Section 105

Subsection 105(1) - Benefits under trust

Cases

Cooper v. The Queen, 88 DTC 6525, [1989] 1 CTC 66 (FCTD)

interest-free loan recognized as obligation rather than benefit

The taxpayer, who was a residuary beneficiary and executor of his mother's estate, was held not to have received a benefit by virtue of an interest-free $400,000 loan made to him by the executors for the purpose of buying himself a home. Rouleau, J. was influenced by the fact that specific legislation dealing with interest-free loans (section 80.4) made no reference to loans made by a trust, and also noted (at p. 6535) that "Any loan which escapes inclusion into income under subsection 15(2) must be understood to have escaped entirely whether interest-free or not, otherwise the purpose of the section is in part defeated."

Words and Phrases
loan
Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality income tax consequences attaching to illegal loan 75
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) interest-free loan 102

See Also

Stevenson v. Wishart, [1987] BTC 283 (CA)

Substantial but regular payments of capital of a trust to pay the nursing-home expenses of the beneficiary were not income in her hands. "If, in exercise of a power over capital, [the trustees] chose to make at their discretion regular payments of capital to deal with the special problems of Mrs. Henwood's last years rather than release a single sum to her of a large amount, that does not seem to me to create an income interest."

Administrative Policy

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

income distributions to minor beneficiaries contrary to trust deed included under s. 105(1)

A family trust paid income to the minor children in breach of a prohibition in the trust deed against making distributions to designated beneficiaries. After concluding that as the amounts were not legally payable, actually paying them did not bring them within the s. 104(6) rule, CRA went on to indicate that the distributions were be includible in the children’s income under s. 105(1) rather than s. 104(13), stating:

[P]aragraph 105(1)(b) has no application as the provision does not apply to an interest in a personal trust that has never been acquired for consideration. In our view, the value of the amount is also not included in income of the minor beneficiaries under 104(13) as discussed above.

The… amount is properly included in income under subsection 105(1), as the two exceptions to the provision are not met.

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 - 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

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

benefit conferred when trust shares redeemed at undervalue

In the course of commenting on common audit issues for trusts, CRA stated:

In one audit that we dealt with, the taxpayer had been the sole shareholder and director of OPCO. The taxpayer settled a trust, purportedly for employees of OPCO, and was the sole trustee. Both taxpayer and the trust subscribed for new common shares of OPCO for a nominal amount. When an offer was received from an arm's length party to buy OPCO several years later, the taxpayer and OPCO entered an agreement to allow OPCO to redeem the shares held by the trust (which now had a significant fair market value) for the nominal amount originally paid for them. This effectively inflated the value of the remaining OPCO shares held by the taxpayer, and thus the amount received by him on the sale of the company. CRA took the position that there was a benefit pursuant to subsection 105(1) in respect of the taxpayer. Furthermore, because the taxpayer, the trust and OPCO were all persons not dealing at arm's length, the trust could be assessed pursuant to subparagraph 69(l)(b)(i) in respect of the disposition of shares.

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

payment of income distributions by children to father not a benefit under the trust

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.

After finding that the amounts returned to the father were income to him under s. 104(13), CRA went on to indicate (TaxInterpretations translation) that such amounts should not be included in his income under s. 105(1):

[A] benefit would not have been conferred on Father "from a trust or under a trust" within the meaning of subsection 105(1) when each of the Children paid the Amounts to him in his personal capacity. Trust was not impoverished because of repayment of amounts by Children to Father. If the Children voluntarily repay certain amounts due to their Father, the benefit is not conferred from or under a trust.

If the Children act as Father's mandatories, the amounts returned to him do not constitute a benefit from or under a trust. Even if the argument were made that this was the case, the exception in 105(1)(a) is met since the income payable to the mandataries must be added in computing the income of the mandatary, namely Father.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) family trust income distributed to children but repaid as reimbursement to father for family expenses was income to him, not them 199
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(24) distributions to children immediately paid to father 174
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) distributions to children immediately paid to father were deductible even though received by children as his agents 169
Tax Topics - Income Tax Act - Section 56 - Subsection 56(4) payment of distributed family trust income by children to father did not engage s. 56(4) as it was only potential income to him 167

6 August 2013 External T.I. 2012-0469481E5 F - Benefit under trust

taxable benefit on sale to beneficiary at undervalue was not eliminated under s. 105(1)(a) when beneficiary sold the property

An estate sold personal-use real estate to one of its beneficiaries for a price less than the property's fair market value, so that s. 69(1)(b)(i) applied. The capital gain to the estate was payable to a beneficiary other than the purchaser.

CRA rejected a submission that the exception in s. 105(1)(a) applied to exclude a taxable benefit to the purchaser because later in the same year the purchaser sold the property at a capital gain which was increased by the amount of the purchaser's reduced cost for the property. Accordingly, that difference represented a taxable benefit to the purchaser, but such amount was required to be added to the purchaser's adjusted cost base under s. 52(1) – with a resulting reduction in the capital gain on the subsequent sale.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 52 - Subsection 52(1) benefit on estate sale to beneficiary at under-value added to property's ACB 129
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) taxable benefit added to acb 129

12 December 2012 Internal T.I. 2012-0464411I7 - Indirect Benefit

interest-free loan

A taxable Canadian corporation (Holdco) which is wholly-owned by a trust of which Mr. A is the sole trustee and is a discretionary beneficiary, makes an interest-free loan to another taxable Canadian corporation (Investco) of which Mr. A is the sole shareholder. In finding that this did not give rise to a taxable benefit, CRA indicated that as there have been no relevant changes since Cooper, s. 105(1) "would not be considered favourably as a ground for including a foregone interest benefit in the income of Mr. A."

4 December 2012 External T.I. 2012-0470951E5 F - Technical News no. 11

no benefit where use of personal-use property of trust extends to an individual related to a trust beneficiary

Is ITTN No. 11 as to the use of personal-use property belonging to a trust is still valid? In so confirming, CRA stated:

[E]ven if the CRA considers the use of trust property by one of its beneficiaries as a benefit under subsection 105(1), in the case of a personal-use property of the trust, the CRA generally does not assess the benefit from the use of the property. …

[T]he CRA has expanded its administrative position to the case where the property is utilized by a person who is related to a beneficiary as the property is, in that situation, a personal use property of the trust.

The summary stated:

It is still the CRA's position that although a taxable benefit does arise from the rent-free use of trust property, such a benefit will not generally be assessed in the case of personal-use property owned by a trust, that is used by a beneficiary under the trust or any person related to the beneficiary.

5 July 2012 Internal T.I. 2010-0388551I7 F - Fiducie - retour de sommes

income distributed to daughter-in-law who in fact was not a beneficiary includible in her income under s. 105(1) but not deductible by trust under s. 104(6)

A family trust whose beneficiaries included Father, Mother, two sons (Son A and Son B) and the wife of Son A (Daughter-in-law A) but not the wife of Son B (Daughter-in-law B) realized a capital gain on the disposition of a qualified small business corporation shares of Holdco, and distributed a portion of those gains to the above four children who, however, immediately returned most of the distributed funds to Father and Mother. The Directorate stated:

[T[he terms of the agreement cannot be interpreted to consider Daughter-in-law B as a beneficiary.

Nevertheless, subsection 105(1) could apply to Daughter-in-law B, and it would be possible to assess on that basis. However, it should be taken into consideration that she has already been taxed on the income allocated to her by Trust.

Nonetheless, taking the foregoing into account, Trust could not benefit from the deduction under paragraph 104(6)(b) respecting the income allocated (namely, the TCG) to Daughter-in-law B.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) s. 75(2) does not apply to an estate freeze as the corp does not own its treasury shares issued to the trust 154
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) capital gain distributed by family trust to children and purportedly lent by them to their parents (also beneficiaries) was instead included in the parents’ income under s. 104(13) 403
Tax Topics - Income Tax Act - 101-110 - Section 110.6 - Subsection 110.6(6) Foisy test of mental element accepted 221

1999 Ruling 9911853 [DRIP produces taxable benefit]

DRIP produces taxable benefit
Proposed transactions

The trustees of a listed REIT will implement a distribution reinvestment plan (the "Plan") under which Canadian-resident unitholders may enroll. Because of foreign securities legislation non-residents will not be eligible. The Plan provides that the REIT shall pay to the Agent (a trust company) all cash distributions paid on Units owned by Unitholders who participate in the Plan and the Agent will use such funds to purchase additional Units directly from the REIT. Additional Units purchased under the Plan will be registered in the name of the Agent, as agent for a Unitholder who participates in the Plan. The price at which Units of the REIT will be purchased by the Agent with cash distributions will be the "Average Market Price," namely XX% of the weighted average price of Units of the REIT on the applicable exchange for the five trading days immediately preceding the relevant Distribution Date. The right to participate in the Plan may not be transferred by a Unitholder without the approval of the REIT and the applicable securities regulatory authorities.

Rulings

A. By virtue of the provisions of subsection 105(1) of the Act, the amount by which the fair market value on the date of purchase of any Units of the REIT exceeds the purchase price paid for such Units pursuant to the provisions of the Plan… shall be included in computing the income of the Unitholder on whose behalf the Units are purchased.

B. By virtue of subsection 52(1)… the amount added to a Unitholder's income pursuant to ruling A shall be added in computing the cost to the Unitholder of such Units of the REIT except to the extent that such amount is otherwise added to the cost or included in computing the adjusted cost base to the Unitholder of such Units.

Comment in Summary

: "The issue was considered by the Policy Review Committee and it was decided that it would not be appropriate to extend our long-standing favourable administrative position concerning dividend reinvestment plans of corporations to income distribution reinvestment plans of trusts. This is consistent with E9321283 in which we concluded that the proposed discounts of 10% to 15% would result in a benefit under 105(1)."

Income Tax Technical News, No. 11, September 30, 1997: "Taxable Benefit for Use of Personal-Use Property"

26 August 1997 Memorandum 970731

A beneficiary generally will not be assessed a taxable benefit for her rent-free use of personal-use property owned by the trust.

9 January 1997 T.I. 963753

S.105(1) does not apply to a distribution of property to which s. 107(2) is applicable.

31 March 1993 T.I. (Tax Window, No. 29, p. 23, ¶2459)

The favourable administrative position applying to personal-use property of an individual that is held by a trust will also apply where a house is owned by a trust and used by parents of a beneficiary.

19 June 1992 Interpretation 9218430 (January - February 1993 Access Letter, p. 25, ¶C104-038)

RC is not prepared to extend the decision in Cooper to benefits arising otherwise than in respect of an interest-free loan emanating from a resident testamentary trust.

91 C.R. - Q10

RC will apply the Cooper decision in similar situations.

90 C.R. - Q24

An interest-free loan made by a trust to a beneficiary does not result in a taxable benefit. S.105(1) is not restricted to non-arm's length beneficiaries.

89 C.R. - Q31

The use of a trust's real property by a beneficiary constitutes a benefit. However, in the case of property that would be personal use property of an individual, such as a home or cottage, RC would generally not seek to assess a benefit for the use of the property where the trust is effectively standing in the place of the individual and no benefit or advantage would have arisen if the individual, instead of the trust, had allowed the use of the property.

88 C.R. - Q69

Where property such as a cottage is held on trust for the use of individuals, RC generally will not seek to assess a benefit where the trust is effectively standing in the place of the individual.

87 C.R. - Q82

S.105(1) benefits should be reported on a T3 supplementary. Appropriate methods should be used to value a benefit.

85 C.R. - Q27

Where an income beneficiary (i.e., a beneficiary with no right to enforce any payment of the capital) receives an interest-free loan. RC will assess a benefit where the borrowed funds are used for non-income-producing purposes, or their is an income-splitting advantage.

80 C.R. - Q45

S.105 will be applicable in most cases to a non-interest bearing loan made by an estate or trust 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.

Whether a benefit to parent when trust pays for child’s necessities (p. 206)

An ancillary question is whether the payment is treated as a benefit under sub-section 105(1).

To avoid this risk, trustees could refrain from paying for necessities and pay only for other expenses of the children, such as summer camp, private school, tutors, and extracurricular activities. …

[CRA’s] administrative position is that a parent has not received a benefit when the trustees pays for the necessities of a minor beneficiary in accordance with the terms of the trust. [F.n. 287… 970648.]

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 - Income Tax Conventions - Article 29B 239
Tax Topics - Income Tax Act - Section 248 - (2)-(41) 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 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

Subsection 105(2)

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.

Personal-use property of the trust (p. 358)

[T]he CRA has adopted the administrative position that when property owned by a trust was or would have been personal-use property of an individual, it does not generally seek to assess a benefit under subsection 105(1), provided that the trust is effectively standing in the place of the individual and no benefit or tax advantage would have arisen if the individual had allowed the use of the property. [fn 210: …9707317…1997: "Revenue Canada Round Table…Question 69…]

Interrelationship with 104(13) (pp. 359-360)

The interrelationship of "benefits" under subsection 105(1) and "income payable" under section 10-4(13) is unclear. "Which section is applicable to income that is distributed by a trust-in the year to a beneficiary? In Lyons v. MNR, the Tax Review Board concluded that subsection 105(1) applied when an income beneficiary under a testamentary trust assigned her income interest, so that the amounts received by the assignee of the interest were viewed as benefits to be included in the income of the assignee under subsection 105(1). However, it apparently was not argued that the effect pf the assignment was to make the assignee a beneficiary of the testamentary trust, so that the amounts payable to the assignee should have been, included in the income of the assignee by virtue of subsection 104(13). One possible ramification is the inability of the purchaser of an income interest, as was the situation of the taxpayer in this case, to claim a deduction for the cost of the income interest, except in respect of an amount included in income pursuant to subsection 104(13) or 105(2).

Another possible ramification is that deductions taken by a trust for income tax purposes may be "wasted" when these deductions are not permitted for trust law purposes (for example, when the trust incurs an allowable business investment loss)….

Relief under s. 52(1) (p. 362)

Subsection 52(1) may assist in avoiding a second level of taxation when a benefit arises pursuant to subsection 105(1) by virtue of a sale of property by the trust to a beneficiary at less than fair market value. While paragraph 69(l)(b) generally applies in this circumstance to deem the trust to have disposed of the property for proceeds equal to its fair market value at the time of the disposition; there is no provision in the Act that otherwise increases the cost base to the beneficiary to fair market value on a corresponding basis..

Payment of necessities (p. 363)

[A]mounts that would, as a matter of trust accounting principles, be regarded as on account of the income beneficiaries (such as running expenses and other expenditures of a recurring nature, including property taxes) should be subject to the provision; however, expenditures incurred to preserve of maintain the property for the benefit of the capital beneficiaries, including major renovations and capital improvements, should not fall within the scope of subsection 105(2).

Payment of life tenant’s condo fees (p. 363)

In Blackstien v. The Queen, [fn 229: 1997 CanL11 83 (TCC).] the court concluded that subsection 105(2) did not apply to include an amount in the income of a life tenant in respect of maintenance paid by the estate of her deceased husband on a condominium residence in Toronto because the payment was not made to fulfill an obligation arising "under the terms of the trust arrangement."…