Section 104

Table of Contents

Subsection 104(1) - Reference to trust or estate

Cases

Canada v. Sommerer, 2012 DTC 5126 [at 7219], 2012 FCA 207

Austrian foundation likely not a trust

Before allowing the taxpayer's appeal from an assessment made on the basis that s. 75(2) applied to attribute a capital gain realized by an Austrian private foundation (founded by the taxpayer's Austrian father) to the taxpayer, Sharlow J.A. noted (at para. 38) that she considered it a "doubtful proposition" that the foundation was a trust, even though the taxpayer's counsel had not argued this alternative basis for overturning the assessment.

First, "an Austrian private foundation is a juridical person with the legal capacity to own property in its own right" and thus is similar to a corporation (para. 40). Second, nothing gave the taxpayer "a legal or equitable claim to the corporate property that is different from that of a shareholder...of a corporation" (para. 42).

Furthermore, there was nothing in the constating documents or Austrian law to support the proposition that the foundation was the corporate trustee of a trust, i.e., that its right "to deal with its property is constrained by any legal or equitable obligations analogous to those of a common law trustee" (para. 41).

Words and Phrases
revert
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(5) 70
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) does not apply to FMV purchases 230
Tax Topics - Treaties treaty applies to economic double taxation 338
Tax Topics - Treaties - Article 13 attributed gain not included 393

Fundy Settlement v. Canada, 2012 DTC 5063 [at 6881], 2012 SCC 14, [2012] 1 S.C.R. 520, aff'g sub nom St. Michael Trust Corp. v. The Queen, 2010 DTC 5189 [at 7361], 2010 FCA 309, aff'g sub nom Garron v. The Queen, 2009 DTC 1568, 2009 TCC 450

trust residence that of Canadian beneficiaries

A Barbados-resident corporation was the trustee of two trusts. The Court found that the trusts were resident in Canada because that is where the beneficiaries exercised the central management and control of the trust (the Barbados corporation's management role was minor). Regarding s. 104(1), the Court stated (at paras. 12-13):

St. Michael argues that s. 104(1) links the trustee to the trust for all attributes of a trust, including residency. However, ... there is nothing in the context of s. 104(1) that would suggest there be a legal rule requiring that the residence of a trust must be the residence of the trustee.

On the contrary, s. 2(1) is the basic charging provision of the Act, and its reference to a "person" must be read as a reference to the taxpayer whose taxable income is being subjected to income tax. This is the trust, not the trustee. This follows from s. 104(2), which separates the trust from the trustee in respect of trust property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 2 - Subsection 2(1) central management and control test for trust residence 244

Antle v. Canada, 2010 DTC 5172 [at 7304], 2010 FCA 280

settler did not intend to lose control of "contributed" property

A purported Barbados trust that was used in connection with a tax plan to avoid Canadian capital gains tax on the disposition of shares of a corporation was found not to exist at the time of a purported sale of shares by the purported trust given that the settler never intended to lose control of the shares to the Barbados trustee or of the money resulting from their sale, he did not sign the trust deed until after the sale of the shares to the third party, and the shares were not validly transferred to the trust (and, in fact, at the relevant time, they could not be so transferred because they were subject to the security interest of a third party).

In response to an argument that these findings were external to the trust deed and the terms of the trust deed itself indicated a trust, Noël JA stated (at para. 12):

A test that requires one to look at all of the circumstances, and not just the words of the trust deed, is an approach that appears to have been adopted by Canadian courts generally.

In going on to find that the purported trust also was a sham, Noël JA stated (at paras. 19, 20):

The Tax Court judge found as a fact that both the appellant and the trustee knew with absolute certainty that the latter had no discretion or control over the shares. Yet both signed a document saying the opposite. …[T]he Tax Court Judge misconstrued the notion of intentional deception in the context of a sham. …It suffices that parties to a transaction present it as being different from what they know it to be.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham trust deed did not reflect the factual expectatons of the settler and trustee 215

See Also

Markou v. The Queen, 2016 TCC 137

TCC had jurisdiction to determine that no lender equitable remedy (under Quistclose trust doctrine) attached to leveraged donation advances

In connection with a leveraged donation arrangement, the taxpayers in the lending agreement directed the lender (“Capital”) to deliver the funds to a charity on their behalf. This was accomplished by Capital delivering the funds to its parent’s law firm (“FMC”) subject to a direction to deliver them to the charity’s law firm, whereupon in accordance with the lending agreement a debt relationship between Capital and the taxpayers was triggered.

In finding that he had the jurisdiction to make a determination under Rule 58(1) as to whether the proceeds that the taxpayers obtained from Capital were subject to a Quistclose trust, C. Miller J stated (at paras 19 & 21):

… The Tax Court of Canada can look at a taxpayer’s circumstances and make a determination as to what facts are true and what legal and equitable rights are available to the taxpayer where such findings will assist the court deciding the correctness of the assessment. The Tax Court of Canada cannot order what a court of equity can order as a result of finding an equitable trust exists. … It can, however, analyze the correctness of an assessment acknowledging any and all rights a taxpayer may have. …

In going on to conclude that there was not a Quistclose trust, he stated (at paras 23, 29, 34 & 35):

… the Quistclose trust… provides a right to a lender to an equitable remedy in situations where the lender has loaned funds to a borrower for a specific purpose, and where the lender is exposed to the risk of other creditors swooping in and snatching those funds from the borrower before the borrower uses them for the intended purpose. …

… With the Quistclose trust, the property is vested with the borrower who has a fiduciary obligation to use funds for a specific purpose or return the funds to the lender. …

… The Appellants, in granting an irrevocable authority to Capital to deliver monies to the charity, had exhausted any power they might have had while the funds were held by FMC. Capital, and only Capital, could direct FMC: the Appellants could not, once the funds were delivered to FMC, direct otherwise. …

… I have concluded that until the funds were delivered to the charity’s lawyers, the Appellants had no legal or beneficial interest in the funds. Once delivered to the charity’s lawyers, the Appellants had a debtor/creditor relationship with Capital. That is all.

Words and Phrases
Quistclose trust
Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 TCC has jurisdiction to determine existence of equitable remedy 90
Tax Topics - General Concepts - Payment & Receipt funds in leveraged donation scheme essentially advanced by lender directly to charity 102

Advocate Gen. for Scotland v. Murray Group Holdings Ltd., [2015] CSIH 77, [2015] BTC 36 (Ct. of Ses. (Inner House, 2nd))

Scottish and English trust concepts had similar practical effect

In the course of finding that the (Scottish) Inner Court was entitled to decide on questions of English trust law that were relevant to a tax scheme using trusts governed by English law, Lord Drummond Young, stated (at para. 50) that:

No doubt the theoretical nature of a trust is different, being based on the notion of legal estate and equitable interest in England, whereas in Scotland it is based on the notion of dual patrimonies of the trustee. Nevertheless the practical results are similar… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(a) income derived from service is assessable even where agreed to be redirected to 3rd party 321
Tax Topics - General Concepts - Evidence Scottish Court of Session entitled to deal with questions of English law 292

Mariano v. The Queen, 2015 DTC 1209 [at 1331], 2015 TCC 244

void for lack of certainty of objects

The taxpayers were participants in leveraged donation transactions which included gifts of courseware licences to a Canadian–resident Trust with a corporate trustee. Ostensibly, the licences then were distributed to the program participants such as the taxpayers after they had been added as capital beneficiaries, with the participants then donating them to CCA. The definition of a capital beneficiary included individuals (subject to specified exclusions) had made written application to the Trustee for consideration for inclusion as a Capital Beneficiary, had made charitable donations to one or more registered charities in the calendar year of such application and received receipts in prescribed form for such donations.

In finding that the Trust was void for lack of certainty of objects, Pizzitelli J stated (at para. 79):

[T]he class of beneficiaries is so hopelessly wide as to not form anything like a class. If "all the residents of London" were too wide a group to form anything like a class, as found in McPhail above, then I must agree that all Canadians who made a charitable donation and anyone else in the world who made a charitable donation entitling them to a prescribed tax receipt from Canadian registered charities is even wider.

See summary under s. 118.1 - total charitable gifts.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other courseware licences valued at modest initial cost, given relevant wholesale market and depressive effect of huge volumes purchased 289
Tax Topics - General Concepts - Ownership no acquisition of unascertained property 66
Tax Topics - General Concepts - Sham taxpayer involvement in deceit unnecessary 357
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2) delegation of power of appointment to promoter not authorized 222
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts no gift where no intent for impoverishment and where gifted property not yet identified 526
Tax Topics - Income Tax Act - Section 248 - Subsection 248(35) attempted use of initial gift to step-up ACB under s. 69(1)(c) 238

Al-Hossain v. The Queen, 2014 TCC 379

bare trust declaration was too late

To secure mortgage financing for his home purchase, the appellant's friend ("Khandaker") agreed to co-sign the mortgage documents and to be placed on title as a co-owner. Less than three weeks after closing, they signed a statutory declaration stating that the appellant was the 100% beneficial owner and that Khandaker held a 0.01% interest in trust for the appellant. In rejecting a submission that the appellant was the sole beneficial owner (so that the new housing HST rebate was available to him), Lyons J stated (at para. 27):

The creation of a trust must be properly documented containing the requisite elements of a trust, dated, signed and in existence prior to or contemporaneous with the matter that is the subject of the trust arrangement.

See summary under ETA s. 254(2).

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 254 - Subsection 254(2) co-owner was not occupant and bare trust declaration was too late 260
Tax Topics - General Concepts - Effective Date bare trust declaration was too late 126

Sheila Holmes Spousal Trust v. Canada (Attorney General), 2013 ABQB 489

superior court declines jurisdiction in tax dispute

The federal Minister assessed the settlor of the appellant trust on the basis that the trust's taxable capital gain and investment income were taxable in his hands because the trust was a sham or invalidly settled, or because s. 75(2) applied. The settlor then filed a notice of objection. The Minister, as agent for the Government of Ontario, issued alternative reassessments in respect of the trust's Ontario provincial tax liability on the basis of the alternative conclusion that the Trust, if valid, was taxable in Ontario, not Alberta. The trustee for the trust filed a notice of objection to this assessment. In dismissing an application to the Court to declare that the trust was valid, Nixon J adverted to the principle in Addison & Leyen Ltd v Canada, 2007 SCC 33 (CanLII), [2007] 2 S.C.R. 793, at para. 11 that "Judicial review should not be used to develop a new form of incidental litigation designed to circumvent the system of tax appeals established by Parliament and the jurisdiction of the Tax Court," and stated (at para. 66):

The only dispute with respect to the validity of the Trust is with the CRA in relation to the payment of tax.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Rectification & Rescission superior court declines jurisdiction in tax dispute 192

Peragine v. The Queen, 2012 DTC 1287 [at 3887], 2012 TCC 348

bare trustee for brother

Webb J. found that the taxpayer held a real property as an agent (and hence as a bare trustee) of his brother. The evidence consistently showed that the property was acquired for, and used in, the taxpayer's brother's business, and that mortgage payments came from the brother's business income. Although the proceeds of disposition of the property were disbursed to the taxpayer, the taxpayer only transferred the funds to his brother or to third parties at his brother's direction and for his brother's benefit.

Lipson v. The Queen, 2012 DTC 1064 [at 2796], 2012 TCC 20

Quebec succession not a trust

The taxpayers received a number of capital distributions from the liquidator of their mother's "succession" (a Quebec estate), but only filed a notice under s. 116(3) respecting the final distribution. The Minister assessed penalties against the taxpayers on the basis that the taxpayer was deemed under para. (d) of the definition in s. 248(1) of disposition to have disposed of taxable Canadian property (an interest in a trust) without filing the required notices under s. 116(3) respecting the previous distributions.

Jorré J. allowed the taxpayer's appeal. A Quebec succession is not a trust. Although s. 104(1) provided that a reference to "trust" or "estate" included an executor or a liquidator of a succession, this merely facilitated a drafting technique to permit the word "trust" or "estate" to refer both to a trust or estate, and the persons charged with responsibility for carrying out the obligations of the trust or estate, as the case may be. In particular, he stated (at paras. 29-30):

What this drafting technique does is avoid the necessity of distinguishing between the trust or estate and the person charged with doing something; one has to read each section referring to "trust or estate" as referring either to the trust or estate or to the person given an obligation in relation to the trust or estate. The technique also avoids the necessity of repeating a series of alternative persons who may be the person who has the obligation.

That is the effect of the attribution of meaning provided for in subsection 248(1): it is not to treat an estate as a trust.

Fourney v. The Queen, 2012 DTC 1019 [at 2575], 2011 TCC 520

bare trust arising on creditor-proofing transfer

Seeking to protect herself from being sued by her brother, the taxpayer transferred title to all her real properties for no consideration to corporations under her majority control. She reported rental and business income and expenses from these properties while her accountant did the same in the corporations' returns. The Minister's reassessment included the inclusion in her income of a taxable capital gain on a disposition of the properties to the corporations.

Hogan J. noted (para. 30) that "a transfer of property for no consideration generally results in a rebuttable presumption of a resulting trust" . This presumption was further supported by the fact that, following the transfer, the taxpayer continued to operate the business properties in a personal capacity. All invoices for repairs and renovations, and all rent cheques were addressed to her personally, and all income and expenses went into or came from her personal bank accounts; and the corporations held themselves out to third parties as the property owners only in limited circumstances.

Hogan J. found that the resulting trust was a bare trust, in which the corporations could reasonably be considered to have acted as mere agents for the taxpayer. The trust was therefore not a "trust" for the purposes of the Act, pursuant to s. 104(1). Furthermore, the transfer was not a "disposition" under s. 248(1) because, as per paragraph (e), the taxpayer retained beneficial ownership. The income and expenses on the properties therefore were those of the taxpayer, and she did not realize a capital gain on the transfer.

Canpar Developments Inc. v. The Queen, 2011 GSTC 118, 2011 TCC 353 (Informal Procedure)

The taxpayer's transfer of a real property to its two shareholders, made for the purpose of securing a bank loan, did not give rise to an implicit trust. Among the reasons given, Paris J. pointed out that the shareholders had never advised the bank of the existence of a trust, which supported the inference that there was no trust.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 285 212

De Mond v. The Queen, 99 DTC 893, Docket: 95-2216-IT-G (TCC)

taxpayer characterized as playing the role of settlor, trustee and beneficiary of his “own” trust, so that it was a bare trust

The taxpayer settled a trust governed by U.S. law (the “Family Trust”) for the purpose of ensuring that its property could be rolled into separate trusts for the benefit of others upon his or his wife’s death without going through probate. He testified that the Family Trust did not hold any property but was merely an instrument to hold three sub-trusts: the husband’s, wife’s and joint property trust. He transferred his own property to the husband’s trust.

The Family Trust entered into a Partnership Agreement to become a limited partner and then through its “trustors,” i.e., trustees (the taxpayer and his wife) signed a separate declaration of trust declaring that the Family Trust held the limited partnership interest as bare trustee for the husband’s and wife’s trusts as to respective 90% and 10% interests.

The taxpayer claimed the partnership’s loss as his own loss as to a 90% share.

Lamarre J accepted that the Family Trust held the partnership interest as bare trustee for the husband’s and wife’s trusts. In finding that the husband’s trust also was a bare trust respecting the partnership interest, so that its share of the losses flowed through to the taxpayer individually, she stated (at paras. 46-48):

According to the Declaration of Trust, the appellant, as trustee of the husband's trust, is to accumulate or distribute the net income and principal thereof as the husband may direct from time to time. Under that same Declaration of Trust, the beneficiaries are the trustors while both trustors are alive.

Furthermore, while both trustors are living, only the husband has the power to revoke the husband's trust and, should he exercise it, the trustee must deliver to the husband any separate property in the husband's trust (the same applies to the wife's trust). It seems to me, therefore, that the appellant can cause the husband's trust's share of the Partnership interest to revert to him at any time….

It is therefore difficult to say that the trustee has significant powers or responsibilities and can take action without instructions from the settlor, or that the trustee is not subject to the control of his beneficiary, since the appellant in fact plays the roles of all three of the constituent parties to the trust: he is the settlor, the trustee and the beneficiary of his own trust.

Administrative Policy

12 July 2016 External T.I. 2014-0560361E5 - Cdn beneficiary of US living trust

question of fact whether a U.S. revocable living trust is an excluded trust

A U.S. revocable living trust is a trust that is usually controlled by and established for the benefit of those who created the trust (“grantors”) during their lifetime. … Where the grantor can change the terms of, or completely revoke the trust during their lifetime, they effectively retain control of the trust assets.

…[The] trust is an excluded trust…where the arrangement is such that the trust/trustee can reasonably be considered to act as an agent for all the beneficiaries unless the trust is described in any of paragraphs (a) to (e.1) of the definition of trust in subsection 108(1). This determination is a legal question of fact, and depending on the specifics of each case a particular grantor trust may in fact be such an excluded trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) potential application to U.S. revocable living trust 178
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) whether there is a foreign tax credit for US tax paid by the grantor of a revocable US living trust 248

10 June 2016 STEP Roundtable Q. 10, 2016-0645781C6 - US Revocable Living Trusts

U.S. revocable living trust is not a bare trust

A U.S. resident (the “grantor”) settles a “revocable living trust” with property including taxable Canadian property. The grantor: is the sole trustee; until death is the sole beneficiary with rights to income and any encroachments of capital; and may revoke the trust at any time. The trust provisions may provide for a distribution of the trust property to named beneficiaries upon the death of the grantor. In light of De Mond, does this arrangement constitute a trust?

CRA indicated that De Mond has not altered its view (in 9518515) that a revocable living trust is recognized at the time that legal title to property is transferred to it, with such transfer being considered to occur at fair market value. The key distinction between a revocable living trust, and a bare trust, is that the former generally includes remainder beneficiaries, so that there is a change in beneficial ownership when property is transferred to the trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(5) transfer to remainder beneficiary of a U.S. revocable living trust on death does not occur as a consequence of death 122
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(a) remainder beneficary of inter vivos trust 161

4 October 2010 Internal T.I. 2008-0289461I7 - Netherlands Antilles private foundation

Netherlands Antilles private foundation qualifies as trust notwithstanding separate legal personality

A private foundation was created pursuant to the laws of the Netherlands Antilles and governed by Articles of Foundation. Its capital consists of assets contributed by the Founder, as well as other assets acquired from others, it may make distributions out of its assets (mostly securities) to such persons and entities as the Foundation Council may determine with the written consent of the Founder (but, in fact, the beneficiaries are listed in the Foundation’s Administrative Rules) and its Foundation Council members who commission its management are appointed by the Founder. Is the foundation a trust or corporation? The Directorate responded:

[T]he private foundation created pursuant to the laws of the Netherlands Antilles is similar, in some respects, to the civil law trust.

In order to characterize a Netherlands Antilles private foundation that displays both corporate and trust attributes, it will be necessary to determine what the distinguishing characteristics of a Canadian corporation are, as compared to a Canadian trust, and the weight that should be attached to each… . Once that is done, a characterization determination can be made by comparing those characteristics with the attributes of the Netherlands Antilles Private Foundation.

…[T]he Foundation possesses a separate legal existence from the beneficiaries of the Foundation...possesses its own capacity to acquire rights and to assume liabilities…[and t]he beneficiaries of the Foundation also are not personally liable for any of the debts incurred by the Foundation. In th[ese] respect[s], the Foundation is similar to a corporation. …

[However] the Foundation does not issue share capital or something else which serves the same function… the beneficiaries do not pay for their interests in the foundation… the beneficiaries of a private foundation cannot transfer their beneficial interest in the foundation to someone else…[and] the beneficiaries of the Foundation never have the right to participate in the decisions of the Foundation. …

[Accordingly] the attributes of a private foundation created pursuant to the laws of the Netherlands Antilles more closely resemble those of a trust under our common and civil law than a corporation. As such, the Foundation should be treated as a trust… . [T]he existence of a separate legal entity clause contained in the Netherlands Antilles legislation governing private foundations would not...preclude an arrangement from being considered as a trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Netherlands Antilles private foundation qualifies as a trust notwithstanding its separate legal personality 107

2014 Ruling 2013-0496831R3 - Irish Common Contractual Fund

Irish contractual fund respected as co-ownership

underline;">: Description of CCF. "CCF" is a common contractual fund established pursuant to the Investment Funds, Companies and Miscellaneous Provision Act 2005 (Ireland) (the "Investment Funds Act"), which provides that a common contractual fund is an unincorporated body established pursuant to a deed of constitution by a management company, under which co-owners participate and share in the collective investments by virtue of holding units and with the property being entrusted to a custodian for safe-keeping in accordance with conditions imposed by the Central Bank of Ireland and with the deed of constitution (which is binding on the unitholders) specifying the conditions for the replacement of the management company or custodian. Each Unit is defined as one undivided co-ownership interest in the properties of the CCF (currently mostly equities of non-Canadian public companies), with the Unitholder holding the co-ownership interests as tenant in common with the other Unitholders. Unitholders may redeem their Units (which are non-voting) on and with effect from any dealing day at the net asset value per Unit and Units may also be converted to Units of a different class. "[T]the Custodian in its capacity as trustee, shall ensure that the sale, issue, conversion, repurchase, redemption, and cancellation of Units effected by or on behalf of the Manager, are carried out in accordance with the Investment Funds Act and the Deed of Constitution." The Custodian and Manager are non-residents.

Irish tax

The CCF is not subject to Irish tax as Unitholders are treated under s. 739I of the Taxes Consolidation Act 1997 (Ireland) as having directly earned income on the CCF properties in proportion to their Unitholdings.

Proposed transactions

CCF, which is a "single strategy" fund under Part 2 of the Investment Funds Act, will extend its investments to equities of Canadian public companies and will accept investments from Canadian residents which are exempt under s. 149(1).

Rulings include

"[E]ach "New Investor" will be treated as the co-owner of an undivided interest as tenant in common with the other Unitholders in each property held by the CCF, …any amount paid or credited by a person resident in Canada to the Custodian in relation to the properties held by the CCF will be an amount paid or credited to each New Investor in proportion to the New Investor's ownership interest in the properties of the CCF …[and s.] 94(3) will not apply to the CCF."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 Irish common contractual fund respected as co-ownership 46

22 November 2013 External T.I. 2013-0511771E5 - Beneficial Ownership - Disposition

mother as nominee for daughter's house

As the taxpayer's daughter did not qualify for a mortgage at the time of her purchase of her home, the bank required legal title to be placed in the taxpayer's name. With the mortgage now having been paid in full by the daughter, legal title will be transferred to her. CRA stated:

[Y]our daughter is likely the beneficial owner of the home. If that is the case, then the transfer of legal title of the house to your daughter would not result in any income tax consequences… .

Locations of other summaries Wordcount
Tax Topics - General Concepts - Ownership mother as nominee for daughter's house 88

8 May 2012 CALU Roundtable Q. 6, 2012-043564 -

holder of insurance proceeds as agent

Shareholders of a corporation use a buy-sell agreement to requires the corporation to acquire insurance on the shareholders' lives (and pay the premiums thereunder) to fund share purchase obligations under the agreement, and further agree to use a third party (the "Insurance Trustee") to hold and apply the insurance proceeds as directed under the agreement, with the corporation being required to pay any insurance proceeds over to the Insurance Trustee upon receipt. Before indicating that such proceeds would be added to the capital dividend account of the corporation as amounts received by it, CRA stated:

A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee's only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

15 July 2010 Internal T.I. 2010-0353701I7 - Classification foreign entity - Trust Enterprise

Liechstenstein Trust Enterprise as trust

Ruling that a Liechstenstein Trust Enterprise would be a trust rather than a corporation. Although it had centralized control, continuity of management and existence, issuance of transferable coupons which might be assimilated to shares, limited liability of coupon holders and legal personality and the ownership of assets, on the other hand it had limited objects, beneficiaries who were not entitled to vote and who did not pay for their interest and who could be liable if they enriched themselves, the application to the entity of rules of equity and references to it as a trust under the Liechtenstein law.

2010 Ruling 2009-0345011R3 - Irish Common Contractual Fund

Irish contractual fund

Irish contractual funds, which gave the unitholders proportionate undivided co-ownership interests in the assets of each "sub-fund (i.e., portfolio) were not trusts to which s. 94(1) applied, with unitholders treated as earning or realizing directly the income or gains from the portfolio property.

2006 Ruling 2006-0199741R3 -

umbrella Irish CCF with sub-funds

underline;">: CCF. A Common Contractual Fund ("CCF") is a type of collective investment undertaking under which Unitholders by contractual arrangement acquire, own and share in the property of the CCF as co-owners, being entitled to an undivided interest as tenants in common in the property comprising the CCF. Accordingly, Unitholders are owners of, and are entitled to all income and gains derived from, the property of the CCF as such income and gains arise. It is legally valid for a CCF to have only one unit-holder.

Proposed transactions

The Manager, which is a corporation resident in Ireland, will constitute the "Fund" in accordance with a Deed of Constitution, so that it will qualify as a "CCF" described in s. 739I(1)(a)(ii) of the Taxes Consolidation Act 1997 (Ireland) (the "TCA"). This requires that: (i) it is an Undertaking for Collective Investment in Transferable Securities ("UCITS") authorized by the European Communities UCITS Regulations (the "Regulations"), (ii) it is constituted otherwise than under trust law or statute law, (iii) each of its units is beneficially owned by a pension fund or by a person other than an individual, or is held by a custodian or trustee for the benefit of a person other than an individual, and (iv) all the investors in the investment undertaking make a declaration on acquiring units in the undertaking. On this basis, the Fund will not be chargeable to Irish tax on its profits. The Fund will be an "umbrella fund" within the meaning of the Regulations. Accordingly the Fund will consist of several Sub-Funds and Units shall be issued in respect of each Sub-Fund. Each Unit will represent a proportionate undivided co-ownership interest in the property of the Sub-Fund. The Irish Custodian has safekeeping responsibilities, and the Canadian Sub-custodian has Canadian tax reporting responsibilities respecting Canadian source receipts.. The Manager will be responsible for managing the Fund's property in accordance with the Prospectus, Deed of Constitution, Regulations and any other regulatory requirements.

Rulings include

:

For the purposes of Part I…, each Unitholder will directly earn its proportionate share of income, losses, capital gains and capital losses from the property of the relevant Sub-Fund of which it is a Unitholder.

For the purposes of Part XIII…, any amount paid or credited by a Canadian payer to the Sub-custodian in respect of the property of a particular Sub-Fund will be an amount paid or credited to each Unitholder of the relevant Sub-Fund in proportion to the Unitholder's ownership of the property of the relevant Sub-Fund.

[T]he Dutch Treaty will apply to each Unitholder that is a resident of the Netherlands for the purposes of the Dutch Treaty for the purposes of determining the withholding rates in respect of the Canadian source income it earns from its share of the property of the relevant Sub-Fund.

2006 Ruling 2004-010610 -

German investment fund

Ruling that an open-end real estate fund established under the Investment Companies Act (Germany) (and to be continued under the Investment Act (Germany)) would be treated as an inter vivos trust that was not a personal trust for purposes of the Act in respect of its proposed investments in a Canadian partnership.

Locations of other summaries Wordcount
Tax Topics - Treaties - Article 4 24

2004 Ruling 2004-006777 -

Irish common contractual fund

Ruling that an Irish Common Contractual Fund would be considered to constitute a co-ownership arrangement.

18 February 2002 External T.I. 2001-004607 -

"unless context otherwise requires"

The purpose of the amendment to s. 104(1) adding "unless the context otherwise requires" was not to make a fundamental change. Although a reference to "trust" generally refers to the term "trustee", the amendment recognizes that, in particular contexts, there are references to trust in the Act that are meant to indicate a trust arrangement, rather than the persons who are responsible for the operation of the arrangement

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) 28

10 January 1996 External T.I. 10 January 1996 TI 9518515 - Transfer of Property to Revocable Living Trusts

transfer to revocable living trust is disposition

Would a transfer of appreciated capital property to a revocable inter vivos trust (also referred to as a revocable living trust), which is not a disposition for U.S. purposes, be a disposition for purposes of the Act? CRA responded:.

Our understanding of a revocable living trust is that pursuant to the terms of the Declaration of Trust: (1) the settlor is the trustee and, during his or her lifetime, is the sole income and capital beneficiary, (2) the settlor retains the ability to revoke, alter or amend the terms of the trust at any time, (3) the settlor has the ability to deal with the property as he or she sees fit during his or her lifetime, and (4) at the time of the settlor's death, the income and capital interests in the trust vest in other beneficiaries. …

[B]y virtue of point (4) above, the settlor would not retain all incidents of beneficial ownership. Consequently, the transfer of property to such a trust would be a disposition of the property at its fair market value.

IT-216 (Cancelled) "Corporation Holding Property as Agent for Shareholder" 20 May 1975

  1. A corporation may hold in trust, as agent for a shareholder, property that was acquired specifically to be held in this way. This situation, however, will only be accepted as a fact where there is an agreement or declaration of trust, entered into before or at the time the property was acquired, between the corporation and the shareholder, which clearly sets out the intention of the parties to the agreement and the degree of participation of the shareholder in the property so held in trust..
Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 85

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Classification of Trusts for Income Tax Purposes", Chapter 2 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Non-application to bare trusts (p. 86)

[T]he non-applicability of the Act to bare trusts has been recognized by the courts. [fn 107: …Brookview Investments Ltd… v. MNR, 63 DTC 1205 (Ex. Ct.): and De Mond v. The Queen, 99 DTC 893 (TCC).]…

Different settlor/multiple beneficiaries (p. 87)

In principle, there seems to be no reason why the beneficiary of a bare trust needs to be the settlor. There also seems to be no reason in principle why a bare trust cannot have more than one beneficiary. Moreover, it should be possible for beneficiaries to control their rights and obligations inter se by contract, without creating a trust for tax purposes.

Donald G.H. Bowman (former Chief Justice of the Tax Court of Canada), "Bare Trusts and Nominee Corporations", Tax Topics (Wolters Kluwer), August 11, 2016, No. 2313, p. 1

Trustee cannot also be an agent (p.4)

My reason for thinking that a trustee holding property or carrying on a business for a beneficiary cannot at the same time be an agent for a principal is based on the view that a trustee that holds property for a beneficiary cannot, as a matter of law, fulfill the obligation of a trustee under the law of trusts as it exists in the common law provinces of Canada or as contemplated by the Income Tax Act, and also as an agent with the power to bind the principal and to take steps that impose upon the principal contractual, legal, or tortious liabilities. The attributes and responsibilities of a trustee for a beneficiary and of an agent for the same person as a principal are irreconcilable. How then does one reconcile that proposition with what Webb J. said in the Peragine case? The short answer is that nowhere in his judgment does Webb J. suggest that the same person can wear both hats at the same time. Webb J. comes down on the side of agency only and does not consider that Salvatore Peragine is simultaneously a trustee.

Bare trustee is only an agent (p. 4)

My conclusions can be summarized as follows:

(a) A "bare trustee" is an agent, not a trustee.
(b) If a "bare trustee" has more of the attributes of a trustee than a mere passive holding of the property the relationship may be over the line from agent to trustee.
(c) No one can legally be a trustee and an agent at the same time. I do not think that Webb J. said that one could but in my opinion Morden J.A. in Trident Holdings Ltd. implied as much.
(d) Judges, when faced with something called a "bare trustee", have to make up their minds and decide which side of the line the entity falls on. They cannot schizophrenically shilly-shally between the two relationships or seek to avoid the admittedly difficult decision by saying "maybe both".

Jack Bernstein, "Trust Residence Question", Canadian Tax Highlights, Vol. 17, No. 7, July 2009, p. 1

Discussion of CRA audits of residence of inter-provincial trusts.

Subsection 104(2) - Taxed as individual

Cases

Olympia Trust Company v. Canada, 2015 FCA 279

fictitious s. 104(2) trust is not the purchaser

Ryder JA affirmed a finding of Bocock J that a Canadian trust company, which was the trustee for self-directed RRSPs that had purchased shares from non-residents without withholding or receiving s. 116 certificates, was the "purchaser" for s. 116(5) purposes rather than the annuitants, i.e., it was on the hook as the shares were taxable Canadian property. Respecting an alternative argument that the purchasers for s. 116 purposes were the RRSP trusts themselves, he stated (at apra. 66):

[T]he critical element of subsection 116(5) is the paying or crediting of an amount to a Disposing Non-Resident as the purchase price or acquisition cost of the TCP… . This action cannot be taken by a fictional person.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(5) RRSP trustee, not annuitant, was the "purchaser" 188
Tax Topics - General Concepts - Evidence contract informed by surrounding circumstances 55

Stricker Oolup v. The Queen, 2003 DTC 2142, 2003 TCC 947 (Informal Procedure)

The taxpayer was able to rebut the presumption of resulting trust in favour of the estate when her grandmother, who with the taxpayer had been the joint holder of a guaranteed investment certificate, passed away. Accordingly, the portion of the GIC that she chose to retain rather than gift to beneficiaries of the estate was characterized as her property, rather than as a fee earned by her from the estate.

Fraser v. The Queen, 91 DTC 5123 (FCTD), aff'd 95 DTC 5684 (FCA)

Approximately 100 taxpayers invested in a pool of mortgages by paying a subscription price for "units" to two companies, that used the proceeds to acquire mortgages and distributed the income and proceeds thereon from time to time to the unit holders. This was found to be a trust rather than an agency arrangement in light inter alia of the lack of any real control by the investors over the actions of the two trustee companies.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 58

Smith v. The Queen, 87 DTC 5355, [1987] 2 CTC 138 (FCTD)

Under a shareholder's agreement containing a right of first refusal, it was agreed that the shares held by the taxpayer would be sold in equal proportions to his three sons for $1.00. The shares of the taxpayer were not held in trust. "While the agreement may have reflected something of a common intent that the shares would pass to the sons in the event of the plaintiff's death, this did not clearly bespeak an intention to transfer or vest the beneficial ownership of those shares in the three sons." Furthermore, the taxpayer "acted at all times as though he were the beneficial owner of the shares."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 173 - Subsection 173(1) 86

Drescher v. The Queen, 85 DTC 5064, [1985] 1CTC 229 (FCTD)

It was found that family members each bought lottery tickets on the understanding that gains would be shared among them. It accordingly was held that the taxpayer purchased a lottery ticket and invested the $1 million prize in term deposits as trustee, and that interest income earned on the monies so invested was earned equally by the three family members.

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Provincial Law 50

Bouchard v. The Queen, 83 DTC 5193, [1983] CTC 173 (FCTD)

It was found that real property, which had been purchased by the plaintiff and his wife, had been held by them in trust over a 13-year period for their son and daughter-in-law, notwithstanding S.9 of the Statute of Frauds (Ontario) and the absence of any writing supporting the existence of the trust other than a purported agreement of purchase and sale between the two generations which had been executed 8 years after the settling of the trust.

Atinco Paper Products Ltd. v. The Queen, 78 DTC 6387, [1978] CTC 566 (FCA)

Gifts were made by the supposed settlor of a trust to her nephews absolutely unencumbered by any limitation on them other than an expressed hope that the ultimate benefit of the gifts would accrue to the benefit of the wives and children of the nephews. The gifts accordingly did not settle a trust nor could a later trust agreement be construed as a valid declaration of trust.

Ablan Leon (1964) Ltd. v. MNR, 76 DTC 6280, [1976] CTC 506 (FCA)

Trusts were not formed when a series of cheques were sent by the supposed settlor to another individual. "From the point of view of the settlor, and it is his point of view that is significant, the transaction, up to and including the mailing of the cheques, remained indefinite, too indefinite to constitute the trusts." When trust deeds were executed over 6 months later, the trusts still were not established since the supposed settlor instead was a nominee.

The Queen v. Esskay Farms Ltd., 76 DTC 6010, [1976] CTC 24 (FCTD)

The taxpayer, in order to defer pursuant to s. 20(1)(n) the recognition of gain on the sale of land to the City of Calgary, agreed to sell the land to a trust company for cash consideration payable in eight years time. The trust company contemporaneously sold the land to the City for close to immediate consideration. The obligations of the trust company under the purchase agreement with the taxpayer were conditional upon the sale to the City occurring, and registered title was transferred directly from the taxpayer to the City.

The relationship of trustee and cestui qua trust did not exist between the trust company and the taxpayer "because the Trust Company received the proceeds for the sale and used these proceeds for its own benefit which is not consistent with acting as trustee for the defendant".

Kingsdale Securities Co. Ltd. v. The Queen, 74 DTC 6674, [1975] CTC 10 (FCA)

An alleged settlement of trusts (prior to the date of execution of the trust deeds) did not occur due to the lack of the requisite certainty of intention on the part of the settlors.

Settled Estates Ltd. v. Minister of National Revenue, 60 DTC 1128, [1960] CTC 173, [1960] S.C.R. 606

The combined presumption in ss. 104(1) and (2) that executors are deemed to be individuals for purposes of taxation of the estate did not apply for purposes of the definition of "personal corporation" in the pre-1972 Act, because that definition only contemplated individuals who were members of a family.

See Also

Evoy Estate v. The Queen, 2016 TCC 263

designation requires that the respective trusts’ future income cannot accrue to different beneficiaries

The will of a Canadian-resident individual established three separate testamentary trusts for each of his three children and their respective children (his grandchildren), but with his surviving wife (Pauline) being the income beneficiary of each trust for her lifetime. The Minister reassessed to add the income of the two other trusts to that of the appellant trust for three successive years, pursuant to a s. 104(2) designation of the three trusts as one trust. The taxpayer maintained that the three trusts could not be so designated, as they did not have common income beneficiaries after Pauline’s death.

Paris J agreed. In rejecting the Crown’s argument that the test in s. 104(2)(b) (of the multiple trusts being “conditioned so that the income thereof accrues or will ultimately accrue to the same beneficiary or group or class of beneficiaries”) must be applied on an annual basis, he stated (at paras 14, 15, 16 and 21):

…[T]he text of paragraph 104(2)(b) appears to contemplate a consideration of the right to receive the income of the trust over the entire lifetime of the trust rather than for each taxation year. The inclusion of the wording “or will ultimately accrue” supports this conclusion. …

… [T]here is no power given to the Minister to re-designate a consolidated trust as multiple trusts in the event that the conditions set out in paragraph 104(2)(b) are no longer met in a subsequent taxation year, nor is any process for applying for a re-designation provided. …

… Had the purpose of the provision been to create an annual test, one would expect to find some indication that the designation would be done annually, or that it could be revoked at some future point.

Paris J concluded (at para 24):

… [T]he entire class of children and grandchildren are not income beneficiaries of each trust. Rather, a different part of the class is named in each of the trusts. … Therefore the trusts are not conditioned so that the income will ultimately accrue to the same group or class of beneficiaries.

Howard v. Commissioner of Taxation, [2014] HCA 21

damages not received as constructive trustee as not received qua director

The taxpayer and four others formed a joint venture to acquire, lease and sell a golf course. The taxpayer attempted to have a corporation of which he and two other of the participants were directors ("Disctronics") acquire the property. The other two joint venture participants (the "non-directors"), rather than agreeing, secretly acquired the gold course for their own account and sold it at a profit.

The taxpayer and the other two directors obtained a damages award against the non-directors for breach of their fiduciary duties to the three directors qua joint venture participants.

The taxpayer was assessed to include his share of the award in his income notwithstanding that Distronics had received that amount and included it in its income. The High Court first held that the taxpayer had not received the award by reason of his position of director (as Disctronics never was admitted to the joint venture) and that no conflict had arisen between his personal interests and those of Disctronics. Accordingly, he had not become entitled to the amount as constructive trustee for Disctronics, and it was income to him.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) agreement assigned rights to proceeds of law suit rather than entitlement under law suit 305
Tax Topics - Income Tax Act - Section 9 - Compensation Payments damages not corporate income as not received qua director 183
Tax Topics - Income Tax Act - Section 9 - Nature of Income agreement assigned rights to proceeds of law suit rather than entitlement under law suit 305

De Mond Jr. v. The Queen, 99 DTC 893 (TCC)

A trust established by the taxpayer was found to be a bare trust given that he could cause the trust property to revert to him at any time, could exercise his power to revoke the trust whenever he wanted to, the trustee had no choice but to convey the property to him upon demand and in light of the fact that he was the settlor, the trustee and the beneficiary. Accordingly, losses arising from the trust property (a partnership interest) could be treated by him as personal deductions.

Collins v. The Queen, 96 DTC 1034 (TCC)

Before rejecting a submission that the taxpayer held half of his shares of a private company on a constructive or resulting trust for his wife, Bowman TCJ. in order that the taxpayers had adopted a complex and sophisticated corporate structure for holding their various business interests and (at p. 1039):

"Both he and his wife are too intelligent to be oblivious to the fact that each owned different portions of the corporate empire and that they did so for good reasons."

Karavos v. The Queen, 95 DTC 1001 (TCC)

Before finding that, in any event, the taxpayer had failed to establish that one-half of his interest in a building was held on a constructive trust in favour of his wife, Sarchuk TCJ. found (at p. 1006) that "a constructive trust is a mechanism by virtue of which a court with equitable jurisdiction can grant redress to an unjustly deprived person", and that it was not appropriate for the Tax Court to dismiss or allow an appeal, or vacate or vary an assessment, on the basis of a finding by it that there was a constructive trust:

"Effectively a court is required to embark on an examination of the totality of a marital relationship extending over a period of 30 years to determine whether an unjust enrichment occurred and whether it would be appropriately remedied by a declaratory order vesting the claimant with title to property or by granting a monetary award. In my view such an inquiry is inappropriate in an income tax context."

Gillis v. MNR, 91 DTC 1457 (TCC)

The presumption under common law and s. 21 of the Matrimonial Property Act (Nova Scotia) of resulting trust with respect to a transfer of property by the taxpayer to his wife was rebutted by evidence that such transfer was motivated by a desire to place the property beyond the legal reach of potential creditors of the taxpayer.

Nelson v. MNR, 91 DTC 37 (TCC)

Insufficient evidence was advanced to support the taxpayers' position that 1/2 of a farm was held on a constructive trust.

Fraser v. MNR, 89 DTC 620 (TCC)

A vehicle under which a company ("Marlowe-Yeoman") invested in and held mortgages on behalf of investors, who had the right to redeem their "units" in the "syndicate" was found to establish a trust relationship rather than a co-ownership arrangement. There was "the duality of property ownership which is characteristic of trust", and Marlowe-Yeoman held the mortgages as a fiduciary. The lack of control of the unit holders over the mortgages, and the right to withdraw without the consent of the other unit holders, was inconsistent with co-ownership.

Zeidler v. Campbell (1988), 29 E.T.R. 113 (Alta. Q.B.)

A voting trust agreement did not give rise to a trust in light inter alia of the fact that the alleged trustee did not acquire any property in the shares and was free to profit from the shares.

Bank of Nova Scotia v. Societé General (Canada), [1988] 4 WWR 232 (Alta. C.A.)

An operator under the 1981 Canadian Association of Petroleum Landmen Operating Procedure held funds received from the non-operators in trust given the aspects of the agreement suggesting a fiduciary relationship including the prohibition on the operator using excess funds and revenues for its own use, and notwithstanding the permission accorded to the operator to commingle its own funds with those of the non-operators.

Miconi v. MNR, 85 DTC 696 (TCC)

A real estate property was found to be beneficially owned by the taxpayer rather than by a corporation controlled by him, with the result that amounts paid by the corporation in respect of the property constituted loans made to him that were subject to s. 15(2). In rejecting a submission that the property was held by the individual under a parol trust in favour of the corporation, Rip TCJ. found that although this claim was supported by probability and by convincing parol evidence, it was not supported by writing, indisputable facts and disinterested testimony.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(2) 93

Administrative Policy

26 April 2013 External T.I. 2013-0486211E5 - Multiple Trusts

applicable criteria

CRA provided general comments respecting several situations where there are several testamentary trusts set up such that the spouse of a deceased taxpayer is the principal beneficiary of the trust property and each child is a residual beneficiary of one of the trusts, and stated:

For the purposes of determining whether the discretion in subsection 104(2) of the Act would be exercised, certain criteria are examined, including but not limited to:

  • whether there was a clear intention to create separate trusts, according to the provisions of the will or trust deed;
  • whether the trusts have common beneficiaries, in particular the number of common beneficiaries and the nature of their respective interests in each of the trusts;
  • whether the assets of each of the trusts are administered and accounted for separately; and the powers of the trustees.

28 December 2011 External T.I. 2011-0430261E5 - Subsection 104(2) of the Act

where a taxpayer dies leaving his property equally to three testamentary trusts of which his surviving spouse is the only capital and income beneficiary during her life and, upon her death, each of the three children is a respective beneficiary, the Minister likely would designate them as a single trust. The Directorate noted that "it is not necessary that each trust have the same beneficiaries; it is sufficient that the beneficiaries of each trust are of the same group or class of beneficiaries."

23 February 1999 T.I. 980975

Where "in-trust accounts" are set up by parents for holding mutual fund investments on behalf of their minor children, the certainty of intention to establish a trust arrangement will be difficult to establish in the absence of a formal trust document.

19 February 1999 Memorandum 983164

Discussion of background to the position in IT-129R, para. 10, respecting the deposit of funds with lawyers pending the outcome of litigation.

22 September 1997 T.I. 971747

Where an "in trust" account is set up to hold a mutual fund investment on behalf of children, the certainty of intention to set up a trust arrangement would be difficult to prove in the absence of a formal trust document.

Income Tax Technical News, No. 7, 21 February 1996

Where property is held by a bare trust, RC will ignore the trust for income tax purposes and will consider the transferor/settlor to be the owner of the property for purposes of the Act.

8 March 1995 T.I. 943325 (C.T.O. "Courtesy Election - Whether a Trust")

A courtesy interest in a deceased married woman's estate that the surviving widower elects to receive, is not a trust but, rather, an interest in land.

18 February 1994 T.I. 933428 (C.T.O. "Bare Trusts")

Where a settlor transfers property to a trust having the characteristics according with RC's understanding of a bare trust (the settlor is the sole beneficiary of income and capital during her lifetime, she retains the ability to revoke or amend the trust at any time and has the unfettered ability to deal with the property as she sees fit during her lifetime) but the settlor also stipulates that income and/or capital interest of other beneficiaries, which are contingent during her lifetime, will vest upon her death, the trust will be considered to be a bare trust until her death. Accordingly, she will report all income and losses related to the property and (subject to the availability of any rollover) will have a deemed disposition at fair market value of the property on her death.

24 February 1993 T.I. (Tax Window, No. 29, p. 14, ¶2439)

The Crown can be constituted a trustee only by the express provisions of an Act of Parliament. Where the Crown is a trustee, the trustee will not be taxable by virtue of Crown immunity.

31 March 1993 T.I. (Tax Window, No. 29, p. 8, ¶2444)

A trust that is a grantor trust for U.S. purposes will be treated as a bare trust for Canadian purposes, with the result that the settlor will be considered to be the owner of the property for purposes of the Act.

25 January 1993 Memorandum (Tax Window, No. 28, p. 22, ¶2398)

Two trusts need not operate concurrently nor need the trustees be the same for a designation under s. 104(2) to be made. Any such designation is applicable only in respect of income rather than losses incurred by the trusts. S.104(2) is considered to be an anti-avoidance measure.

October 1992 Central Region Rulings Directorate Tax Seminar, Q.Q (May 1993 Access Letter, p. 234)

In order for a bare trust to exist for purposes of the Act, the declaration of trust must have been entered into at the time the property in question was acquired by the corporation and the corporation should not be empowered to perform any active duties with respect to the property other than those directly related to the business reasons for there being a bare trust.

23 January 1992 T.I. (Tax Window, No. 16, p. 21, ¶1712)

A trust under which the trustee does not have any significant powers or responsibilities and does not take any action regarding the trust property without instructions from the settlor, and the settlor is the sole beneficiary, would be ignored for income tax purposes.

18 November 1991 Memorandum (Tax Window, No. 11, p. 6, ¶1536)

If a trust is used to achieve a beneficial result for tax purposes not otherwise available to the settlor, this usually is an indication that the trust should be regarded as a valid trust and not as an agent or a bare trust.

10 May 1990 T.I. (October 1990 Access Letter, ¶1471)

Where the parties to an arrangement intend to create a trust for tax purposes and the custodian of the property acts as a trustee under an agreement giving him the usual rights and obligations of a trustee, the fact that the arrangement would not be a trust under the civil law would not preclude it from being treated as a trust for tax purposes.

27 October 89 Memorandum (March 1990 Access Letter, ¶1147)

No provision of the Act allows a usufruct to be treated as a trust.

89 C.M.TC - "Bare Trusts"

general discussion

88 C.R. - Q.31

A constructive trust is subject to the trust provisions of the Act.

88 C.R. - Q.32

Where a bare trust exists at common law, ss.104(1) and (2) will apply because the transferor transfers the legal title while retaining the beneficial ownership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 22

80 C.R. - Q.12

A minor cannot hold shares in a corporation and, in an estate freezing context, where a trust is used to hold shares for a minor, then it is required that either no dividends be paid until the minor is 18, or no preferred beneficiary election be made and no amounts paid or payable to or for the benefit of the beneficiary.

79 C.R. - Q.24

RC usually considers settlor/beneficiary as the actual owner of the property in a bare trust, except that s. 104(1) or (2) is applied for the purpose of requiring a T3 return.

A blind trust is not a bare trust.

IT-129R "Lawyers' Trust Accounts and Disbursements"

Where funds are deposited with a lawyer by litigants for safekeeping and investment pending a court order or settlement, the income generated is regarded as income of the trust and the beneficial owner of the income will be considered to be the eventual recipient of the funds.

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Purpose of s. 104(2) (pp. 246-7)

Lloyd F. Raphael has stated that the "apparent purpose of [subsection 104(2)] is to prevent a settlor from splitting potential income of a trust for a beneficiary by the creation of several trusts, each with smaller incomes, for the same beneficiary. [F.n.420 – Lloyd F. Raphael, Canadian Income Taxation of Trusts, 3d ed. (Toronto: CCH Canadian, 1993), at 267.] He has also stated that the power to consolidate trusts under subsection 104(2) was introduced into the Act because of the reasoning of the courts in Holden v. Minister of National Revenue. [F.n.421 – (1933), 1 DTC 243 (PC). ] … The Privy Council concluded that on a true construction of the will there were three distinct trusts, which should be assessed and taxed separately.

Potential retroactive effect (p 247)

The designation under subsection 104(2) is clearly effective once the designation is made, but it is not clear whether the subsection permits the minister to make the designation effective for the time before the designation was made. It has been suggested that the designation may be effective for the earlier period. In commenting on the Mitchell case [56 DTC 521], Lloyd F. Raphael has stated that "if the original trust property received by the trusts from the settlor is substituted for other property, whether by sale or exchange, it would appear that the Minister could make the designation after the substitution or that the designation could be made retroactively to the date of the creation of the trusts, seeing that the wording of the subsection is not limited to the trusts' incomes of any year." [F.n. 424 …Supra note 420, at 270.] This statement was noted by the CRA in a technical interpretation…. [F.n.425 … 9238787.]

Treatment of losses (p. 248)

The designation under subsection 104(2) deems the property of all the trusts to be the property of the designated single trust, and the income of all the trusts to be the income of the designated single trust. It is not clear whether the word "income," as used in this context, should also include loss. The inclusion of loss may be consistent with the underlying concepts of treating all trusts as if they were one trust. However, the CRA has suggested that subsection 104(2) should not be used to consolidate the income of one trust with the loss of another trust. [F.n. 426 Ibid.]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144

Keith R. Hennel, "Escrow Arrangements in Acquisition Agreements: What Are You Creating?", CCH Tax Topics, No. 2176, November 21, 2013, p. 1

Whether an escrow arrangement represents a trust (p. 2)

As indicated by other commentators, poorly drafted escrow arrangements have resulted in the income earned in the escrow account being taxable as if the escrow arrangement were in fact a trust. [fn 9: Daniel Lang and Charles Taylor, "Tax Issues in Purchase and Sale Agreements", Report of Proceedings of the Sixty-Third Tax Conference, 2011 Tax Conference (Toronto: Canadian Tax Foundation, 2012), 1-52. See also E.G. Kroft, "Tax Clauses in Acquisition Agreements" in Selected Income Tax and Goods and Services Tax Aspects of the Purchase and Sale of a Business, 1990 Corporate Management Tax Conference (Toronto: Canadian Tax Foundation, 1991), 9:1-99] Whether an escrow arrangement creates a trust will depend on all the facts and circumstances, including the terms of the arrangement. It is interesting that, with respect to interest earned on funds deposited with a lawyer by a litigant or litigants for safekeeping and investment, pending a court or settlement establishing its proper disposition, the Canada Revenue Agency ("CRA") considers such income to be income of a trust and recognizes that the beneficial owner is the eventual recipient of the funds. [fn 10: IT-129R, "Lawyers' trust accounts and disbursements", November 7, 1986 at para. 10. Note that in IT-129, at para. 10, the CRA states: "[C]onditional upon waivers being filed by each of the litigants and the lawyer-trustee for the relevant taxation years, the Department will defer assessment of the income until the recipient is finally determined". See also CRA Document No. 9831647, Lawyer's trust account, February 19, 1999, and CRA Document No. 2007-0233761C6, 2007 Step Conference – Question 1 – In-trust accounts.

Lipson, "The Bare Trust and the Element of Control", Tax Topics, No. 1214, 15 June 1995, p. 1.

Waters, "An Overview of the Law of Trusts", 1988 Conference Report, c. 35.

Subsection 104(4) - Deemed disposition by trust

See Also

Green v. The Queen, 2012 DTC 1061 [at 2788], 2012 TCC 10 (Informal Procedure)

The taxpayer and his siblings received a real estate property from a testamentary trust on a rollover basis under s. 107(2) and sold the property. The Minister assessed capital gains arising on this sale apparently on the basis that the the property's adjusted cost base to the taxpayer was based on its 1971 V-Day value - notwithstanding that there had been a deemed disposition and reacquisition of the property by the trust at fair market value in 1999 under the 21-year deemed disposition rule (whose application had been deferred to 1999 by virtue of an election made under s. 104(5.3)(a)(i)), although the 1999 deemed disposition was not reported by the trust.

Favreau J dismissed the self-represented taxpayer's appeal from this assessment, but coupled with a comment (at para. 15) that capital gains had been accruing in the trust since 1999 (perhaps implying that the taxpayer's capital gain should be computed based on the property's 1999 rather than 1971 value).

Administrative Policy

14 February 2014 Internal T.I. 2013-0490891I7 - Revocable Living Trust

revocable living trust formed on initial settlement date

On a date prior to 1988, the Trust was created and Mother (a U.S. resident) and each of her children (also U.S. residents) transferred their interests in the Property to the Trust. The Trust Deed provided that during the duration of the Trust, and provided that each of the Children was then living, Mother and the Children had the right to revoke the Trust , in which event the trust estate was to be distributed in specified shares to Mother and each of the Children. Upon the death of the last of the surviving Grantors of the Trust or upon the sale of its property, the trust estate was to be distributed to the then living descendants of Mother, per stirpes.

CRA concluded:

As stated in our presentation at the 1995 CTF conference…a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value… . Therefore… the Trust would be subject to the 21-year deemed disposition provisions of subsection 104(4)… .

After noting that CRA had expressed a different policy between 1988 and 1995, CRA stated "to the extent the subject transactions at issue in the current file occurred in XXX and prior, it cannot be said that at the time, the subject taxpayers relied on opinions we subsequently expressed between 1988 and 1995."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition revocable living trust formed on initial settlement date 183

6 September 2013 External T.I. 2012-0459531E5 - Gross royalty trust units held by an estate

application to Public Trustee trust

An estate administered by the Public Trustee potentially could remain in existence for more than 21 years. Accordingly, there could be a deemed disposition of gross royalty trust certificates held by the estate 21 years after the trust was created if the interest in the gross royalty trust was capital property.

22 March 2013 External T.I. 2012-0473661E5 - Joint Spousal or Common-Law Partner Trust Status

spousal trust still exposed after divorce

A joint spousal or common-law partner trust will maintain its status after a divorce for purposes of s. 104(4)(a), so that the deemed disposition rules in s. 104(4)(a) will apply on the death of the latter of the two ex-spouses.

6 December, 1994 T.I. 941969 (C.T.O. "Application of 104(4) to a Non-Resident Trust")

A non-resident trust that is not subject to taxation in Canada is not subject to the deemed disposition rule in s. 104(4), with the result that the cost of its capital properties will not thereby be increased to their fair market value on a date of deemed disposition under s. 104(4). However, where the beneficiary is a Canadian resident and a non-resident trust is a personal trust, s. 107(2)(b) is applicable in determining the cost to the Canadian beneficiary of property acquired on the wind-up of the trust.

25 April 1994 T.I. 940902 (C.T.O. "Communal Organization and '21-Year Rule' for Trusts")

S.104(4) will not apply to a communal organization which is deemed to be an inter vivos trust pursuant to s. 143(1) because of the exclusion in the definition of "trust" in s. 108(1).

26 January 1994 Internal T.I. 7-933240 -

S.104(4) also applies to non-resident trusts that own taxable Canadian property.

8 September 1993 T.I. (Tax Window, No. 33, p. 6, ¶2640)

The deemed realization rules in s. 104(4)(b) will apply to charitable and non-profit organizations which are trusts.

31 March 1993 T.I. (Tax Window, No. 29, p. 23, ¶2451)

Although s. 104(4) generally applies to revocable trusts, it does not apply to property held by bare trusts.

22 March 1993 T.I. (Tax Window, No. 29, p. 12, ¶2443)

Where the will of the testator directs the executor and trustee to hold the residue of the estate in trust for the testator's child for life and on the child's death to divide the property into equal shares for the testator's grandchildren and to pay and transfer such property to another trustee, or to hold such property, in a separate trust for each grandchild, then in the absence of s. 104(5.8), the 21-year period referred to in s. 104(4)(b) will commence anew on the distribution to the grandchildren trusts. However, where the will directs the executor and trustee to hold the residue in trust for the testator's child for life and on the death of the child to continue to hold the residue in trust for the testator's grandchildren then living under certain terms and conditions, there will be considered to be only one trust created upon the testator's death which will continue to govern the property held for the grandchildren.

1993 CALU Conference, Q. 2 (C.T.O. "Insurance Policy and Fair Market Value of Shares - CALU")

Where a spousal trust owns shares of a corporation that owns an insurance policy on the life of the spouse, in determining the fair market value of the shares upon the death of the spouse for purposes of the deemed disposition rule in s. 104(4), the amount the corporation will be entitled to receive under the policy as a consequence of the death of the spouse will be taken into account, given that for purposes of s. 104(4) there is no provision comparable to s. 70(5.3) that will limit the fair market value of the insurance policy.

22 November 1991 T.I. (Tax Window, No. 13, p. 7, ¶1632)

A designation under s. 104(13.1) or (13.2) will not affect the status of a spousal trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 14

Articles

W.P. Goodman, "How to Minimize the Impact of the Deemed Realization of Trust Property", Goodman on Estate Planning, Vol. VII, No. 1, p. 493.

Paragraph 104(4)(a)

See Also

Grimes v. The Queen, 2016 TCC 280

FMV determined with minority discount and without discount for shareholder taxes

The taxpayer trust was deemed under s. 104(4)(a) to dispose of its property at fair market value. The FMV of its shares of a Holdco wholly-owning an Opco was to be determined without any discount to the FMV reflect income taxes that would be payable by it on a redemption by it of its Holdco shares.

One of the two individuals who was a trustee of the trust also held special voting preferred shares of Holdco in her personal capacity that represented 69% of the total Holdco voting rights. Lafleur J found that it was appropriate to apply a 12.5% minority discount to the Holdco common shares held by the trust in this light, stating that she was required to assume in the valuation exercise that only the non-controlling shares of the trust were being sold, and not the special voting shares not held by it. She also applied a further 15% “marketability discount” to the common shares’ valuation.

Finally, advances made by Opco to an individual director were treated as having a nil value because of a regular practice of eliminating such advances by way of annual bonuses.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Shares no discount for shareholder-level taxes, minority discount re NAL party’s voting control, marketability discount, advances valued at nil given practice of converting to bonuses 622

Administrative Policy

10 June 2016 STEP Roundtable Q. 11, 2016-0645821C6 - Tainting of a Spousal Trust

rule is engaged based on the trust terms at the time of its creation

When asked to comment on the statement in IT-305R4, para. 8:

Once a trust qualifies as a spouse trust under the terms of subsection 70(6), it remains a spouse trust and is subject to the provisions affecting such trusts (for example, paragraph 104(4)(a)) even if its terms are varied by agreement, legal action or breach of trust. However, these events may cause other provisions of the Act to apply, such as paragraph 104(6)(b) and subsections 106(2) and 107(4).

CRA stated:

The wording of subparagraph 104(4)(a)(i) clearly provides for a deemed disposition date that is based on the terms of the trust “at the time it was created”; accordingly, even if the terms of the trust are varied by agreement, legal action, or breach - it is the terms of the trust upon creation that would determine the application of subsection 104(4). In the case of a post-1971 spousal or common-law partner trust, as defined in subsection 248(1), these would be the terms described in subparagraph 104(4)(a)(iii).

The main purpose of paragraph 8 in IT-305R4…is to clarify that in applying paragraph 104(4)(a), one must look to the terms of the trust at time of creation, such that any subsequent change in the terms of the trust would not invalidate the application of paragraph 104(4)(a).

28 November 2010 CTF Roundtable, 2013-0487431C6 - Value of Vote-Only Shares – 2010 CTF Conference

CRA generally will ignore any premium that could be attributed to controlling non-participating preference shares, for purposes of subsection 70(5) of the Income Tax Act (the "Act"), where the shares were held to protect the deceased's economic interest in the corporation.

We are not aware of the issue of the valuation of such shares having arisen in any CRA compliance audits involving paragraph 104(4)(a) of the Act. Accordingly, we have not had the opportunity to give full consideration to whether the above position should apply for purposes of that provision.

Articles

Carmen Thériault, "Alter Ego and Joint Partner Trust", 21 Estates, Trusts & Pensions Journal, p. 345.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 0

Paragraph 104(4)(a.2)

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Example of application (p. 190)

Paragraph 104(4)(a.2)…can apply when a trust borrows money from an income beneficiary and. distributes the borrowed funds to a capital beneficiary, thereby decreasing the value of the income beneficiary's interest, in the trust and reducing the tax that would be payable in respect of a deemed disposition of the income beneficiary's interest on death.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Paragraph 104(4)(a.3)

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Purpose (p. 192)

Paragraph 104(4)(a.3) is an anti-avoidance rule…[whose] purpose… is to ensure that a taxpayer cannot use the rollover in subsection 73(1) to defer the consequences of the deemed disposition of the taxpayer's property on becoming a non-resident.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Paragraph 104(4)(b)

Administrative Policy

2 June 2011 External T.I. 2011-0399501E5 - TCP distributed by N/R trust to N/R beneficiary

A non-resident inter vivos trust distributes its shares of a private Canadian real estate corporation (Canco) in satisfaction of the capital interest of its sole non-resident beneficiary. CRA stated:

[A] non-resident trust may be subject to the deemed disposition rule in paragraph 104(4)(b). This provision provides for a deemed disposition of specified property on the day that is 21 years after the creation of every trust. This provision could give rise to tax consequences if it applies to a non-resident trust, for example if the non-resident trust is deemed as a consequence of the application of paragraph 104(4)(b), to have disposed of taxable Canadian property.

Subsection 104(5.3)

Articles

Edgar, "Deemed Realization of Trust Property: Proposed Amendments to the 21-Year Rule", Estates and Trusts Journal, April 1992, p. 207.

Subsection 104(5.5)

Administrative Policy

September 1992 B.C. Revenue Canada Round Table, Q. 30 (May 1993 Access Letter, p. 228)

S.104(5.5)(b) could have application where an individual is given a nominal absolute interest under a trust or a contingent interest which is virtually certain not to vest, no other beneficiary under the trust qualifies as an exempt beneficiary and the only practical reason for having the individual as a beneficiary is to allow the trust to qualify for the election under s. 104(5.3)

Tax Professionals Mini Round Table - Vancouver - Q. 30 (March 1993 Access Letter, p. 110)

Discussion of circumstances where s. 104(5.5)(b) may be applied.

25 June 1992 External T.I. 5-921209 -

S.104(5.5)(a)(ii) would not preclude an individual from being a beneficiary under a trust where the termination of the beneficiary's interest before enjoyment of any benefit could occur on the beneficiary's death.

Subsection 104(5.6)

Administrative Policy

31 March 1993 T.I. (Tax Window, No. 29, p. 11, ¶2441)

Re situation where one trust is a beneficiary of another.

Subsection 104(5.8) - Trust transfers

Cases

Ozerdinc Family Trust v Gowling, 2017 ONSC 6

s. 104(5.8) acknowledged to apply to replacement trust

It was acknowledged that a tax lawyer had fallen below the relevant standard of care in failing to advise clients that a new family trust which replaced an old family trust would, by virtue of s. 104(5.8), have a deemed disposition of its assets only four years later - which, in fact, occurred (see Grimes). The law firm argued that it should not be treated as the proximate cause of the loss, as the clients’ accounting firm should have been keeping track of the deemed disposition date.

Labrosse J applied Clements v. Clements, 2012 SCC 32 (“the test for showing causation is the ‘but for’ test… in other words that the injury would not have occurred without the Defendant’s negligence”) in finding that causation had been made out.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Negligence and Fiduciary Duty test of causation of damages from professional negligence is a “but for” test 329

Administrative Policy

13 June 2017 STEP Roundtable, Q.2

GAAR generally applicable to using Canco to defer s. 104(4) deemed disposition only for lifetime of existing beneficiaries

Does CRA have an update respecting its comments at the 2016 CTF Roundtable, Q.1 respecting a distribution from a discretionary family trust ("Old Trust") to a Canco the shares of which are held by a newly established discretionary family trust ("New Trust"), thereby avoiding the application of the 21-year deemed disposition rule?

CRA noted that the New Trust was provided with another 21 years to determine who, from among the potential beneficiaries, would receive the trust property, which could result in deferring the unrealized gain beyond the lifetime of the individual beneficiaries alive on the date of the Old Trust’s 21st anniversary, that such planning circumvented the anti-avoidance rule in s. 104(5.8), and that CRA will apply GAAR when faced with a similar set of transactions unless substantial evidence supporting its non-application is provided.

At the 2016 CTF Roundtable, CRA also indicated that it was also considering the application in the situation whereby the realization of the accrued gains inherent in the distributed property would not be deferred beyond the lifetime of the existing beneficiaries at the time of the 21st anniversary of Old Trust, on the basis that the deferral of the realization event, i.e. the death of the individual beneficiary, would be consistent with that achieved by a deferred rollover of property to a Canadian resident individual beneficiary pursuant to s. 107(2) (although, in fact, the trust property would continue to be held indirectly in a discretionary trust.)

CRA has now concluded its review of this second situation, and has concluded that the Act does not contemplate any deferral beyond the 21-year period while property is directly or indirectly held in a discretionary trust, so that it will not rule thereon unless substantial evidence supporting the non-application of GAAR is provided.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) abusived distribution of trust property to corporate beneficiary to defer gain for lifetimes of current beneficaries 195

2016 Ruling 2014-0552321R3 F - Trust to trust Transfer

104(5.8) applied to transfer to new trust with the same beneficiaries and essentially the same terms

The transfer of all the assets of an existing inter vivos trust (which was approaching its 21st anniversary) to a new inter vivos trust, whose terms were more-or-less the same but had been clarified to resolve key ambiguities, was ruled to be subject to s. 104(5.8).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (f) para. (f) exception applied on transfer from old discretionary inter vivos family trust to new trust with terms considered to be substantively the same 750
Tax Topics - Income Tax Act - Section 74.4 - Subsection 74.4(4) having a trust interest vest indefeasibly in a minor is consistent with the minor not receiving or having any use of the trust capital 458
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - trust - (g) trust holding property on its 21st anniversary for minors was not subject to s. 104(4) as their shares would have been deemed under the Trust Deed to be irrevocably determined by then 397

29 November 2016 CTF Roundtable Q. 1, 2016-0669301C6 - GAAR & 21-year rule planning

making a s. 107(2) distribution to a corporate beneficiary held by a new trust is an abusive circumvention of the s. 104(4) 21-year rule

A discretionary trust (Old Trust) that is approaching its 21st anniversary distributes property with an unrealized gain to a corporate beneficiary (Canco) that is wholly owned by a newly-established discretionary trust (New Trust – also resident in Canada) under s. 107(2). S. 104(5.8) should not affect the timing of the 21st anniversary of New Trust since the property was not transferred directly from Old Trust to New Trust. Does CRA agree?

When this issue came before it on a ruling request, the GAAR Committee concluded that this planning circumvented s. 104(5.8) contrary to its object and spirit, as well as that of the deemed disposition rule in 104(4)(b) and the scheme of the Act for the realization of capital gains. Accordingly if the distribution is made by an existing discretionary trust to a Canadian-resident corporation wholly owned by a new discretionary trust resident in Canada, CRA generally will infer that the primary purpose of the distribution is to defer the income tax otherwise applicable under s. 104(4).

CRA is further concerned that this device could be used to defer the realization of the capital gains for several generations, or even indefinitely.

A distribution to a corporate beneficiary will generally be acceptable if the individual shareholders of that corporation are resident in Canada because, ultimately, what that means is that, as the individuals are residents of Canada, there will be taxation in their lifetime or on death. As for non-resident individual beneficiaries, CRA is looking to see that there will be taxation within Canada in their lifetime.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) avoidance of 21-year rule through 107(2) transfer to corporate beneficiary 134

10 June 2013 STEP Roundtable, 2013-0486001C6 - 2013 STEP CRA Roundtable Question 11

The first deemed disposition day of a pre-1972 non-spousal testamentary trust was deferred until January 1, 1999 through an exempt beneficiary election under s. 104(5.3). On January 1, 2000, one of its beneficiaries died and its assets were transferred to a successor ("transferee") trust in a transfer to which s. 104(5.8) applied. What is the "disposition day" of the transferee trust under s. 104(5.8)?

CRA found that the day determined under s. 104(5.8)(a)(i)(A) is January 1, 2020, and the day determined under s. 104(5.8)(a)(i)(B) is January 1, 2021, so that the transferee trust's first deemed disposition day is January 1, 2020. Under s. 104(5.8)(a)(ii), the transferee trust would not also have a deemed disposition on January 1, 2021 for purposes of subsections 104(4) to (5.2).

8 January 2013 External T.I. 2012-0459621E5 - Deemed disposition day on trust-to-trust transfer

A testamentary trust made an exempt beneficiary election under s. 104(5.3) so that its deemed disposition day was deferred until January 1, 1999. In 2000, one of the beneficiaries died and a successor trust was established. Accordingly, assets were transferred from the testamentary ("transferor") trust to the successor ("transferee") trust and s. 104(5.8) applies to the transfer.

In these circumstances, the first deemed disposition date is the earlier of:

January 1, 2020 being (under s. 104(5.8)(a)(i)(A)) the first day on or after the transfer date on which the transferor trust would have been deemed under s. 104(4) to dispose of its property, without regard to the transfer - i.e., 21 years after January 1, 1999; and

January 1, 2012 being (under s. 104(5.8)(a)(i)(B)) the first day on or after the transfer date on which the transferee trust would have been deemed under s. 104(4) to dispose of its property - i.e., 21 years after January 1, 2000.

Therefore, the transferee trust's first deemed disposition day is January 1, 2020. Under s. 104(5.8)(a)(ii), the transferee trust would not also have a deemed disposition on January 1, 2021.

Subsection 104(5.31)

Administrative Policy

16 September 1996 External T.I. 5-962956 -

Discussion of procedure for revocation of election.

Subsection 104(6) - Deduction in computing income of trust

Cases

Turcotte v. ARQ, 2015 QCCA 396

no s. 104(6) deduction for testamentary gift distributed to charity and deducted under s. 118.1(5)

An estate received $475,000 from the RRSP of the deceased and paid a legacy bequeathed by the deceased to a charitable foundation of 70% of the estate. As this gift was deemed under the Quebec Taxation Act equivalent of the pre-2016 version of s. 118(5) to have been made by the deceased, the estate claimed a charitable credit in the terminal return of the deceased (and, pursuant to the equivalent of s. 118.1(4), in the preceding year). In preparing its own return, the estate included the RRSP receipt in income (as it was required to do) but also deducted the payment to the foundation under the Quebec equivalent of s. 104(6)(b).

In denying this deduction, Vézina JCA stated (at paras. 14, 15 and 18, TaxInterpretations translation):

Here, the decision to donate the Sum received was that of the deceased, which takes precedence over, and excludes, the subsequent decision of the Estate to distribute it as income.

Respecting a similar but not identical situation, three authors are of the view that the double deduction is contrary to tax law [then citing a brief discussion by Poyser et al. of the situation where a trust which "has a qualified done as an income beneficiary…[and] property [is] transferred to the charity in the exercise of that discretion… ."]

Only a literal (and almost blinkered) interpretation of the TI would justify not applying the [Poyser] conclusion on the first case to the second, so as to permit "double dipping."

After quoting Imperial Oil, [2006] 2 S.C.R. 447, 2006 SCC 46, at para. 25 as to interpreting "harmoniously with the scheme of the Act," he then stated (para. 20):

This contradicts ["heurtre"] using a fact (fictitious at that) to obtain an advantage and then through sleight of hand ["par la suite de l'occulter complètement"] obtaining a second.

Appeal dismissed.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(5) no s. 104(6) deduction for testamentary gift distributed to charity and deducted under s. 118.1(5) 69

Administrative Policy

13 June 2017 STEP Roundtable, Q.10

a discretionary family trust may be unable to establish that expenses reimbursed by it were for the children’s benefit

A father who is the trustee of a discretionary family trust reimburses himself out of the trust funds for itemized expense of restaurant meals of the children and issues T3 slips to them. Is this acceptable?

CRA noted the three requirements in ITTN 11 for trust deductibility and inclusion in the beneficiaries’ income:

  • the trust must exercise discretion, pursuant to the terms of the trust or the will, to make the amount of the trust income payable to the child before the payment is made;
  • either:
    • notification to the parent of the exercise of the discretion, along with the parent’s direction to pay the amount to the appropriate person, must occur, or;
    • the payment must be made pursuant to the parent’s request and direction, where the parent was advised of that discretion; and
  • it is reasonable to consider that the payment was made in respect of an expenditure for the child’s benefit.

CRA further noted that Degrace Family Trust stated that “the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of the beneficiary,” and that in a 1999 technical interpretation, where “the household expenditures [were] basically totaled and divided by the number of family members in order to determine the child’s share” CRA indicated that

[I]t would be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) payments by discretionary turst of alleged children's expenses must clearly be for their benefit 150

1 November 2016 Internal T.I. 2016-0663971I7 - 104(6)(b), whether amount became payable

prohibited distribution from trust

A family trust paid income to the minor children in breach of a prohibition in the trust deed against making distributions to designated beneficiaries. CRA considered, notwithstanding s. 104(24), that if the amount cannot be legally payable, actually paying it will not bring it within the s. 104(6) rule. Accordingly, there was no s. 104(6) deduction to the trust, and CRA considered the distributions to be includible in the children’s income under s. 105(1) rather than s. 104(13).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) income that is paid to a minor beneficiary in contravention of the trust deed is non-deductible under s. 104(6) 180
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) income distributions to minor beneficiaries contrary to trust deed included under s. 105(1) 134
Tax Topics - General Concepts - Illegality distribution contrary to trust deed not considered to be payable 123

29 November 2016 CTF Roundtable Q. 14, 2016-0669871C6 - Estate distribution

income from an estate residue generally can be distributed on a deductible basis

CRA considers that the residue of the Estate can include income and that such income generally can be made payable to a residual beneficiary, so that such income can be deducted by the estate under s. 104(6).

However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for purposes of subsections 104(6) and 104(13).

In such a case, instead of the deduction, “the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) income may not be payable to beneficiary if estate required to pay taxes thereon 299

10 June 2016 STEP Roundtable Q. 12, 2016-0634921C6 - Phantom Income

payment in kind of distribution of phantom income

As deemed income (e.g., a capital gain deemed to arise under a s. 48.1 election on the IPO of a Canadian-controlled private corporation) is not recognized as income or capital for trust law purposes, in order for it to be distributed under ss. 104(6) and (24) its distribution must be authorized under the trust deed and the trustees must specifically distribute it (which can be accomplished by a payment in kind, e.g., distributing the shares in question).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distributions of phantom income must be authorized and effected under the trust deed 200

10 July 2013 Internal T.I. 2013-0475501I7 F - Amounts returned to trustee/beneficiary

distributions to children immediately paid to father

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

In finding that the amounts distributed by the Trust likely were deductible in computing its income under s. 104(6)(b), CRA stated (TaxInterpretations translation):

[T]he acts of Father, as trustee, in causing the income to be payable to the Children and to designate those amounts under subsection 104(19), were valid. However, we consider that the return of those amounts made by the Children to Father raises a serious doubt as to the use of those funds by the Children in their complete discretion. If the evidence demonstrates that the amounts were payable to the Children as mandataries of Father, such amounts may be deducted… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) distributions to children immediately paid to father 166
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distributions to children immediately paid to father 166
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) distributions to children immediately paid to father 138
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) distributions to children immediately paid to father 110

2007 Ruling 2007-024528 -

realization and distribution of target MFT gain

After the acquisition of a mutual fund trust (the "Fund") by Bidco, the Fund sells all its assets, including an interest in a limited partnership, to Bidco in consideration for the assumption of liabilities and a note of Bidco. The Fund then declares a distribution of the capital gain realized by it on such sale, and also declares a distribution of other taxable income and of a capital distribution, and satisfies the distributions by distributing the note to Bidco. Ruling that the Fund will receive a s. 104(6) deduction for the amount of income that is so distributed by it.

2007 Ruling 2007-022420 -

gains allocated to redeemed units

Trust agreements are amended to provide that the trustee shall allocate all or a portion of net capital gains realized by the trust in the year to unitholders who have redeemed units of the trust at any time in the year, provided that the amount of net capital gain so allocated to a particular redeeming unitholder shall not exceed the amount by which the amount payable on the redemption of the units exceeds the adjusted cost base of the units being redeemed, and to provide that proceeds of redemption otherwise payable will be reduced by the amount of such allocation: ruling that the trust may deduct the taxable portion of the capital gains payable to a redeeming unitholder and make a s. 104(21) designation in respect of that amount, that the proceeds of disposition of the redeemed units will be equal to the excess of the net asset value of the units over the capital gains distribution in respect of those units, and that s. 107(4.1) will not apply.

2003 Ruling 2003-000348 -

distribution on redemption of YTD capital gains

The Declaration of Trust of a mutual fund trust is amended to provide that on redemption of units, the unitholders will be paid a proportionate share of net capital gains and net income realized on their class of units in the year to date, with the redemption proceeds being reduced accordingly. Rulings that the mutual fund will be entitled to deduct under s. 104(6)(b) the taxable portion of the capital gains distribution so paid to redeemed unitholders and that s. 104(7.1) will not apply.

2002 Ruling 2001-009107 - Mutual fund trust - capital gains

distribution of capital gains on unit redemptions

The trust agreement respecting a mutual fund trust is amended to provide that where units of the fund are redeemed, a portion of the redemption proceeds will be treated as the redeeming unitholders' share of the fund's net realized capital gains in the year up until the date of redemption, and that the balance of the net capital gains realized by the fund will be allocated to unitholders at the end of the year.

Ruling that the fund may deduct from its income the capital gains distributions made to redeeming unitholders, that the proceeds of disposition of the redeemed unitholder of the redeemed units will be the amount by which the proceeds paid exceeds the amount treated as a capital gains distribution, and that s. 104(7.1) will not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 132 - Subsection 132(4) - Capital Gains Redemption A of formula to redeemed unitholder reduced by any amount of allocated capital gains 142

1997 Ruling 971128

Income arising under s. 94.1 to a Canadian resident trust may be deducted under s. 104(6) if, under the trust indenture, the amount in question is payable.

12 December 1996 T.I. 962934

Where preferred shares are distributed, the amount of the distribution will be the fair market value of the preferred shares.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) allocation of capital gain realized on distribution 60

IT-381R2 "Trusts - Deduction of Amounts Paid or Payable to Beneficiaries and Flow-Through of Taxable Capital Gains to Beneficiaries"

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Deduction in executor’s year or of formula amount (p. 203)

[S]ubsection 104(6) can potentially apply to amounts paid or payable from an estate. However, Canadian common law generally provides that an executor is not required to distribute income to the beneficiaries of the estate in the estate's first year (the so-called executor's year). Accordingly, it can be argued that no amount of income is deductible to the estate under subsection 104(6), unless the income is actually paid to the beneficiaries during the year. Nonetheless, as an administrative matter the CRA permits an executor to make income payable to the beneficiaries of an estate during the executor's year, provided that no beneficiary objects to this treatment. [F.n. 275 … IT-286R2.] …

The CRA accepts that an amount may be deductible to the trust when the amount is determined by a formula and is not calculated until the preparation of the trust's tax return after the end of the applicable year. [F.n. 276 Ginsburg v. MNR, 92 DTC 1774 (TCC).]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Gabrielle Richards, "Executor's Year", Canadian Current Tax, October 1987, p. J49

Subsection 104(7.01) - Trusts deemed to be resident in Canada

Administrative Policy

25 July 2014 Internal T.I. 2013-0513641I7 - Deemed resident trust under subsection 94(3)

meaning of "maximum amount...deductible"

The Estate of a Canadian resident, with two of his children as (apparently non-resident) beneficiaries (A and B), was not resident in Canada by virtue of having a non-resident liquidator, but was deemed to be resident in Canada as described in s. 94(3)(a). The Estate's income included pension and third-party investment income and a deemed dividend from shares (which were not taxable Canadian property) of a taxable Canadian corporation. The full amount of the deemed dividend was made payable to Beneficiary A. The other income of the Estate was taxable in the Estate (with Head Office noting that assuming this income was payable to Beneficiary B, the Estate might wish to make a s. 104(13.1) designation). Head Office stated:

the expression "the maximum amount that....would be deductible under subsection 104(6)" in paragraph 104(7.01)(a) refers to the maximum amount otherwise available for a deduction by the trust under subsection 104(6) and not the amount that the trust would choose to claim pursuant to paragraph 104(6)(b).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 120 - Subsection 120(1) addition for s. 94 deemed trust 146
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(g) Part XIII withholding treated like Part I instalment 147

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Effect of specified factor (p. 208)

Subsection 104(7.01) limits the amount of the deduction under subsection 104(6) for distributions of Canadian-source income by a section 94 deemed resident trust to beneficiaries who are not resident in Canada, ensuring that the income is subject to part I tax in the trust. …

The specified factor of 0.35 operates as a form of rough justice, but does not distinguish between different rates of tax….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Subsection 104(7.1) - Capital interest greater than income interest

Administrative Policy

2015 Ruling 2015-0578051R3 - Variation of trust indenture

addition of preferred units to a listed MFT’s capital

The Declaration of Trust of the Fund, which is a listed closed-end mutual fund trust (with one class of units) not holding non-portfolio property, will be amended to create a new class of preferred units, which will receive a preferential distribution up to their redemption value on liquidation, will be allocated income and net taxable capital gains of the Fund for ITA purposes in proportion to Fund distributions received by them and, insofar as the initial series is concerned, will be entitled to fixed cumulative quarterly cash distributions, will be retractable after a specified date and also redeemable after a specified date, and will be listed on the Stock Exchange.

CRA ruled that the amendments and issuance of preferred units would not result in a disposition of (existing) Units or Fund property, and that s. 104(7.1) would not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition addition of preferred units not disposition 81

2014 Ruling 2014-0518521R3 - Issuance of a new class of units - Hedged Class

addition of FX-hedged units

An open-end mutual fund trust ("Fund 1") investing in senior floating rate loans around the world will add a class of units (the "Hedged Class") intended for investors who wish to invest on a currency neutral basis. Accordingly, Fund 1 will purchase currency forward contracts (the "Canadian Hedging Contracts") solely in respect of the Hedged Class, and:

The Hedged Class…will have a return that is based on the performance of Fund 1's portfolio of investments without regard for the performance, either positive or negative, attributable to changes in value of the relevant foreign currency relative to the Canadian dollar because the foreign currency exposure of the portion of Fund 1 that is attributable to the Hedged Class will be substantially hedged using the Canadian Hedging Contracts.

Rulings re no disposition of the existing units on such amendment, no resettlement of Fund 1 and no application of s. 104(7.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition addition of FX-hedged units 144

2012 Ruling 2011-0429611R3 - Variation of Trust Indenture

addition of preferred units

An open end (as described in s. 108(2)(a)) mutual fund trust (the Trust), whose units (the Units) trade on an exchange, wishes to qualify as a closed-end mutual fund trust under s. 108(2)(b), in order that it can issue (non-retractable) "Preferred Units."

Following an amendment of its Declaration of Trust (not described), the Trustees will authorize the issuance of two series of Preferred Units (designated as Series A Preferred Units and Series B Preferred Units) having rights determined by the Trustees based on current market conditions. The Series A Preferred Unit provisions may provide for a fixed, cumulative preferential cash distribution payable quarterly (with a specified reset on specified anniversaries based on GOC yields), a right of the holder on each anniversary to have its units reclassified as Series B Preferred Units, a right to be repaid the subscription amount plus accumulated and unpaid distributions (the "redemption amount") on termination of Trust, a redemption right of Trust on specified anniversaries to redeem for the redemption amount, and an absence of voting rights except after specified arrears. The Series B Preferred Unit provisions would be similar except that the distributions would be based on a floating rate. The two series would rank in parity with each other (and ahead of the Units) and would both be listed.

Ruling that s. 104(7.1) will not apply to deny the deduction by Trust of any amount it otherwise is entitled to deduct under s. 104(6)(b) in respect of amounts paid or payable to its Unitholders or Preferred Unitholders.

Similar prospectus.

See also summaries under s. 108(2)(b) and s. 248(1) - disposition.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(2) - Paragraph 108(2)(b) application of asset tests to sub LPs on look-through basis; special voting unit 348
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition reclassification of preferred REIT units 270

2012 Ruling 2011-0410181R3 - Variation of trust indenture

addition of preferred units with proportionate allocation of taxable income to distributions

An open end (as described in s. 108(2)(a)) mutual fund trust (the Trust), whose units (the Units) trade on a stapled basis with a second open-end mutual fund trust (FE Trust), wishes to qualify as a closed-end mutual fund trust under s. 108(2)(b), in order that it can issue (non-retractable) "Preferred Units." For the closed-end qualification steps, see the summary under s. 108(2)(b) - and a summary of one of the disposition issues, see s. 248(1) - disposition.

The Trust will amend its Declaration of Trust to provide for the issuance of the Preferred Units, which will be entitled to priority over the Units with respect to the payment of distributions (other than distributions paid through the issuance of additional units) and with respect to liquidating distributions. However, neither the Units nor the Preferred Units of any series shall have any term that gives any holder thereof an interest in the income of the trust as a percentage of any distribution received by the holder of those units that is greater or lesser than an interest in the income of the trust as a percentage of any distribution received by the holder of any other Units, or preferred Units of any series - and, similarly, the Declaration of Trust will provide that income and net taxable capital gains of the trust "will be allocated to Unitholders and Preferred Unitholders in the same proportions as the [respective] distributions received" by them.

The Declaration of Trust will be amended to provide that the Units will not be redeemable by the holders on and after a specified date. Following these amendments, the Trustees will authorize the issuance of Series A Preferred Units having rights determined by the Trustees based on current market conditions.

Ruling

that s. 104(7.1) will not apply to deny the deduction by the Trust of any amount it otherwise is entitled to deduct under s. 104(6)(b) in respect of amounts paid or payable to its Unitholders or Preferred Unitholders.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(2) - Paragraph 108(2)(b) conversion of note to satisfy 10% test/partnership look-through 251
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition addition of preferred units 194

12 October 2012 External T.I. 2012-0448351E5 - treatment of trailer fee rebates

MFT fee rebate paid directly to large investor as trust distribution

A mutual fund trust pays commissions ("DSC Commissions") to the dealer through whom its units were purchased and also pays an annual trailer fee. However, the dealer proposes to provide an investor with a rebate (the "Rebate") of a portion of such commission and trailer fees. This is accomplished by the Rebate being paid in cash directly to the investor (or, alternatively, being paid in cash to the dealer which, in turn, provides it to the investor). After noting that the arrangements could be structured so that s. 12(2.1) did not apply to the investor, with the payments to the investor being treated instead as distributions of income (or, where applicable, capital) of the mutual fund trust to the investor, CRA declined to provide definitive guidance on s. 104(7.1) although, based on past experience, it might not be applicable:

...in many of the cases we have seen subsection 104(7.1) was not applicable because it was not "reasonable to consider that one of the main purposes for the existence of any term, condition, right or other attribute of an interest in a trust (other than a personal trust)" was "to give a beneficiary a percentage interest in the property of the trust that is greater than the beneficiary's percentage interest in the income of the trust". That is, where a Dealer wishes to pass on to his clients a portion of the DSC Commission or Trailer Fee that he has earned, as a marketing tool in order to remain competitive, the main purpose test required in subsection 104(7.1) would not be met.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) MFT fee rebate 189
Tax Topics - Income Tax Act - Section 12 - Subsection 12(2.1) no s. 12(2.1) inclusion if MFT fee rebate paid directly to large investor as trust distribution 189

2011 Ruling 2010-0389921R3 - New series of units - US dollar and Hedged

USD and hedged series

in order to permit some unitholders (who have US dollars to invest) to achieve a return in US dollars that is the same as the Canadian market return without being affected by the US/Cdn. FX rate, various mutual fund trusts will issue a "Series USD" (with subscriptions and distributions payable in US dollars) and purchase currency forward contracts (with resulting gains or losses being allocated to the holders of the Series USD, but with the NAV being determined in a similar manner to the existing series) to accomplish this end. Conversely, each fund will issue "Hedged Series" which, through the purchase of related currency forward contracts, will generate foreign market returns for those with Canadian dollars to invest which are neutral to fluctuations in the Canadian dollar compared to the relevant foreign currency.

S. 104(7.1) will not apply in light inter alia of the uncertain direction of FX fluctuations.

2010 Ruling 2010-0361771R3 - Variation of trust indenture

addition of preferred units with proportionate allocation of taxable income to distributions

A closed-end mutual fund trust intends to qualify as a REIT. The beneficial interests in the trust currently consist of only one class of units (the "Units").

The trust will amend its declaration of trust to create a new class of "Preferred Units," consisting of more than one series (including the Series A and B Preferred Units described further below). The Preferred Units of each series will be entitled to priority over the (ordinary) Units with respect to the payment of distributions (other than distributions paid through the issuance of additional units) and with respect to the distribution of assets of the trust or returns of capital in the event of the liquidation or winding-up of the trust. However, neither the Units nor the Preferred Units of any series (except as otherwise provided in the terms of of a particular series of Preferred Units) shall have any term that gives any holder thereof an interest in the income of the trust as a percentage of any distribution received by the holder of those units that is greater or lesser than an interest in the income of the trust as a percentage of any distribution received by the holder of any other Units, or preferred Units of any series - and, similarly (and except as provided otherwise by the trustees in the terms of any particular series of Preferred Units), the declaration of trust will provide that "income and net taxable capital gains for the purposes of the Act will be allocated to Unitholders and Preferred Unitholders in the same proportions as the distributions received by such holders."

By virtue of the distributions preference of Preferred Units, the trust shall not pay any amount to the Unitholders (other than through the issuance of additional Units) unless and until the distribution entitlements of the Preferred Units have been paid in full. In the event of the termination of the trust, the trust net assets will be distributed to the Preferred Unitholders in accordance with the terms of the Preferred Units, with the remaining balance being distributed proportionately on the Units.

The Series A Preferred Units will be entitled to a fixed cumulative preferential cash distribution, payable quarterly, of between X% and Y% (with the rate to be reset on the 5th anniversary of issuance based on the five-year Canada bond yield), with such distributions to be paid in priority to any amounts paid to the Unitholders (other than through the issuance of additional Units). They will have the right on termination of the trust to be paid their subscription price plus any accumulated and unpaid disttributions, in preference to the Units. On such 5th anniversary (and every 5th anniversary thereafter) they can be required by the holder to be reclassifed as Series B Preferred Units (ranking on parity with the Series A and with similar attributes to the Series A except for a floating rate); and on such anniversary dates they also will be redeemable at the option of the trust for their subscription price plus accumulated unpaid distributions. They generally will be non-voting.

Ruling that s. 104(7.1) will not apply to deny the deduction by the trust of any amount it otherwise is entitled to deduct under s. 104(6)(b) in respect of amonts paid to its Unitholders or holders of its Series A Preferred Units.

2007 Ruling 2007-022420 -

Trust agreements are amended to provide that the trustee shall allocate all or a portion of net capital gains realized by the trust in the year to unitholders who have redeemed units of the trust at any time in the year, provided that the amount of net capital gain so allocated to a particular redeeming unitholder shall not exceed the amount by which the amount payable on the redemption of the units exceeds the adjusted cost base of the units being redeemed, and to provide that proceeds of redemption otherwise payable will be reduced by the amount of such allocation: ruling that s. 107(4.1) will not apply.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) gains allocated to redeemed units 167

2004 Ruling 2004-007431 -

Members of the public subscribe for Class A redeemable units of a mutual fund trust (the "Fund"). A holding corporation for a vendor group accomplishes an indirect sale of a business to the Fund by selling shares and limited partnership units to the subsidiary trust of the Fund (the "Trust") in consideration for Class A and Class B units of the Fund (which previously had been transferred by the Fund to the Trust in consideration for debt) and for cash. The Class B units of the Fund, for so long as subordination arrangements are in place, receive distributions of distributable cash only after stipulated amounts of distributable cash (corresponding to estimates provided to the public at the time of their subscription for Class A units) are first distributed on the Class A units, with the Class A and Class B units thereafter sharing rateably once the Class B units have received their catch-up adjustment. Adjustments to the redemption amount of the Class B units (which are exchangeable at the end of the subordination period into Class A units) also reflect the subordination arrangement.

Ruling that s. 104(7.1) did not apply to the Fund.

2001 Ruling 2001-010847 -

A unit trust whose purpose was to raise financing for a corporation has one class of units that are held by the public and another class of units that are held by the corporation. The Trust annually pays all its net distributable funds to the holders of one class of units to a maximum of the "indicated yield", and then to the holders of the other class of units as to the balance of the net distributable funds. In commenting as to why s. 104(7.1) would not apply, the Agency stated that:

"Generally, multi-class structure trusts may be permissible so long as the units are not structured with the objective of giving an interest in the capital of the trust that exceeds the income entitlement of the class. The difference in dividend rate between the two classes of capital units is to compensate for the fact that one class is redeemable after X years where the other is only redeemable on maturity."

ATR-65 CANCELLED 20 April 1995

MFT management fee rebate distributions to large unitholders

The management agreements between open end mutual fund trusts (the "Funds") and their "Manager" will be amended to provide that the Manager may accept a management fee at a rate which is less than that otherwise payable by a Fund. In such event, a Fund will distribute the amount of any such reduction ("Management Fee Distributions") to the unitholder with whom the reduced rate is negotiated, based primarily on the size of its investment. Accordingly, each Declaration of Trust will be amended to provide that the requirement to make pro rata distributions to unitholders of a Fund will not apply to Management Fee Distributions, so that the trustee of a Fund will be required to make Management Fee Distributions only to the applicable unitholders.

After noting that the effect of this arrangement was that the "small" unitholders' percentage interest in the property of each Fund would be greater than their percentage interest in the Fund income, CRA stated:

Subsection 104(7.1) is an anti-avoidance measure intended to prevent the streaming by commercial trusts of income and capital to different beneficiaries depending on their taxable status. As the purpose of the Proposed Transactions is not to effect such streaming, we will not apply subsection 104(7.1).

Articles

Carrie Smit, "Recent Transactions of Interest", 2011 Canadian Tax Foundation Conference Report, C. 10

In early 2011 RioCan successfully completed the issuance of 5 million series A units for gross proceeds of $125 million. …

Subsection 104(7.1), although broadly drafted, was enacted as an anti-avoidance measure to prevent the streaming of income and capital to different beneficiaries depending on their taxable status. The legislative intent appears to be that subsection 104(7.1) should apply only in circumstances where the terms attaching to the units of a trust are tax-motivated. …

In the context of RioCan's preferred unit issuance, the CRA appears to have interpreted subsection 104(7.1) in light of this legislative intent; clearly, the purpose of the preferred units is not to stream income and capital in a tax-motivated manner. This ruling is somewhat similar to other rulings issued by the CRA permitting the creation of different classes of units, where the objective is not to give an interest in capital of the trust to a class of units that exceeds the income entitlement of that class.

Botz, "Mutual Fund Trusts and Unit Trusts: Selected Tax and Legal Issues", 1994 Canadian Tax Journal, Vol. 42, No. 4, p. 1037.

Goodman, "The Tax Treatment of Commercial Trusts", 1989 Canadian Tax Journal, July-August issue, p. 1053

Subsection 104(8)

Cases

Re Liberal Petroleums Trust (1985), 21 E.T.R. 90 (Alta.Q.B.)

Income taxes were paid by a unit trust as a consequence of s. 104(8). Since the trust deed required the trustee to pay the taxes imposed on the trust and to distribute the residue rateably among the unit holders, there was found to be no basis for having the non-resident unit holders bear all of the ultimate incidence of the additional taxes imposed at the trust level.

Subsection 104(13) - Income of beneficiary

Cases

Brown v. The Queen, 79 DTC 5421, [1979] CTC 476 (FCTD)

If a trust does not deduct pursuant to s. 104(6) an amount payable to its beneficiary, that amount is nevertheless taxable in the hands of the beneficiary notwithstanding that it is also taxable in the hands of the estate by virtue of s. 104(2).

See Also

Pope & Ors v. R & C Commrs., [2012] UKUT 206 (Tax and Chancery Chamber)

The son of the taxpayer, who was the beneficiary of his own life insurance policy, likely died in 1998 when he was abducted by Angolan rebels, but this was never conclusively established. In 2002 the insurer paid the £100,000 principal amount insured to the taxpayer, plus an additional amount £36,425.97, which the Tribunal determined was interest. A grant of letters of administration for the estate did not occur until 2005.

Subsection 59(1) of the Income and Corporation Taxes Act 1988 (UK) provided:

Subject to subsections (2) and (3) below, income tax under Schedule D shall be charged on and paid by the persons receiving or entitled to the income in respect of which the tax is directed by the Income Tax Acts to be charged.

The Tribunal found that the interest was not chargeable income to the taxpayer. The administration of her son's estate had not even been commenced, let alone completed. If her son were alive, the taxpayer would have no entitlement to the interest. If he were dead, then all beneficial interests would be in suspense, pending the grant of letters of administration - and after such grant, the next of kin (the taxpayer and her husband) had no proprietary interest in any asset comprised in the unadministered estate (para. 70). Accordingly, the taxpayer had no entitlement to the interest, and it was not chargeable under s. 59(1).

Gros v. The Queen, 2012 DTC 1110 [at 3059], 2012 TCC 14 (Informal Procedure)

The taxpayer held units of a listed mutual fund trust (Fording Canadian Coal Trust), which disposed of all its assets to Teck Cominco Ltd. in a non-rollover transaction, thereby realizing a fully taxable gain. It distributed all of the sales proceeds (cash and shares of Teck Cominco) to its unitholders including the taxpayer, and immediately thereafter redeemed its units in their hands for a nominal amount.

Hogan J. found that the distribution to the taxpayer gave rise to an income inclusion to the taxpayer under s. 104(13). The taxpayer argued that the transaction was substantively similar to a sale of his shares resulting in a capital gain. However, it is not generally open to the courts to disregard the form of a transaction, especially where the form of the transaction is specifically chosen to effect specific tax consequences.

Joseph v. The Queen, 2010 DTC 1229 [at 3649], 2010 TCC 350 (Informal Procedure)

A unit trust ("Fording") of which the taxpayer was a unitholder agreed to a cash and stock takeover bid from Teck Cominco, as a result of which the unitholders (after voting in favour of the takeover) received, on the surrender of their units, the sale proceeds for assets sold by Fording to Teck Cominco. As most of the proceeds received by the taxpayer were allocated to him as income of Fording under s. 104(13), those amounts were income to him rather than a capital gain.

Administrative Policy

24 June 2015 External T.I. 2015-0565951E5 F - Legatee by particular

allocation of interest income of succession to legatee by particular title

Is a legatee by particular title (i.e., the recipient of a specific bequest, even if not an heir by virtue of the Civil Code of Quebec ("CCQ") a beneficiary of the succession; and what is the treatment the treatment of interest paid to the legatee by particular title that accrued from the time of death up to the payment of such legacy given that s. 743 of the CCQ provides that the fruits and revenues from the property bequeathed accrue to the legatee from the opening of the succession? After referencing s. 248(25), CRA stated:

[E]ven if not an heir within the meaning of CCQ, a legatee by particular title is a beneficiary of the succession within the meaning of the Act. ...

Questions as to whether section 743 of the CCQ applies and whether the legatee by particular title is entitled to an amount of interest as income beneficiary of the succession are legal issues on which we cannot rule. If such is the case, the succession may deduct the amount of the trust's interest income that is paid by it in computing its income under paragraph 104(6)(b). … The legatee by particular title must include it in computing income under subsection 104(13).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(1) - Beneficiary legatee by particular title is a beneficiary even if not an heir 66

2015 Ruling 2015-0570291R3 - Foreign tax credit on income from a trust

distribution of IRA proceeds by U.S.-resident trust is income under s. 104(13)(a)

As a result of the death of an individual who had previously become resident in the U.S. (the "Settlor"), and who was the sole contributor to a U.S.-resident trust with U.S.-resident trustees (the "Trust"), the taxpayer and another Canadian-resident became equal beneficiaries of the remainder interest in the Trust. Upon the Settlor's death, her Estate (which is a trust for purposes of the Act and is resident in the U.S. for purposes of the Act) became the beneficiary of her IRA, a "foreign retirement arrangement." All amounts in the IRA are pre-tax amounts; all distributions from the IRA are taxable under section 72 of the IRC.

Proposed transactions

The proceeds of the IRA will be paid to the Estate, which then will pay such proceeds to the Trust. The Trust will pay cash legacies to U.S. charities. The Trust will pay the remaining proceeds of the IRA (after a holdback for possible state tax) to the Beneficiaries which, under s. 1441 of the IRC will be subject to a U.S. withholding tax of 30%, reduced to 15% under the Treaty. Under the IRC, the withholding tax of 15% is a tax payable by the Beneficiaries.

Rulings

The proceeds of the IRA paid to the taxpayer inclusive of the 15% U.S. withholding will be considered to be income from a trust that is sourced in the U.S., and will be included in the taxpayer's income under ss. 104(13)(a) and 12(1)(m). (The brief reasons cite s. 56(1)(a)(i)(C.1).) The 15% withholding tax withheld by the Trust from the taxpayer's share of the distribution described above will be a "non-business-income tax" paid to the U.S. government to the extent that it is not deducted by the taxpayer under s. 20(12).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(7) - Non-Business-Income Tax withholding on IRA proceeds 59

16 June 2014 STEP Roundtable, 2014-0523001C6 - Trusts structured to invoke 75(2)

Brent Kern schemes don't work even if Sommerer issue fixed

An "evil trust" is structured to deliberately cause the application of subsection 75(2), so as to cause the attribution of dividend income to a connected corporation, where the income will not be taxable, while at the same time distributing proceeds in the form of cash by way of either a capital distribution or a loan to the intended recipient. CRA noted that:

[The] trust structures designed to purposely invoke attribution pursuant to subsection 75(2), with a view to avoiding the payment of tax on extracted corporate dividends …typically involves two Canadian corporations and a trust that acquires shares in one of the corporations ("Corp A"). In some cases, the acquisition is by subscription for the Corp A shares using cash contributed to the trust by the other corporation ("Corp B"), or the arrangement may involve having Corp B contribute shares of Corp A that it holds directly to the trust. In either case, when Corp A subsequently declares a dividend on the shares held by the trust, the scheme is intended to attribute the dividend income to Corp B, which then claims an offsetting deduction under section 112.

After noting that in some instances and based on Sommerer "subsection 75(2) will not apply to attribute income in respect of that property to the beneficiary," CRA stated:

In the alternative, if the facts are such that it may be concluded that the trust did not acquire the shares for fair market value consideration, CRA will typically challenge the arrangement on other grounds. Depending on the particular facts, assessments may be pursued to include the dividend income pursuant to paragraph 12(1)(j) or subsection 104(13), in calculating the income of the trust and/or its beneficiaries. Furthermore, CRA would typically hold the view that a strong GAAR argument would exist in support of an assessing position in such cases.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) Brent Kern schemes don't work even if Sommerer issue fixed 407

10 July 2013 Internal T.I. 2013-0475501I7 F - Amounts returned to trustee/beneficiary

distributions to children immediately paid to father

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

In finding that the distributions were taxable to him rather than his children, CRA stated (TaxInterpretations translation):

In order for the Children to be considered as true beneficiaries of the income distributed by the Trust, it must be completely available to them for their benefit ["qu'ils puissent en disposer complètement à leur profit"]. … [I]t could be argued that the Children's role was as accommodation parties, or as mandataries or nominees, for Father. The Children thus had a right to receive Trust amounts payable to them, in the most part, as mandataries of Father and which were paid to them, as such, by the Trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distributions to children immediately paid to father 166
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) distributions to children immediately paid to father 164
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) distributions to children immediately paid to father 138
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) distributions to children immediately paid to father 110

16 October 2012 External T.I. 2012-049061E5 -

MFT fee rebate

A mutual fund trust pays a base level of managament fees to a fund manager, but pays a reduced effective rate in respect of unitholders with large investments. This is accomplished through a distribution of the rebate amount to the the large investors (which rebate, depending on the circumstances, might be required to be reinvested in additional units), and (presumably) with a corresponding reduction in the fees otherwise payable to the manager. Given that the trust deed provides that distributions will be paid first out of income, such distributions (whether or not reivested) generally will be treated as distributions of income of the trust that will be included in the large investor's income under s. 104(13), with a corresponding deduction to the trust under s. 104(6) - unless the distributions are paid out of trust capital.

12 October 2012 External T.I. 2012-0448351E5 - treatment of trailer fee rebates

MFT fee rebate

A mutual fund trust pays commissions to the dealer through whom its units were purchased and also pays an annual trailer fee. However, the dealer proposes to provide an investor with a rebate (the "Rebate") of a portion of such commission and trailer fees. This is accomplished by the Rebate being paid in cash directly to the investor (or, alternatively, being paid in cash to the dealer which, in turn, provides it to the investor). CRA stated:

Where the Rebate is paid to the Investor through the Mutual Fund, subsection 12(2.1) may be applicable, particularly where the agreements entered into by all three parties so dictate. Where however transactions are structured and legally effective so as to make the amount paid to the Investor a distribution from trust income, subsection 12(2.1) would not be applicable. In such a case, subsection 104(6) would generally be applicable to allow the Mutual Fund a deduction for the payment to the Investor while 104(13) would bring the amount into the Investors' income. The DCS Commissions and Trailer Fees paid (net of the rebate) by the Mutual Fund to the Dealer would be business income to the Dealer.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.1) MFT fee rebate paid directly to large investor as trust distribution 257
Tax Topics - Income Tax Act - Section 12 - Subsection 12(2.1) no s. 12(2.1) inclusion if MFT fee rebate paid directly to large investor as trust distribution 189

2 October 2012 External T.I. 2012-0448021E5 - Distribution by a non-resident trust

non-resident trust

Given that "[p]aragraph 250.1(b) of the Act generally provides that where income is to be determined under the Act for a non-resident person, it will be done in accordance with the provisions of the Act... income of [a] non-resident trust, will be determined in accordance with paragraph 3(b) of the Act," so that only 1/2 of capital gains will be included in its income. Accordingly, when the full gain is distributed by the non-resident trust to a Canadian-resident beneficiary, only half of the distribution will be included in the beneficiary's income as (in light of s. 108(5)) as income from property, being the beneficiary's trust interest.

10 August 2012 External T.I. 2012-0453041E5 - Income recognition-mutual fund beneficiary

recognition of distributed trust income deferred until beneficiary year in which trust year ends

A spousal testamentary trust with a March 31, 2013 taxation year end would include income, that became payable to it in January to March 2012 by a mutual fund trust with a calendar year, in its income for its March 31, 2013 taxation year, as the year in which the relevant trust year ended.

2004 STEP Roundtable Q. 3, 2004-0069951C6 -

phantom income

While a trust's income is determined in accordance with the Act, the amount payable to the beneficiary is determined in accordance with the trust indenture. Accordingly, it usually will not be possible for a trust to allocate "phantom income" (for example, interest accruing to it that is not payable to it) to beneficiaries.

6 June 2003 Internal T.I. 2002-0183437 - Distributions from non-resident trust

no ability to allocate capital because only income

In commenting on whether the Canadian resident beneficiary received an amount out of income or capital in the context of the situation where there was no net capital available for distribution and CRA concluded that there was a receipt of dividend income that was distributed to the beneficiary in the year, CRA stated:

A trustee of a discretionary trust can, in fact, choose whether to make a certain payment out of income or out of capital - at least, to the extent of the trust's income and capital. If the trustee chooses not to distribute income to the income beneficiary, then a greater amount will be available for distribution to the capital beneficiary in future. However, the trustee cannot change the true nature of an income distribution by merely considering it to be a capital distribution.

24 March 1994 T.I. 940285 (C.T.O. "Distributions from Foreign Trusts")

Income distributions received by a Canadian resident from a non-resident trust or mutual fund trust are generally included in income as income from a trust irrespective of the source of such distributions (as business income, property income or capital gains).

IT-85R2 "Health and Welfare Trusts for Employees"

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Distribution of gain by distribution of related property (p. 312)

[T]he CRA expressed the view that in the absence of any evidence of an intention to the contrary, it is reasonable to conclude that the distribution of property with an accrued gain includes the capital gain that has accrued on such property and to the extent that the capital gain was included in the trust's income for tax purposes, it is payable to the beneficiary. [fn 106: 2003-0000695…See also…2004-0062121E5] This conclusion appears to be correct; when the trust has distributed the property subject to an accrued gain to the beneficiary the gain on the distribution has arguably been paid because the trust no longer has the property to distribute, and the beneficiary to which the distribution was made is the person who should be considered to have received it. This may not be the case, however, when the wording of the trust document does not permit a gain to be allocated to the beneficiary who receives the distribution in kind, or when the trustees expressly determine not to make the income paid or payable to the beneficiary. …

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Net capital losses generally carried forward rather than back (pp. 216-7)

The amount included in a beneficiary's income under subsection 104(13) or (14) or section 105 cannot be reduced when a trust carries back capital losses (or non-capital losses) to a prior year and allocates the amounts against the trust's income. These amounts remain taxable to the beneficiaries. However, the carryback of net capital losses reduces the trust's net taxable capital gains and eligible taxable capital gains for the purposes of the designations in subsections 104(21) and (21.2), and therefore reduces the amounts that are designated to the beneficiaries under these subsections. Accordingly, in many cases a trust carries forward net capital losses to be applied in future years and does not carry back net capital losses to prior years.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Bowman, "Sophisticated Estate-Planning Techniques: Cross-Border Dimensions", 1993 Conference Report, pp. 38-20-21:

Comparison of the taxation of resident trusts under s. 104(13)(a) and non-resident trusts under s. 104(13)(c).

Subsection 104(13.1) - Amounts deemed not paid

See Also

Lussier v. The Queen, 2000 DTC 1677 (TCC)

late designation by letter was valid return amendment

An estate sent a letter in November 1994 amending its returns for 1992 and 1993 to make designations under s. 104(13.1), with the intended effect that amounts distributed to the taxpayer (a beneficiary) which had been included in her income by reassessment under s. 104(13) should now be excluded. Archambault J stated (at paras. 25, 26 and 34):

[A]lthough there is no general provision in the Act authorizing Canadian taxpayers to amend tax returns already filed, there is nothing to prevent them from doing so…[and] it is in the interest of tax administration to allow such amendments. …

…[T]he letter…was an amendment to the estate's tax return and its effect was to amend the initial return.

Since subsection 104(13.1) says nothing about the existence of a time limit, it is not essential that the designation be made within a specific time. All that matters is that it be made in the tax return, which is the case here given the fact that the return was amended.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 150 - Subsection 150(1) - Paragraph 150(1)(c) late designation by letter was valid return amendment 80

Administrative Policy

19 September 2015 STEP Roundtable, Q.5

late s. 104(13.1) designation to utilize loss carryback

Does s. 104(13.3) establish that designations under s. 104(13.1) or (13.2) can only be made so as to apply non-capital or capital losses of other years to bring taxable income down to nil? If a trust realizes a non-capital or capital loss in one of its subsequent three taxation years, is it permissible to amend its return for the particular year to include the amount of income paid or payable to beneficiaries in its income, thereby resulting in net income that can be offset by a loss carryback?

After agreeing with the first proposition, CRA indicated that, although the Act does not specifically provide for the late-filing of s. 104(13.1) or (13.2) designations, at the 2009 APFF Conference, CRA noted that it would accept a late-filed s. 104(13.1) designation where a designation is made in respect of a carryback of a non-capital loss. The CRA would only reassess beneficiaries' income and make a corresponding adjustment to the trust's income tax return if the tax years to which they related were not statute-barred and provided that there was no retroactive tax planning.

Similarly, CRA generally would accept a late-filed (13.2) designation where the trust had a capital loss carryback to apply against capital gains, subject to the caveats mentioned above.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13.2) late s. 104(13.2) designation to utilize capital loss carryback 79

IT-342R "Trusts-Income Payable to Beneficiaries"

13 May 1998 T.I. 971832

"Subsection 104(13.1) permits a trust to deduct less than the full amount of its income payable to a beneficiary and thus choose to have that income taxed at the trust level rather than the beneficiary level ... . Subsection 104(13.1) does not explicitly require that the beneficiary's share of income be an amount payable to the beneficiary in the year. Thus, in our opinion, a designation under subsection 104(13.1) would be available with respect to amounts deemed payable pursuant to subsection 104(18)."

15 January 1998 T.I. 972921

S.104(13.1) permits different amounts to be designated for each beneficiary, but only to the maximum amount determined by formula. This is illustrated by an example.

7 March 1996 T.I. 960678

Where a designation has been made under s. 104(13.1) in respect of an amount payable to the beneficiary, that amount is considered not to have been paid to the beneficiary for purposes of s. 104(13) and also for the purposes of s. 212(1)(c).

8 April 1993 T.I. 923634

Where a spouse is entitled to receive all the income of a testamentary spousal trust but revokes in writing his or her right to receive such income in a given year, a valid designation may be made under s. 104(13.1). "It is not necessary for the spouse to give up the right to receive actual distributions from trust income during the year in order for a designation... to be made."

19 September 1991 Internal T.I. 7-912069 -

In response to a suggestion that "if no amount is paid to the beneficiaries, no 104(13.1) designation would be possible because the formula would always produce a nil amount", the Department indicated that s. 104(13.1) indicates that the trust's income for the year should be determined in accordance with the terms of the trust document, rather than the provisions of the Act and that the beneficiary's shares of that income would be dictated by those terms.

2 May 1995 External T.I. 5-950139 -

"Where a trust is a spousal trust the designation under subsection 104(13.1) ... would not in and by itself, disqualify the trust as a spousal trust ... . Furthermore, it is not necessary for the spouse to give up the right to receive actual distributions from the trust income during the year in order for a designation pursuant to subsection 104(13.1) of the Act to be made.

25 April 1990 Memorandum (September 1990 Access Letter, ¶1427)

There is nothing in s. 104(13.1) to restrict trusts and estates utilizing that provision to enjoy the use of lower marginal tax rates applicable to both a testamentary trust and the beneficiary.

19 April 1990 T.I. (September 1990 Access Letter, ¶1426)

In a situation where a trust has two equal beneficiaries who share income equally, and of the trust income of $10,000, the trust has deducted $5,000 under s. 104(6), the trust will not be permitted to effectively make an s. 104(13.1) designation on behalf of only one beneficiary. The purpose of the provision is to enable the trust to designate to all its beneficiaries their respective shares of the portion of the trust's actual income distributions that are not deducted at the trust level. Accordingly, each beneficiary will be taxable on $2,500.

7 December 1989 T.I. (May 1990 Access Letter, ¶1225)

Discussion of various consequences where a beneficiary makes a payment to the trustee to enable the trustee to pay the tax liability of a trust caused by a designation under s. 104(13.1).

Subsection 104(13.2) - Idem [Amounts deemed not paid]

Administrative Policy

10 June 2016 STEP Roundtable Q. 5, 2016-0634901C6 - Subsection 104(13.3)

CRA will accept amended beneficiary returns to reflect their transfer of previously-allocated capital gains back to a trust making a s. 104(13.2) designation to absorb a loss carryback

A trust carries back an allowable capital loss realized in a subsequent year and files a late s. 104(13.2) designation to include in its income a taxable capital gain realized for that previous year that was previously allocated out to the beneficiaries. Their returns for that year would then be amended to remove the capital gain. Is that permissible?

CRA, after confirming that a trust can make a late s. 104(13.1) or (13.2) designation as long as the application of the loss results in nil taxable income of the trust for the previous year, indicated that it will reassess the beneficiaries’ returns for that year to remove that gain provided that their returns are not statute-barred.

CRA further indicated that:

  • the T3A loss carryback request, and the T3 adjustment request for the previous year, should be filed together so that they can be processed concurrently;
  • the trust should issue amended T3s; and
  • the beneficiaries would need to file T1 adjustment requests.

19 September 2015 STEP Roundtable, Q. 6(a)

use of late-filed s. 104(13.2) designation to offset taxable capital gain allocated under s. 104(13.4)(b)(i)

Can a taxable capital gain which is deemed to be payable to an individual (causing a deemed disposition) under s. 104(13.4)(b)(i) be offset through the carryback of an allowable capital loss which is realized in a subsequent year? CRA indicated that a late-filed s. 104(13.2) designation is available in order to carry back and apply the subsequent loss unless there is retroactive tax planning.

19 September 2015 STEP Roundtable, Q.5

late s. 104(13.2) designation to utilize capital loss carryback

CRA accepts that if a trust has pushed out income to its beneficiaries in Year 1 and in, say, Year 3, realizes a non-capital or capital loss, it can amend its return for Year 1 to include income, which it previously had pushed out to its beneficiaries, in its income, thereby resulting in net income that can be offset by a loss carryback – and with the beneficiaries' returns then being reassessed to exclude the previous inclusion under s. 104(13). See summary under s. 104(13.1).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13.1) late s. 104(13.1) designation to utilize loss carryback 201

IT-342R "Trusts-Income Payable to Beneficiaries"

Subsection 104(13.3)

Administrative Policy

25 July 2016 External T.I. 2016-0630781E5 - 104(13.3) and a CPP/QPP death benefit

CPP benefit generally no longer eligible under 104(13.1)

After confirming that, by virtue of the new s. 104(13.3), “the option to include [a] CPP/QPP death benefit in income on a T3 return will no longer be available by making a designation under subsection 104(13.1) if the estate’s taxable income (determined as though the designation were valid) for the year is greater than nil,” CRA then reaffirmed its statement in 2011-0401851C6 that:

where the initial taxation year of a testamentary trust coincides with the executor year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24).

Accordingly, depending on the terms of the will, CRA would be amenable to considering that such income receipt could be flushed out to be beneficiaries.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) executor's year would not preclude a CPP death benefit from being payable to the beneficiaries in the year 235

Articles

Gary I. Biasini, "The Trust is Dead, Long Live The Trust", Tax Topics (Wolters Kluwer CCH), Number 2227, November 13, 2014, p. 1.

Use of s. 104(13.1) designation to shift income to Alberta trust (p.4)

Consider a situation where a husband and wife (each Manitoba residents and each… in the highest marginal tax bracket) each own one-half of the common shares of a Manitoba corporation. The corporation has $7 million of RDTOH… . A non-eligible dividend will result in a dividend refund to the corporation of 33 1/3%, whereas the couple would pay 40.77% tax on the dividend.

An adviser may suggest that each settle a trust on an Alberta-resident trustee for the benefit of the other. The terms of the trust would be such that each spousal trust would quality as one described in paragraph 73(1.01)(c) such that any transfer to such a trust would occur on a tax-deferred rollover pursuant to the provisions of subsection 73(1).

On the subsequent receipt of dividends by each trust, as the terms of the trust entitle the spouse beneficiary to all income, the income should be taxed in that spouse beneficiary's hands as it is payable to him or her and then the provisions of subsection 74.1(1) would attribute such income back to the spouse settlor of the trust, resulting in taxation of such income in the taxpayer and province it would have been taxed had no planning taken place. In order to avoid this result, the trustee would designate, pursuant to subsection 104(13.1), that such income would instead be taxed in the trust. Provided that the trust is legally resident in Alberta, the dividend income would then be taxed at the highest marginal rate (29.36%) applicable in Alberta. Such planning, if effective would result in an 11.41% tax saving.

Draft s. 104(13.3) prevents taxation of income at Alberta trust level (p. 4)

Proposed subsection 104(13.3) in the latest proposals jeopardizes this type of planning after 2015. It would have the effect of invalidating any designation made pursuant to subsection 104(13.1) (and its companion subsection 104(13.2), which permits taxable capital gains to be so designated) if, prior to the invalidation of the designation by the proposed subsection, the income of the trust would be greater than nil. In effect, if subsection 104(13.3) is enacted as currently written, after 2015, the designations under subsections 104(13.1) and (13.2) will only be available for use to retain income in a trust against which a loss in the trust can be claimed and not to result in taxable income in the trust to be taxed, in our example, in the jurisdiction of the residence of the trust.

Paragraph 104(13.4)(b)

Administrative Policy

19 September 2015 STEP Roundtable, Q.6(b)

deemed allocation of income to individual after his or her death

How does trust income - deemed under s. 104(13.4)(b)(i) to be payable to the individual - become his or her income given that the individual is deceased? Does the income preserve its character?

CRA indicated that s. 104(13.4)(b)(i) functions as if the deceased individual were, in fact, alive so that the income which is deemed to have been made payable in the year is (on a fictional basis) treated as if it had been made payable while the individual was still alive. On that basis, the normal income inclusion under s. 104(13)(a) would apply.

The designations normally made under s. 104(19) to (22) allow for character preservation.

Finance

16 November 2015 Letter of Brian Ernewein to Joint Committee, CALU and STEP Canada respecting s. 104(13.4)

...Your submissions include comments on subsection 104(13.4) of the Income Tax Act and related provisions, which deal with the income tax treatment of certain trusts that are subject to deemed realization events as a result of-the death of a beneficiary. ...

We understand from these discussions that [you]… would generally support an option that would, put in very general terms, subject affected trusts and their beneficiaries to an income tax treatment for the 2016 and later taxation years that more closely corresponds to that available to trusts for 2015 and earlier taxation years, by taxing in the trust the income deemed to be recognized on the death of the beneficiary. Under this option, the subsection 104(13.4) and related amendments generally would remain as enacted, except that paragraph 104(13.4)(b) would be amended so that it did not apply to a trust in respect of the death of a particular beneficiary unless

  • the trust is immediately before the particular beneficiary's death a testamentary trust that is a post-1971 spousal or common-law partner trust;
  • the trust was created by the will of a taxpayer who dies before 2017;
  • the particular beneficiary is resident in Canada immediately before the

    particular beneficiary's death; and

  • the trust and the particular beneficiary's graduated rate estate jointly elect in prescribed form to have that paragraph apply.

…[T]o… fully address the "stranding" issue described above in a manner that would allow for consistent tax treatment with that available in respect of gifts made by similar trusts before 2016, the option described above would include provision for a trust to be permitted to allocate the eligible amount of a donation made by the trust after the beneficiary's death, but during the calendar year in which the death occurs, to its taxation year in which the death occurs (i.e., the taxation year deemed to end by paragraph 104(13.4)(a)). Such a provision would be expected not to impose any additional compliance burden on the trust given that paragraph 104(13.4)(c) operates to defer the trust's filing-due date for that taxation year to the day that is 90 days after that calendar year.

It remains an important tax policy objective that trusts (including estates) not obtain unintended tax benefits… . We will, therefore, include in our consideration of whether the above option should be recommended, whether additional amendments may be necessary to give effect to these policy objectives.

…We are interested in your comments on our understanding of your submissions and of our description of the option identified in our discussions that we understand you to support.

Subsection 104(14) - Election by trust and preferred beneficiary

Cases

Sachs v. The Queen, 80 DTC 6291, [1980] CTC 358 (FCA)

Where preferred beneficiary elections have been made jointly by a trust and the children of the settlor there has "been an exercise of the trustee's authority to pay the whole of the income for the taxation years in question to the children and to irrevocably confer on them the right to it "(per Thurlow, C.J.); "by completing the election under subsection 104(14), and by distributing dividends pursuant thereto ... the trustee has created a vested interest in the accumulating trust income" (per Heald, J.).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.1 - Subsection 74.1(2) 160

Administrative Policy

10 June 2016 STEP Roundtable Q. 4, 2016-0645801C6 - QDT & pref beneficiary election

preferred beneficiary election and qualified disability trust election potentially can coexist

Each of four grandparents of a disabled grandchild establishes a trust for the grandchild individual under their will, with one of the trusts being intended to be a qualified disability trust (“QDT”). In this context, is it possible for a preferred beneficiary election to be made for each of the four testamentary trusts created for the benefit of the grandchild individual?

After confirming that only one of the trusts could be a QDT by virtue of the joint beneficiary making a joint election with one of the trusts in a given taxation year, CRA indicated that the introduction of the QDT provisions does not restrict the availability of the preferred beneficiary election.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 122 - Subsection 122(3) - qualified disability trust preferred beneficiary and QDT elections not mutually exclusive 78

87 C.R. - Q.9

It may be possible for capital beneficiaries who are not otherwise entitled to share in the income of the trust to elect in respect of trust capital gains.

87 C.R. - Q.10

A distribution to a beneficiary other than the beneficiary who elected will not necessarily render the election invalid.

IT-394R "Preferred Beneficiary Election"

Subsection 104(15) - Allocable amount for preferred beneficiary

Paragraph 104(15)(b)

Administrative Policy

24 July 1992 External T.I. 5-921590 -

A clause in the trust deed allowing the trust deed to encroach upon capital in favour of one or more of the beneficiaries constitutes a discretionary power for purposes of s. 104(15)(b), with the result that the calculation of a preferred beneficiary's share of the accumulating income is to be determined under s. 104(15)(c).

87 C.R. - Q.11

The phrase "to share equally in any income of the trust" is not interpreted to mean "to share equally in the accumulating income of the trust."

84 C.R. - Q.33

An alternate beneficiary who has succeeded to the income rights of a deceased discretionary beneficiary will be considered to be a discretionary beneficiary unless under the trust deed he has acquired a fixed right to a share of the accumulating income of the trust.

Paragraph 104(15)(d)

Administrative Policy

86 C.R. - Q.55

A trust may not allocate CCA to a beneficiary that is greater than his income from the trust.

Subsection 104(18) - Trust for minor

Administrative Policy

19 February 2014 External T.I. 2013-0500561E5 F - Payment to a subtrust for minor

exercise of discretion by family trust in favour of secondary infant trust

The beneficiaries of a family discretionary trust are secondary trusts each of which has an infant beneficiary. The income of a secondary trust is not payable in the year to the beneficiary but the right thereto vests in the year. Before indicating that s. 104(18)(c) might be considered to be satisfied on a review of the trust terms, CRA noted (TaxInterpretations translation):

[T]he wording of paragraph 104(18)(c) is sufficiently broad to encompass the discretionary power held by any person, whether the trustee or not, so as to include a discretionary power exercised otherwise than under the trust terms.

13 June 1995 Memorandum 951422 (C.T.O. "Payment into Court by an Estate for Deceased's Children")

Where pension income received by an estate is paid pursuant to a court order into the court for the benefit of the deceased's minor children, s. 104(18) does not apply because that provision applies only where the income of the trust would, if the beneficiaries were not minors, otherwise be payable to them. Here, the amounts were not payable by the estate to the children but were paid into court.

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Issue whether beneficiary can thwart retention (p. 207)

Subsection 104(18) permits an estate to retain income until a beneficiary attains a certain age. However, because the income must unconditionally vest, there is a question whether the beneficiary can cause a distribution to occur pursuant to the rule in Saunders v. Vautier….

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Jack Bernstein, "Benefitting Beneficiaries", CA Magazine, March 1996, p. 24.

Subsection 104(19) - Designation in respect of taxable dividends

Administrative Policy

3 June 2016 External T.I. 2016-0647621E5 F - Dividend designation from a trust - timing

designation not effective until end of year

On May 31, 20X1 (the last day of its taxation year), Opco pays a dividend of $10,000 to a family trust, which immediately distributes that amount to Holdco (a beneficiary), which has a calendar year end and is connected to Opco as per s. 186(4)(a). The $10,000 distribution is designated as a dividend under s. 104(19). On June 1, 20X1, the family trust sells all the shares of Opco to a third party. Is the dividend subject to Part IV tax?” In finding that this amount is subject to Part IV tax, CRA stated (TaxInterpretations translation):

[T]he amount designated in respect of the beneficiary (taxpayer) in accordance with subsection 104(19) should be considered to be deemed to be received as a dividend by the beneficiary of the trust at the end of the trust’s taxation year in which the trust received the dividend. This position is based on the fact that the trust cannot make the designation before the end of its taxation year and that the requirement that the trust is resident in Canada throughout the year cannot be satisfied until the end of the taxation year of the trust. …

Thus…Holdco is deemed to have received the dividend on the shares in the capital of Opco on December 31, 20X1. At that time, Opco and Holdco were not connected corporations given the sale…of Opco… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(a) dividend distributed by a trust to a connected corporation can be subject to Part IV tax due to the delayed implied effective date of s. 104(19) designations 113

14 January 2013 External T.I. 2012-0465131E5 - Dividend designation from a trust

In response to an inquiry "as to when a taxable dividend will be considered to have been received by a beneficiary of a trust where the dividend is initially received by the trust and, for the purposes of subsection 104(19), is designated by the trust in favor of the beneficiary in the trust's return of income for the taxation year in which the trust received the dividend," CRA stated "that the amount of a taxable dividend designated in favor of a particular beneficiary pursuant to subsection 104(19) will be deemed to have been received by the beneficiary at the time that is the end of the particular taxation year of the trust in which the trust received the dividend."

Income Tax Technical News, No. 41, 23 December 2009

"Eligible Dividend Designation - Subsection 89(14)": A taxable dividend, designated as an eligible dividend under s. 89(14) that is paid to a Canadian resident trust will maintain its character when distributed by that trust to its Canadian resident beneficiaries under s. 104(19).

25 April 1991 Memorandum (Tax Window, No. 2, p. 23, ¶1215)

A trust can make the designation under s. 104(19) in favour of a non-resident beneficiary, and such designation will not result in an undue reduction of tax.

IT-372R "Trusts - Flow Through of Taxable Dividends and Interest to a Beneficiary"

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Streaming of dividends and interest (pp. 121-3)

The CRA has confirmed that in the case of a fully discretionary trust, the trustees have discretion about how the income is allocated and can allocate the dividend exclusively to the Canadian resident and the interest exclusively to the non-resident. [F.n. 309 … 2001-0112945.] When the trust deed mandates that income be paid to two (or more) beneficiaries without indicating how the income is to be split, the CRA generally requires that each, source of income be distributed on a pro rata basis. [F.n. 310 … 901027.]

Deemed receipt at year-end (p. 214)

The CRA's view is that a beneficiary is deemed to receive a dividend from a trust that made a designation under subsection 104(19) at the end of the taxation year, and not when the distribution is in fact made. [F.n. 313 … 2013-0495741C6 … and … 2013-0495801C6.] The reason for this timing is that a trust may make a designation under subsection 104(19) only to the extent that it is a resident of Canada throughout its taxation year, and the trust cannot know if it is resident throughout the year until the year (or the deemed taxation year) ends. This timing potentially allows corporations to defer payment of part IV tax through the interposition of a trust.

Streaming of dividends to non-resident beneficiaries (p. 223)

[A]ssume that a Canadian-resident inter vivos trust receives a dividend of $10,000 on shares of a US public corporation, and $10,000 of Canadian-source interest income. The trust makes $5,000 of its income payable to a Canadian-resident individual beneficiary, makes $5,000 payable to a Canadian-resident charity, and retains $10,000 of income in the trust. Under the Canada-US tax treaty, the US withholding tax on the dividend is $1,500. It is preferable that the $10,000 payable to the Canadian-resident beneficiary is from the US-source dividend. When the trust is fully discretionary, it should be possible to allocate the income in this manner.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) 163
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Subsection 104(20) - Designation in respect of non-taxable dividends

Administrative Policy

14 May 2013 External T.I. 2012-0469591E5 F - Capital dividend received by a trust and CDA

A Canadian-controlled private corporation paid a capital dividend to its sole shareholder, a trust, in 20x1. The beneficiaries of the trust were Mrs., minor children of Mr. and Mrs., and any corporations controlled by Mr. This capital dividend was not distributed by the trust in 20x1 as the children and Mrs. were designated beneficiaries and no corporation controlled by Mr. yet existed. Such a corporation was formed in 20x2.

CRA noted that as the dividend was not payable to a beneficiary in 20x1, no s. 104(20) designation could be made in that year. As for 20x2, no s. 104(20) designation could be made for any distribution to the new corporate beneficiary in respect of a capital dividend received by the trust in the preceding year.

Subsection 104(21) - Designation in respect of taxable capital gains

Administrative Policy

24 March 2015 External T.I. 2012-0470991E5 F - Mutual fund trust

flow-through to unitholder of capital gain designated by MFT

Would a s. 39(4) election apply even if a mutual fund trust was a "day trader" that used margin? CRA stated (TaxInterpretations translation):

[T]he election under subsection 39(4) does not apply to a disposition of a Canadian security by a taxpayer who, at the time of the disposition, is a trader or dealer in securities… . These exceptions do not apply to a MFT or a mutual fund corporation. The election made by a MFT under subsection 39(4) thus is always applicable even where the trust has one or other of the statuses listed in paragraphs 39(5)(a) to (g)... .

…[S]ubsection 104(21) expressly provides for the preservation of the nature of net taxable capital gains that a trust allocates to its beneficiaries… . [T]he election and allocation of a taxable capital gain in accordance with subsections 39(4) and 104(21) determines the nature of the amount allocated to a holder of units of a MFT. In context, the latter generally need not examine the facts and circumstances respecting the given situation to determine the nature of an amount allocated by the trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 132 - Subsection 132(6) day trading included in investment undertaking 56
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Income-Producing Purpose s. 39(4) presumption establishing expense non-deductibility 60
Tax Topics - Income Tax Act - Section 39 - Subsection 39(5) - Paragraph 39(5)(a) election can be made by leveraged day-trading MFT 175
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares capital v. income character determined at trust level 88

16 June 2014 STEP Roundtable, 2014-0523061C6 - Trust audit issues

capital gain distributed to different beneficiary

CRA noted that 2014-051719117 concerned a discretionary family trust (of which father and the adult children were capital and income beneficiaries) which after filing its T3 return for a taxation year, identified an overlooked a capital gain for the year, and sought a late designation under ss. 104(21) and (21.2) in respect of the children beneficiaries. The amount of the gain was actually paid to their father. CRA stated:

It was our view that a late or amended designation under subsection 104(21) of the Act was not available to the trust. It was noted that in respect of the adult children, one of the requirements under subsection 104(21) is that the amount designated can reasonably be considered to have been included in computing their respective incomes for the year pursuant to paragraph 104(13)(a) or section 105.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) benefit conferred when trust shares redeemed at undervalue 190
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) taxpayer stuck with two-transaction form 147
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(1) - Total Charitable Gifts executors lacked power to make gift 86
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(a) - Legal and other Professional Fees legal and accounting expenses 39
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) settlor taking back undervalued freeze shares 70

25 February 2014 Internal T.I. 2014-0517191I7 - Late or amended 104(21) designation

late designation not available for undistributed amounts

Following the filing of its T3 return, a discretionary family trust purported to make 104(21) and (21.2) designations respecting the net taxable capital gain associated with an overlooked disposition, with the adult children beneficiaries filing amended personal returns reported their share thereof and claiming a capital gains deduction. In concluding that such late designations were not available, CRA noted that "amounts included in income pursuant to paragraph 104(13)(a) must have become payable in the trust's taxation year."

2007 Ruling 2007-024528 -

trustees making filings on behalf of terminated fund

Ruling that following the redemption of all the outstanding units of an income fund, any document that the fund is required to file under the Act will be considered to have been filed by the fund on the date that it is filed by its trustees.

1998 Strategy Institute Round Table 981493

A beneficiary's entitlement to only the taxable portion (75%) of a capital gain of a trust would not affect the amount available to be designated to that beneficiary under s. 104(21).

12 December 1996 T.I. 962934

allocation of capital gain realized on distribution

Where a trust realizes a capital gain on distributing preferred shares to beneficiaries who are both income and capital beneficiaries pursuant to terms of the trust that permit the trustee to distribute all or part of either the income or capital to the beneficiaries on a discretionary basis, the taxable capital gain can be allocated to the beneficiaries under s. 104(21.2).

12 April 1995 External T.I. 5-941713 -

Taxable capital gains of a mutual fund trust designated to a non-resident unitholder under s. 104(21) would not be taxable in Canada.

28 June 1993 T.I. (Tax Window, No. 32, p. 11, ¶2605)

A capital gain realized by a trust will be allocated in accordance with the trust deed or, if the trust deed is silent, to the income beneficiaries. In particular, if the definition of income in the trust deed excludes capital gains, the trustees generally can allocate such gains to the capital beneficiary

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 18

IT-381R3 "Trusts - Deduction of Amounts Paid or Payable to Beneficiaries and Flow-Through of Taxable Capital Gains to Beneficiaries" 14 February 1997

5

A trust that has realized taxable capital gains in a particular taxation year may, within the limits of subsection 104(21), designate in its return of income for the year all or part of the amount of those gains as a taxable capital gain for the year of one or more beneficiaries. An amount designated to a beneficiary under subsection 104(21) must reasonably be considered to be part of the amount included in the beneficiary's income for that year under any of the provisions referred to...above... .

Forms

Subsection 104(21.2) - Beneficiaries’ taxable capital gain

Administrative Policy

23 June 2015 External T.I. 2015-0571801E5 F - Allocation of Capital Gains to Beneficiaries

allocation of QSBC gain to a beneficiary added after QSBC disposition

A discretionary family trust, with Mr., his wife and their children and grandchildren as beneficiaries, disposes of qualified small business corporation ("QSBC") shares in the year pursuant to an earnout clause, with the trust using the cost recovery method described in IT-426R, so that gain is recognized in that and subsequent years. If Ms. Y becomes the common-law spouse of Mr. and a beneficiary before or after the disposition, may the trustees allocate to her a portion of the capital gains recognized in those years? CRA responded (TaxInterpretations translation):

[I]f a trust allocates an amount to a beneficiary respecting a net taxable capital gain from a disposition of a QSBC pursuant to subsection 104(21) and an eligible taxable capital gain pursuant to subsection 104(21.2) in its return of income for the year, the beneficiary is deemed to have disposed of a capital property which is a QSBC for the purposes of subsection 110.6(2.1).

Consequently, if the trust complies with the requirements of subsection 110.6(2.1), Ms. Y, having been allocated a net taxable capital gain, would not be prevented from claiming the capital gains deduction by reason of her not being a beneficiary for the period of 24 months preceding the disposition of the QSBC by the trust or of her not being a beneficiary until after the disposition of the QSBC by the trust.

29 April 2014 External T.I. 2014-0518951E5 F - Taxable capital gain designation from a trust

deemed receipt of QSBC gain in year in which trust allocation year ends

A testamentary trust disposed of qualified small business corporation shares in 2013 during its taxation year ending January 31, 2014. Would the gain when allocated to the beneficiary qualify as a capital gain from the disposition of QSBCs for the beneficiary's 2014 taxation year?

In responding affirmatively, CRA stated (TaxInterpretations translation):

[S]ubparagraph 104(21.2)(b)(ii) provides in particular that that the beneficiary is also deemed to have a taxable capital gain from the disposition of a QSBC for his taxation year in which the year of allocation ends equal the amount obtained under the formula provided in clause 104(21.2)(b)(ii)(B).

IT-381R2 "Trusts - Deduction of Amounts Paid or Payable to Beneficiaries and Flow-Through of Taxable Capital Gains to Beneficiaries"

Subsection 104(22) - Designation in respect of foreign source income

Administrative Policy

IT-506 "Foreign Income Taxes as a Deduction From Income" 5 January 1987

  1. … Since the rules in subsection 104(22) apply only to that subsection and to section 126, a beneficiary may not utilize the provisions of subsection 20(11) or (12) in respect of foreign taxes allocated to it under subsection 104(22).

2005 Ruling 2004-0106481R3 -

dividends received by employee benefit plan trust on shares of non-resident parent deemed by s. 104(22) designation to be income form a source in a country other than Canada

Employees ("Participants") of the "Corporation," which is resident in Canada, or of the Corporation's non-resident listed parent (the "Parent") or of other North American subsidiaries of Parent agree that an agreed percentage of their salary will be applied to purchase shares of ordinary common shares of Parent ("Shares) on their behalf, to be held in a personal account (a "Personal Account'). The Corporation and any other Participating Company approved by the compensation Committee may make contributions to a Canadian-resident trust established by the Corporation (the "Trust") to be used by the Trustee to fund the purchase of Shares to be awarded as "Matching Shares" to Participants. Such contributions would be made to the Trust as soon as practicable following the acquisition of the Participant Shares to which such Matching Shares relate. Upon receipt of such contributions, the Trustee will purchase the Shares on the open market. The Matching Shares generally will be distributed from the Trust to the Personal Accounts of the eligible Participants on the next business day following the second anniversary of the acquisition date of the Participant Shares to which such Matching Shares relate. The Trustee shall use any cash dividends received in respect of Shares held in the Trust as directed by the Committee, which may include a direction to pay cash to a beneficiary of the Trust that is a Participating Company.

Ruling respecting such a distribution that

for the purposes of subsections 104(22) and 104(22.1) and section 126..., where the Trust makes a valid designation under subsection 104(22)...in respect of amounts received by the Trust as dividends on Shares of the Parent, the amounts so designated will be deemed to be the Participating Company's income from a source in a country other than Canada, to the extent that it is reasonable to consider...that the amounts are part of the income of the Trust that, because of subsection 104(13)..., were included in the income of the Participating Company... .

IT-201R2 "Foreign Tax Credit — Trust and Beneficiaries" 12 February 1996

  1. Subsection 104(22) allows a trust to designate its foreign source income for a taxation year to its beneficiaries provided the trust was resident in Canada throughout the year. The designation is made in the trust's income tax return for the year. The amount that a trust can designate in respect of a particular beneficiary is limited to the portion of the trust's income for the year from a source in a country other than Canada that
  • can reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust arrangement) to be part of the income that was included in the beneficiary's income by virtue of subsection 104(13) or (14)…; and
  • is not designated by the trust in respect of any other beneficiary.

When the trust has made this designation, subsection 104(22) deems the designated income to be income of the particular beneficiary from that foreign source for the purposes of subsections 104(22) and (22.1) and the foreign tax credit rules under section 126.

  1. When a beneficiary of a trust is another trust, the other trust can, within the terms of subsection 104(22), designate foreign source income to its own beneficiaries that had been designated to it in its capacity as beneficiary, and ad infinitum if there are other trusts in succession.

Articles

Manjit Singh, Andrew Spiro, "The Canadian Treatment of Foreign Taxes", 2014 Conference Report, (Canadian Tax Foundation), 22:1-37

Pure flow-through structure for designation of foreign business income (p 15)

An alternative to this structure [Canadian LP atop US LP atop US private REIT] is… a pure flow-through structure. [fn 71: …[S]ee R&R Real Estate Investment Trust. … Circular of Westcap Investments Corp.," July 18, 2014… .] In this structure, the Blocker LP is considered to indirectly carry on business in the U.S. and accordingly is subject to U.S. corporate income tax, plus U.S. branch tax (because it has elected to be treated as a foreign corporation for U.S. tax purposes).

From a Canadian tax perspective, the trust is generally considered to carry on the business it indirectly carries on through its subsidiary partnerships, including for purposes of the definition business income tax" in subsection 126(7)….Provided the necessary designations are made under subsection 104(22), the unit-holders of the trust will each be considered to have paid their pro rata share of such tax and will be eligible to claim foreign tax credits under subsection 126(2). Because the income retains its character as business income by virtue of paragraph 96(l)(f) and subsection 104(22), subsection 20(11) does not apply to limit individuals to a 15% credit. [fn 73: A similar flow-through approach could be used with respect to income from property that would be considered to be income from real or immovable property for purposes of the Act.]

In order to achieve this full flow-through treatment, it is critical that there are no entities in the structure that would be regarded as corporations for Canadian tax purposes (other than corporate general partners having nominal economic interests)….

Hugh Chasmar, "Mutual Fund 'Switch Funds'", Taxation of Corporate Reorganizations, Canadian Tax Journal, Vol. 46, No. 1, 1998, p. 172 at 190

"Many fund managers, however, do not allocate foreign source income and foreign taxes to investors in a trust. The marginal tax benefit to most unit holders is modest relative to the effort required ....".

Subsection 104(22.1) - Foreign tax deemed paid by beneficiary

Administrative Policy

IT-201R2 "Foreign Tax Credit — Trust and Beneficiaries" 12 February 1996

  1. When, as a result of a designation [under s. 104(22)], a portion of the income of a trust from a foreign source is deemed to be income of a beneficiary from that source for a particular taxation year, subsection 104(22.1) deems the beneficiary to have paid for that particular year a pro-rata share of the business-income tax or non-business-income tax paid by the trust on that income for the purposes of determining the beneficiary's foreign tax credit under section 126. The pro-rata share is equal to the proportion of the business-income tax or non-business-income tax paid by the trust on the foreign source income for a taxation year of the trust that ends in the particular year that the beneficiary's deemed income under subsection 104(22) from that source is of the trust's income for the year from that source….

Subsection 104(23) - Testamentary trusts

Administrative Policy

2 October 1996 Memorandum 962292

Although, where a taxpayer is a beneficiary under more than one testamentary trust, she may elect under s. 104(23)(d) separately in respect of benefits under each trust, only one return may be filed under s. 104(23)(d).

Paragraph 104(23)(a)

Administrative Policy

7 September 1994 Memorandum 940625 (C.T.O. "First and Last Taxation Year of a Testamentary Trust")

"The final taxation year of a testamentary trust winding-up will end on the date of final distribution of its assets and not at its normal taxation year end ... . For administrative purposes, it is our understanding that the Department accepts the date chosen on the request for the final clearance certificate of a testamentary trust as being the effective date of winding-up of that trust, as long as the assets are distributed shortly after the clearance certificate is issued."

Subsection 104(24) - Amount payable

See Also

Hall v. The Queen, 2003 DTC 779, 2003 TCC 410 (Informal Procedure)

Interest income of an estate in respect of which the executor, a trust company, issued T5 slips to the taxpayer beneficiaries was not payable to them in that year because they were in a dispute with the trust company as a result of which the distribution of trust funds to them was delayed. Accordingly, the taxpayers did not have an absolute right to the distributions in the taxation year in question.

Degrace Family Trust v. The Queen, 99 DTC 453 (TCC)

trust funds spent on household expenses

In finding that trust property spent by Mrs. Degrace, the sole trustee of a family trust, on such matters as mortgage payments, decorating costs, groceries, medicine and diapers were not deductible under s. 104(6), Bonner TCJ. stated (at p. 453):

"Assuming, without deciding, that payment of trust funds to a trustee and expenditure of such funds by the trustee for the benefit of a beneficiary may constitute payment to a beneficiary within the meaning of subsection 104(24) of the Act, the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of [a] beneficiary. The evidence here shows nothing more than the use by a person who happened to be a trustee of trust property to pay the ordinary expenses of a household in which the trustee and beneficiaries resided. For that reason alone the appeals must fail."

Langer Family Trust v. MNR, 92 DTC 1055 (TCC)

household expenses

Trustees of a family trust used amounts withdrawn from the bank account of the family corporation to pay various personal expenses (which in three of the four taxation years in question exceeded $100,000) of their children. At the end of the year, the accountants booked these amounts as a dividend to the trust, and a corresponding distribution by the trust to the children as beneficiaries.

In finding that these measures were not effective to reduce trust income, Taylor TCJ. stated (at p. 1059):

"Trustees cannot avoid the direct involvement of the beneficiaries thereby reducing the funds in the trust without clear and unambiguous direction from the beneficiaries so to do ... . Effectively that which Dr. Langer did was to shift some of his own income to the income of the children, and then retroactively treated that as if the children, as beneficiaries had been supported by the income of the trust."

Ginsburg v. MNR, 92 DTC 1774 (TCC)

income payable even before amount ascertained

The taxpayer was entitled under the will of her late husband to all the income from the residue of his estate under a spousal trust, and received various distributions from the spousal trust. The trust, which was subject to a lower rate of tax than she, reported the trust income and it was not reported as her income. Following a proposal by the Minister, over six months following the death of the taxpayer’s husband, to assess the taxpayer for trust income, she executed a form purporting to confirm that she had disclaimed her entitlement to income from the trust – and took the position that the distributions to her were of taxed capital.

After rejecting the validity of the disclaimer, Christie ACJ then rejected an alternative argument that the amounts were not payable to her under s. 104(24) because the precise amount of estate income had not been ascertained, stating (p. 1778):

Her entitlement [under the will] to that income and hence her entitlement to enforce payment arose as the funds generated by the assets of the trust became its property. The fact that for practical reasons such as the requirement for information might delay implementation of a mechanism for enforcements such as instituting judicial proceedings does not mean that the entitlement to enforce is in abeyance pending the receipt of the information. Entitlement to enforce payment and taking steps to enforce payment are not synonymous."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) - Paragraph 248(8)(b) backdated renunciation was ineffective 160

Grayson v. MNR, 90 DTC 1108 (TCC)

A deceased friend of the taxpayer had provided in his will for the devising of all his property to the taxpayer. Although the will did not specify the creation of the trust, the taxpayer caused a trust of which he was the sole beneficiary to be created. Because the taxpayer as the sole beneficiary was in the legal position (all administrative matters having been completed) to enforce the winding-up and full distribution of the estate to him prior to the end of the estate's first fiscal year-end, the income of the estate was includable in his income (notwithstanding that in completing the estate's trust return he did not take a deduction under s. 104(6)).

Administrative Policy

13 June 2017 STEP Roundtable, Q.10

payments by discretionary turst of alleged children's expenses must clearly be for their benefit

A father who is the trustee of a discretionary family trust reimburses himself out of the trust funds for itemized expense of restaurant meals of the children and issues T3 slips to them.

CRA quoted its somewhat general statements in ITTN 11 (respecting trustee payments to children), which might be construed as consistent with this practice, but then quoted as “helpful” the statement in Degrace Family Trust that “the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of the beneficiary,” and also a statement in a 1999 technical interpretation that, where “the household expenditures [were] basically totaled and divided by the number of family members in order to determine the child’s share…it would be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.”

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) a discretionary family trust may be unable to establish that expenses reimbursed by it were for the children’s benefit 247

1 November 2016 Internal T.I. 2016-0663971I7 - 104(6)(b), whether amount became payable

income that is paid to a minor beneficiary in contravention of the trust deed is non-deductible under s. 104(6)

Although the trust indenture for a family trust specified that no “designated person” beneficiary could receive or otherwise obtain the use of any of the income or capital of the trust, amounts nonetheless were paid to the minor beneficiaries, and purportedly included in their income under s. 104(13). Could the trust deduct such amounts under s. 104(6)? After referencing the trust indenture prohibition and in finding that there was no s. 104(6) deduction, CRA stated:

[I]t is prima facie not possible, pursuant to subsection 104(6), for an amount to become payable in the year to a beneficiary that is a designated person under the terms of the trust indenture. …

[S]ubsection 104(24) provides a rule of application that alters the ordinary result…only if…an amount has first been determined to have become payable to a beneficiary. As no amount has become payable to a beneficiary pursuant to subsection 104(6), subsection 104(24) has no application. …

By analogous rationale, in our view no amount may be included in computing the income for the year of a minor beneficiary under the trust pursuant to subsection 104(13) in this case.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) income distributions to minor beneficiaries contrary to trust deed included under s. 105(1) 134
Tax Topics - General Concepts - Illegality distribution contrary to trust deed not considered to be payable 123
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) prohibited distribution from trust 74

25 July 2016 External T.I. 2016-0630781E5 - 104(13.3) and a CPP/QPP death benefit

executor's year would not preclude a CPP death benefit from being payable to the beneficiaries in the year

Is the option to include a Canada Pension Plan (“CPP”) or Quebec Pension Plan (“QPP”) death benefit on a post-2015 T3 return will no longer be available because of s. 104(13.3)? After noting that “the option to include the CPP/QPP death benefit in income on a T3 return will no longer be available by making a designation under subsection 104(13.1) if the estate’s taxable income (determined as though the designation were valid) for the year is greater than nil,” CRA referenced its statement in 2011-0401851C6 that:

where the initial taxation year of a testamentary trust coincides with the executor year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24).

CRA then concluded:

To the extent that a CPP/QPP benefit is payable to a beneficiary of the estate in the tax year that it was received by the estate, the amount so payable would be included in the beneficiary’s income under subsection 104(13) and would be deductible by the estate under subsection 104(6). However, where the amount was not payable to a beneficiary of the estate in the tax year that it was received by the estate, it would be taxable in the hands of the estate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13.3) CPP benefit generally no longer eligible under 104(13.1) 150

29 November 2016 CTF Roundtable Q. 14, 2016-0669871C6 - Estate distribution

income may not be payable to beneficiary if estate required to pay taxes thereon

A simple Will typically directs the Executor to pay the debts and expenses of the deceased, makes specific bequests of property and finally specifies what is to be done with the residue. Where during the administration of an estate that arose after 2015, taxable income is generated yet all debts and specific bequests have been paid, can the Executor pay or make payable this taxable income to the residual beneficiaries, such that the amount of this taxable income would be considered payable, under s. 104(24), for the purposes of ss. 104(6) and 104(13)? CRA responded:

Where there is no indication in the Will from which assets the gift is to be paid, generally the Executor can make the payment as they wish as long as they act impartially (the evenhand rule), they follow the classification of gifts (and...they have paid the liabilities of the...estate). The residue of the Estate can include income and the residue of an estate is not necessarily comprised only of after tax amounts. Accordingly...the income of the estate may be paid or made payable to a residual beneficiary, and a deduction pursuant to subsection 104(6) may be taken by the estate....

However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for purposes of subsections 104(6) and 104(13).

Accordingly, the estate would be precluded from claiming a deduction... . Instead, the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) income from an estate residue generally can be distributed on a deductible basis 139

8 June 2016 External T.I. 2015-0604971E5 - Deemed capital gain of a trust

general power to encroach on capital is not sufficient to make a deemed gain payable

1) Where the power to encroach on capital is general and the trustees exercise their discretion to encroach before the end of the trust’s year to pay an amount equal to the capital gain, will that be sufficient to meet the requirement of subsection 104(24)?

2) If so, is there any reason why it cannot be paid in the form of shares that were the subject of the s. 48.1 election?

CRA responded:

Under trust law, capital gains would typically be considered to be part of the capital of a trust; however, a deemed capital gain created under a provision of the Act is a “nothing” for trust purposes. It is not possible to define a deemed capital gain to be income (or a capital gain) for trust purposes. A power to encroach on capital is not in and of itself sufficient to make a deemed capital gain payable.

In order for the deemed gain to be made payable for purposes of subsection 104(24) of the Act:

  • the terms of the trust must specifically permit an amount equivalent to the deemed capital gain to be paid or payable, or
  • the trustee must have the discretionary power to pay out amounts that are defined as income under the Act.

…The resolution authorizing the distribution should indicate that the payment in kind is in respect of the amount of the deemed taxable capital gain and not in (partial) satisfaction of a beneficiary’s capital interest in the trust. To the extent that the trust agreement permits such a distribution, the payment in kind will be accepted as a payment for purposes of subsection 104(24).

27 April 2016 External T.I. 2016-0625001E5 F - Surplus Stripping

distribution of s. 84(1) dividend effected with note issuance

An individual (Mr. X), and a corporation (Holdco) wholly owned by him are the beneficiaries of a Quebec discretionary trust (Trust) holding all the shares of Opco. A deemed dividend of $100,000 generated under s. 84(1) from increasing the stated capital of Opco’s shares was allocated to Holdco pursuant to s. 104(19). This dividend did not exceed the applicable safe income. Opco then made a cash distribution of stated capital of $100,000 to Trust, which makes a capital distribution to Mr. X of $100,000.

Before concluding that these transactions constituted impermissible surplus stripping, CRA stated:

[W]here the trust deed specifically provides that the Trustees have the power to pay an amount equal to Phantom Income, the trustees must notify the beneficiaries of the portion of Phantom Income to which they have become entitled before the end of the taxation year of the trust. The decision of the trustees to exercise this power and the notice given to the beneficiaries should be documented, such as in a resolution signed by the trustees or in the minutes of a meeting of the trustees. Where trustees exercise this right during the year without, however, paying property in kind or distributing funds before the end of the year, an amount will be considered payable under subsection 104(24) if a promissory note is issued that is payable on demand without any restriction.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 84 - Subsection 84(2) using a trust to funnel a deemed dividend from creating PUC to a Holdco beneficiary and funnelling that PUC to the individual beneficiary, is surplus stripping 204
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) funnelling deemed dividend to holdco trust beneficiary and resulting PUC to individual beneficiary/shareholder was surplus stripping 126

10 June 2016 STEP Roundtable Q. 12, 2016-0634921C6 - Phantom Income

distributions of phantom income must be authorized and effected under the trust deed

A trust realizes “phantom income,” for example, a deemed capital gain under a s. 48.1 when its shares of a CCPC become publicly listed. How does the trust meet the requirement that the income is paid or made payable to the beneficiary by the end of the year? Can the payment be made “in kind” by distributing such shares?

CRA indicated that, as the deemed capital gain is not recognized as income or capital for trust law purposes, in order for it to be paid or payable, the trust indenture must specifically permit or require an amount equal to the deemed capital gain to be paid or payable, or the trustees must have the discretionary power to pay out that deemed amount and actually irrevocably exercise that discretion (in writing, and with notice before the year end to the beneficiaries) such that the beneficiary is entitled to enforce payment of that amount in the year.

It is possible to make the distribution by way of a payment in kind provided the trust indenture so provides. The resolution should indicate that it is coming first out of the deemed taxable capital gain before being paid in satisfaction of the beneficiary's capital interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) payment in kind of distribution of phantom income 76

9 October 2015 APFF Financial Strategies and Financial Instruments Roundtable Q. 6, 2015-0595851C6 F - Income of a trust payable to a beneficiary

CRA will not accommodate a trust which merely distributes all it can

Where a trust distributes all of its share of the accounting profits of a partnership but its share of the taxable income of the partnership is higher, it will be subject to trust-level taxation on the excess.

2 October 2015 External T.I. 2015-0595111E5 F - Amount paid pursuant to 104(24)

amount payable can include a payment in kind if authorized by trust deed

Would the delivery of property from a trust to a beneficiary constitute an amount that had become payable under s. 104(24)? CRA responded:

[A]n amount that becomes payable under subsection 104(24) includes a payment in kind.

…The trust deed must provide that the trustee may pay the income of the trust by transfers in kind of property of the trust.

…Where a trust transfers to a beneficiary a promissory note held by it…[its] value could, in certain circumstances, be nominal.

10 July 2013 Internal T.I. 2013-0475501I7 F - Amounts returned to trustee/beneficiary

distributions to children immediately paid to father

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

In finding that the distributions were taxable to him rather than his children, CRA stated (TaxInterpretations translation):

In order for the Children to be considered as true beneficiaries of the income distributed by the Trust, it must be completely available to them for their benefit ["qu'ils puissent en disposer complètement à leur profit"]. … [I]t could be argued that the Children's role was as accommodation parties, or as mandataries or nominees, for Father. The Children thus had a right to receive Trust amounts payable to them, in the most part, as mandataries of Father and which were paid to them, as such, by the Trust.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) distributions to children immediately paid to father 166
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) distributions to children immediately paid to father 164
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) distributions to children immediately paid to father 138
Tax Topics - Income Tax Act - Section 56 - Subsection 56(2) distributions to children immediately paid to father 110

30 October 2012 Ontario CTF Roundtable, 2012-0462931C6 - CTF Ontario Conference- Trust payment to Minor

notice of distribution note

In response to a query as to whether the requirement, for "proper notice" being given to a beneficiary as to a demand promissory note being given in payment of a distribution, is satisfied where notice given to the guardian of a minor beneficiary, CRA stated (quoting from E9529647):

It is our view that the beneficiaries must be advised before the end of the trust's taxation year of the trustees' decision, including the apportionment of the trust's income to which the beneficiary is entitled in the year to enforce payment, even if the actual amount is not known. (In case of a minor beneficiary, the trustees may advise the legal guardian of the child's property of this right.) Although legal rights may exist without being in writing, in our opinion, the trustees' exercise of discretion and notification given to the beneficiaries of their decision should be in writing (e.g., a resolution signed by the trustees, minutes of the trustees' meeting) as failure to do so would result in the trustees and the beneficiaries having to provide the CRA with other satisfactory evidence to support their claim that amounts became payable to the beneficiaries in the year.

4 March 2013 External T.I. 2011-0428661E5 - trust payments to minor

distribution note in Quebec

The trustees of a civil law trust exercise their discretionary power in order to allocate an amount of income or taxable capital gain to a minor child beneficiary, with the amount being paid by issuing a non-interest bearing promissory note while the funds representing the income or taxable capital gain are left in the trust and reinvested. CRA was asked if the amount was "payable" and is thus deductible in the calculation of the income of the trust and added to the income of the minor child, and whether it matters if the note bears interest. CRA quoted from its response in 2010 STEP Round Table, Q. 2 2010-0363071C6:

a. Ordinarily, a promissory note is given and received as acknowledgement of the existence of and/or the conditional payment of a debt and does not create the debt.

b. A promissory note should only be issued by a trust to a beneficiary as evidence of an amount payable to the beneficiary where the trust indenture (or relevant provincial legislation where the indenture is silent on the issue) permits the trustees of the trust to do so.

c. Although a promissory note issued by a trust in respect of an amount payable to a beneficiary may be non-interest bearing, it must be payable on demand without restriction. Where the actual amount that is payable to a beneficiary is known before the end of the trust's taxation year, the promissory note should also be delivered to the beneficiary before the end of the year.

d. However, where it is not possible to determine the actual amount that is payable to a beneficiary until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information, the promissory note should be delivered to the beneficiary as soon as the amount is quantified. (Where the beneficiary is a minor and the trust indenture so permits, the promissory note may be delivered to the legal guardian of the minor's property.

28 May 2012 CTF Prairie Trust Roundtable, 2012-0444891C6 - CTF Prairie Conference- Trust payment to Minor

note distribution notice to guardian

CRA confirmed that "proper notice" of payment to a minor beneficiary by way of issuance of a promissory note can be given to the beneficiary's guardian, by referring to a statement in Question 2 of the 2010 STEP Round Table, 2010-0363071C6 that:

In case of a minor beneficiary, the trustees may advise the legal guardian of the child's property of [sic] this right.

8 June 2010 2010 STEP Roundtable Q. 2, 2010-0363071C6 - STEP Roundtable Q2

distribution note can be issued after year end based on administative delays in calculating income

For an amount to be "payable" to a beneficiary in a trust's taxation year, the beneficiary must have an enforceable right to payment by the end of that year. However, "the fact that the actual amount of the income of a trust in a year cannot be ascertained until after the end of the trust's taxation year due to administrative delays in obtaining the necessary information will not, in and by itself, result in an amount apportioned to a beneficiary in the year based on that income not being payable to the beneficiary in the year (as supported by...Ginsburg v M.N.R., 92 D.T.C. 1774 (T.C.C.))." However, it is possible for the beneficiary to obtain a right to payment of an unknown amount if the amount is unknown because it depends on a subsequent contingency or event, rather than because of administrative delays.

The beneficiary must also be advised before the end of the trust's taxation year of the trustees' decision to pay and the basis on which payment is to be apportioned. Where the amount is known, ordinarily a demand promissory note will be given to the beneficiary (or the beneficiary's legal guardian) as acknowledgement of the existence of the debt. The note should be delivered in the trust's taxation year or as soon as possible (i.e., in the event of the aforementioned administrative delays).

Locations of other summaries Wordcount
Tax Topics - General Concepts - Effective Date 149

6 March 2001 External T.I. 2000-006082 -

payable as of Dec. 31

"While most mutual fund trusts calculate the amount of income for a year to be distributed to the unitholders after the year-end, the trust indentures of these trusts typically provide that these amounts are due and payable at the end of the year and that the unitholders have the legal right to enforce payment of those amounts as at the year-end. The Canada Customs and Revenue Agency generally considers such provisions to result in the income distributions of the mutual fund trusts to fall [sic] within the ambit of subsection 104(24) of the Act."

Income Tax Technical News, No. 11, September 30, 1997, Payments Made by a Trust for the Benefit of a Minor Beneficiary".

26 August 1997 T.I. 972246

Discussion of the circumstances in which a payment made by a discretionary trust to third parties for the benefit of minor beneficiaries will be considered to be paid to that beneficiary for the purposes of ss.104(6)(13) and (24).

6 March 1997 Memorandum 960622 (see also 26 February 1997 Memorandum 952964)

Legal entitlement of a beneficiary to enforce payment to her of income of the trust is established by (a) the trustees irrevocably exercising their discretion in the year to apportion the trust income to that and the other relevant beneficiaries and (b) by the trustees giving notification of that exercise to the beneficiary in the year. Payment of the amount by cheque or by a demand promissory note should be made by the trust once the amount is known. "The trustee's exercise of discretion and notification given to the beneficiaries of their decision should be in writing (e.g., a resolution signed by the trustees, minutes of the trustees' meeting). Failure to do so will result in the trustees and their beneficiaries having to provide our Department with other satisfactory evidence to support their claim that amounts became payable to the beneficiaries in the year."

1 August 1996 T.I. 960455 (C.T.O. "Amount Payable Subsection 104(24)")

The fact that the amount of income of an inter vivos family trust cannot be known at year-end because the only source of income of the trust is a mutual fund trust does not distribute its income until after December 31, does not, by itself, cause RC to conclude that a beneficiary of such family trust could never have an enforceable right to demand payment of that amount in the year.

13 June 1995 Memorandum 951422 (C.T.O. "Payment into Court by an Estate for Desceased's Children")

Where pension income receivable by an estate is paid pursuant to a court order into the court for the benefit of the deceased's minor children, the pension income will not be considered to be payable to them because it is the court and not the children who are entitled to receive or enforce payment of the amount from the estate.

June 1995 Memorandum 950867 (C.T.O. "Lifetime Capital Gains Exemption & Personal Trust")

Because it is not possible for a deemed capital gain (in this instance, arising under s. 110.6(19)) to be income (or a capital gain) for trust purposes, a capital encroachment power and/or the issue of a promissory note would not be sufficient to make such a deemed gain payable for purposes of s. 104(24).

81 C.R. - Q.55

Where a particular beneficiary's entitlement to or share of the income of a trust is before the courts, the amount cannot be considered to be payable.

IT-286R2 "Trusts - Amount Payable"

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Trusts Resident in Canada", Chapter 3 of Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016.

Deduction for payment for benefit of minor with parent’s consent (pp. 205-6)

The court in Langer Family Trust held that subsection 104(24) applies to payments of expenses only when the beneficiary consents. However, in many cases beneficiaries are minors and cannot consent to a payment by the trust. Recognizing this difficulty, the CRA generally permits a deduction under subparagraph 104(6) (b) when (1) the trustee exercises his discretion pursuant to the terms of the trust to make the amount of the trust's income payable to the child in the year before the payment is made, (2) a parent or guardian of the beneficiary directs the trustee or otherwise consents to the payment of the relevant expense on behalf of the child, and (3) it is reasonable to conclude that the minor beneficiary benefits from the payment. [F.n.283 – Cindy Radu and Siân Matthews, "Trust Administration—Best Practices," in 2010 Atlantic Provinces Tax Conference (Toronto: Canadian Tax Foundation, 2010), 4A:l-20. With respect to the final requirement…[see] 1999-001310.]

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(3) 374
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(4) - Paragraph 251.1(4)(d) 437
Tax Topics - Income Tax Act - Section 251.1 - Subsection 251.1(1) - Paragraph 251.1(1)(g) - Subparagraph 251.1(1)(g)(ii) 115
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) 141
Tax Topics - Income Tax Act - Section 112 - Subsection 112(3.2) 331
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(1) 144
Tax Topics - Income Tax Act - Section 251.2 - Subsection 251.2(3) - Paragraph 251.2(3)(b) 112
Tax Topics - Income Tax Act - Section 252.2 - Subsection 252.2(2) 115
Tax Topics - Income Tax Act - Section 256 - Subsection 256(7) - Paragraph 256(7)(i) 176
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) - Paragraph 70(6)(d.1) 161
Tax Topics - Income Tax Act - Section 70 - Subsection 70(6) 1201
Tax Topics - Treaties - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(35) 157
Tax Topics - Income Tax Act - Section 248 - Subsection 248(8) 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.2) 59
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(4) - Paragraph 104(4)(a.3) 38
Tax Topics - Income Tax Act - Section 118.1 - Subsection 118.1(6) 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) 164
Tax Topics - Income Tax Act - 101-110 - Section 105 - Subsection 105(1) 91
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(18) 49
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) 66
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(19) 311
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) 125
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(bb) 144
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(2) 379

Jack Bernstein, "Recent Tax Issues Affecting Family Trusts", Tax Profile, Vol. 5, No. 21, May 1998, p. 247.

Jack Bernstein, "Benefitting Beneficiaries", CA Magazine, March 1996, p. 24.

Gabrielle Richards, "Executor's Year", Canadian Current Tax, October 1987, p. J49

Subsection 104(28)

Administrative Policy

S2-F1-C2 - Retiring Allowances

Payment of retiring allowance after death

2.27 An individual might terminate employment but die before receiving all or a part of a retiring allowance to which they were entitled. In this case, any remaining amount received by their dependent, relation or legal representative will normally be included in the recipient’s income as a retiring allowance pursuant to subparagraph 56(1)(a)(ii). If the payment is made to the deceased individual’s graduated rate estate, the payment could flow through the estate and retain its character as a retiring allowance under subsection 104(28). ...