will not be deducted in computing the resource profits of the payor. Conversely, royalties subject to a Crown charge paid to a resident including a trust will be production royalties and will be deducted under subsection 1210(1) of the draft ITR in computing the resource profits of the payor. A resident recipient of such production royalties, including a trust, will be able to include the production royalties in its resource profits, pursuant to paragraph 1204(1)(b.1) of the ITR and subsection 1210(1) of the ITR.

You enquired whether the example on page 6 of the department's January 1983 publication 'Notice to Petroleum & Gas Revenue Tax Act Taxpayers' is correct in showing production royalties of $500 per month, taxable at 16% and incremental production royalties of $50 per month taxable at 50% for the period January 1 to May 31, 1983. The example's illustration of this overlap is correct. Paragraphs 81(1)(r) and (s) were added to the ITA to exclude incremental oil revenue and incremental resource royalties, as defined in the PGRT Act, from income for purposes of the ITA. These provisions were included in clause 32 of Bill C-112 which was passed on June 29, 1982.

A correction to our letter of December 13, 1982 is required. The words "…and oil produced on a particular day from a low productivity well…" on the fifth and sixth lines of page 4 should be removed.

Our comments in this letter, wherein we have agreed with your conclusions, are expressions of opinion only and are not binding on Revenue Canada, Taxation, as explained in paragraph 24 of Information Circular 70-6R, issued by Revenue Canada, Taxation on December 18, 1978.

Yours truly, for Director General Corporate Rulings Directorate Legislation Branch