Subsection 104(24) - Amount payable

CRA indicated that s. 104(24) would be satisfied regarding the distribution by an estate of a pension benefit received by it to the sole beneficiary (the surviving spouse) through the estate issuing a demand note to her “to the extent that the issuance of the note was permitted by the will and … the demand note was unconditional.”

CRA indicated that the fact that the distribution was paid in the year did not establish (e.g., under s. 104(24)) that it was payable for the purposes of s. 104(6), and that “[i]f the amount cannot be paid in accordance with the terms of the trust and the relevant trust law, the amount cannot be considered to have become payable for the purposes of subsections 104(6) and (13).”

After the Office of the Public Trustee for the Province (the “Trustee”) finalized the Estate of the deceased, received a CRA clearance certificate, and closed its file, with the 36-month graduated rate estate (“GRE”) period then expiring, the Trustee was contacted by the Government of Canada Pension Centre that a pension payment was still owing to the deceased, which amount was then paid and received by the Estate on the last day of the Estate’s taxation year, and distributed by the Trustee in the following taxation year. Regarding whether the amount was deductible under s. 104(6) in the year of receipt, the Directorate stated:

Whether or not the amount was payable to the beneficiary, and the beneficiary was, on the last day of the Estate’s taxation year, entitled to enforce payment of the income received by the Estate on that same day is a question of law and fact which only the Trustee can determine.

If, based on all the facts and surrounding circumstances, the Trustee determines that the beneficiary was, on XXXXXXXXXX, entitled to enforce payment of the lump-sum amount received by the Estate, the beneficiary is required to include the gross amount of the lump sum benefit in their income for their 2019 T1 Income Tax and Benefit Return (T1 Return) pursuant to subsection 104(13).

In light of s. 138.1(1)(f), the taxable income of a related segregated fund trust is deemed for the purposes of computing the income of the trust and beneficiaries under ss. 104(6), (13) and (24) to have been payable in the year to the beneficiaries, with the allocation amongst them to be determined by reference to the terms and conditions of the policy. (There is a similar rule in s. 138.1(3) for capital gains.)

CRA made the point that this is tax law, not real law. In fact, the beneficiaries generally have no entitlement to enforce payment to them of the accruing income. In particular having regard to the CRA view that “to be a right or thing [under s. 70(2)] … the individual would have to be legally entitled to receive the amount at the time of the individual’s death (the right would have to exist)” CRA considered that even though an individual annuitant who died part way through the year was allocated the income that had been earned in the year up to the time of death on the T3 slip received by his executors, he had no legal entitlement to the allocated amounts. Hence, such income was not rights or things, so that it could not be included on a separate s. 70(2) return.

CRA stated that where an estate receives a lump sum from a pension plan of the deceased beyond the 36-month period in which it could qualify as a graduated rate estate (“GRE”), CRA would have no discretion to extend the 36-month period.

The executor was unable to distribute the income to the sole beneficiary before the end of the year of receipt. CRA indicated that although nothing had been paid to the beneficiary in the year, if the executor determined that the beneficiary was entitled to enforce payment of the lump-sum benefit, that amount would be required to be included in the beneficiary’s income, pursuant to ss. 104(13) and (24).

A personal trust wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco") with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which immediately on-pays that amount to Holdco.

CRA indicated that since a s. 104(19) designation by a trust cannot be effective until the trust’s year end, if by the effective time of the deemed dividend payment as a result of the designation (December 31, 20X1), the above trust had disposed of Opco to a third party, whether Opco was connected for Pt. IV tax purposes would be tested at that time, so that there would be no exemption from Pt. IV tax under s. 186(1)(a).

However, a similar timing issue would not arise if, for some reason, Holdco ceased, after the receipt by it of the $5,000 from the Trust (September 20, 20X1) and before the trust year end (December 31, 20X1), to be a trust beneficiary, but with Opco continuing to be connected on December 31, 20X1 with Holdco pursuant to s. 186(4)(a) by virtue of common control as described in s. 186(2). In this regard, CRA stated:

[I]t must be determined [for s. 104(13) purposes] whether all or part of the income of the trust has become payable to the beneficiary. That determination must first be made in light of the ordinary meaning given to the term "payable" under the applicable private law.

… [I]t should be noted that subsection 104(24) does not alter the ordinary meaning of the term "payable" nor does it specify when an amount becomes payable. Rather, subsection 104(24) provides that, for the purposes of those provisions, an amount otherwise payable under the applicable private law is deemed not to have become payable to a recipient in a taxation year. However, this deeming rule does not apply if the amount was paid to the beneficiary in the year or if the beneficiary was entitled in the year to enforce payment of it. …

[A] taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13)” ... .

[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.

Following the death of the spouse respecting a spousal trust, the trust’s sole asset (a private company) is wound-up, thereby giving rise to a deemed dividend under s. 84(2). Can this dividend be made payable to the residuary beneficiaries of the trust (the surviving children) given that the trust deed does not contain an extended definition of income, but also given that the children’s interests in the trust at that point are vested indefeasibly? CRA responded:

[I]f the terms of the trust indenture are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend for the purposes of subsection 84(2), we will generally allow a deduction by virtue of paragraph 104(6)(b) in respect of that deemed income. However, this deduction will be permitted to the extent that the trustee exercises this power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in satisfaction of the beneficiary’s interest in the capital of the trust.

An individual’s will simply provides for the executor to pay all debts, and distribute the estate in equal portions to the three adult children. All estate assets have not been fully distributed by the end of the “executor’s year”, such that the beneficiaries may possess the legal right to enforce payments from the estate. Is the income of the estate payable equally to the beneficiaries by virtue of their entitlement to an equal share of the residue and, if not, what is necessary to this end? Is the income earned in the executor’s year considered as not payable to beneficiaries, and does this depend on whether the estate fiscal year falls entirely within the executors’ year?

Respecting the first question, CRA stated:

Generally, the law provides the executor with a year (often referred to as the “executor's year”) to administer an estate, during which time the right to income of the estate is unenforceable by a beneficiary. After this time, it is a question of fact as to whether the executor is able to distribute property and whether the income of the estate is payable to the beneficiaries.

[Here] the entitlement to an equal share in the residue of the estate would not in and of itself result in the income of the estate being automatically payable to the beneficiaries.

Respecting the second question, CRA stated:

IT-286R2 [para. 6] notes that 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), where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the taxation year of a testamentary trust coincides with the executor’s year, and all of the beneficiaries agree to this treatment.

[Here] the executor has chosen the initial taxation year end of the estate to be a date that is prior to the end of the executor’s year; as a result, the executor’s year would extend into the second taxation year of the estate … the comments in paragraph 6 of IT-286R2 would also apply to the initial taxation year of the estate.

Where a portion of the executor’s year falls within the second taxation year of the estate, it is possible that income earned by the estate during that portion of the year may be subsequently paid or become payable to the beneficiary during the remainder of the estate’s taxation year. As a result, the income earned during the portion of the executor’s year which falls within the estate’s second taxation year may instead be taxable in the beneficiaries’ hands. This ultimately relies on whether an amount is paid or whether the beneficiary is entitled to enforce payment of the amount … .

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.”

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.

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.

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.

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).

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.

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.

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.

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.

A taxable capital gain of $375,000 was allocated to Beneficiary A of a discretionary family trust ("Trust") for which an amount is payable to him or her but not yet paid. The unpaid amount to Beneficiary A is acknowledged as debt of the Trust. The debt does not bear interest and has a 25-year term.

After quoting the statement in 2010-0373431C6 that:

if the beneficiary cannot demand payment of the promissory note because of a contingency or restriction, we are of the view that the conditions of subsection 104(24) are not satisfied because that beneficiary does not have the right to demand the payment of the promissory note before the end of the year.

CRA stated:

[T]he acknowledgement of debt does not appear … to satisfy the conditions set out above. As a result, the conditions of subsection 104(24) would not be met.

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 deductible by the trust, even though the income inclusion likely should be to him rather than his children, 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 repayment of those amounts 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 by Trust in computing its income.

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.

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.

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.

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).

CRA noted:

A national project was initiated in fiscal year 2005-2006 to develop an audit strategy for trusts resident in Canada. That project was completed in the 2007-2008 fiscal year; and following its completion, audit staff continues to focus on the audit of trusts resident in Canada.

CRA has stated that in cases where amounts of distributed income are not paid in cash, not only must the trust issue a promissory note, but it must also notify the beneficiaries of the portion of income to which they are entitled. What is the legal basis for the requirement to issue a promissory note and notify the beneficiaries of the trust? CRA responded:

In order for an amount to become payable in a taxation year to the beneficiaries of a discretionary trust under subsection 104(24), the trust indenture must give the trustees discretionary authority to pay or make payable the amounts that the Act treats as income. In addition, it must require the trustees to exercise their discretion before the end of the trust's taxation year. In that regard, this exercise must be made irrevocably, without any conditions being attached to the right of the beneficiaries to demand payment in the year.

In addition, the trustees must notify the beneficiaries of the portion of income to which they are entitled before the trust's taxation year-end. The trustees' decision to exercise this power and the notice given to the beneficiaries should be recorded in writing, such as in a resolution signed by the trustees or in the minutes of a meeting of trustees.

As soon as a beneficiary's right to demand payment from the income of a trust is established, it must be substantiated. The CRA has indicated that a promissory note, which is due and payable on demand, without any conditions attached to a beneficiary's entitlement to an amount out of the trust, is acceptable evidence of the beneficiary's right to demand payment of the amount for the purposes of subsection 104(24). In that regard, we use the term "billet à ordre”, which translates the term "promissory note", as provided under the Bills of Exchange Act, R.S.C., 1985, c. B-4.

In light of the above, where the trust indenture permits a trustee to issue a promissory note payable on demand by a beneficiary without any conditions attached to the beneficiary's entitlement, it is our view that the issuance of such a note will generally constitute an amount that became payable by a trust within the meaning of subsection 104(24) for the taxation year in which the beneficiary received the note.

In responding to an inquiry regarding the payment by the trustee of a trust, that potentially qualified with the non-discretionary elements described in s. 104(18), of maintenance, living and educational expenses for the benefit of the minor beneficiaries, CRA stated:

Although the position published in Income Tax Technical News, No. 11 is intended to apply to the situation of a discretionary trust, it may also apply, with necessary modifications, in situations where the trust is not discretionary on the basis that the income is payable to the minor pursuant to the provisions of the trust indenture in such a situation rather than through the exercise of the trustee's discretion.

… The expenses covered by our position … include expenses that a parent may be obligated to pay as a result of a parental obligation. Notwithstanding that fact, the CRA considers the minor beneficiary to have received the income from the trust when the position is applied, and not the parents. Further, in that situation, the parents would not be taxed pursuant to subsection 105(1) by virtue of the payment of those expenses by the trust.

… Among the examples mentioned, we are of the view that tuition fees for the education of a minor beneficiary or fees paid at a summer camp attended by the minor beneficiary would relate to an expense incurred for the child, the payment of which, subject to the other conditions stated in Income Tax Technical News, No. 11, would be considered to be payment of income to the child. On the other hand, with respect to the acquisition of a car, one would have to examine the relevant facts to determine whether the acquisition is for the benefit of the minor child or for the benefit of another person. …

How can the trustee designate or report an amount so that it is considered to be payable to a beneficiary?

After noting that CRA has not relied on the comments in Sachs in relation to the preferred beneficiary designation that the "authority to pay income to beneficiaries … includes the authority to declare or designate income as held for them to the exclusion of the continuance of the trustee's authority to deprive them of it” to establish a position with respect to the term "payable" and referring to its comments in IT-286R2, para. 8, CRA stated:

[A] written resolution signed by the trustees of a trust (or the minutes of a meeting of the trustees), whereby the trustees confer an irrevocable right on a beneficiary of the trust to receive a portion of the trust's income, is a means of establishing that the beneficiary has become entitled to enforce payment. Without such documentation, trustees and beneficiaries would have to provide other evidence that would satisfy the CRA that the amount was paid in the year to the beneficiary or that the beneficiary had the right to enforce its payment.

Can a personal trust annually allocate to its beneficiaries the interest income deemed to be earned by it on a prescribed debt obligation such as a stripped coupon even though no amount will be received until the subsequent year of the coupon’s maturity? CRA responded:

Deemed interest income under … Regulation 7000 debt obligations is not income of the trust under the Civil Code. Consequently, such income is not likely to constitute income payable to a beneficiary in the year under a trust indenture. However … we allow a deduction pursuant to subsection 104(6) in respect of deemed income if the terms of the trust indenture are such that the trustee is required to pay an amount equal to that income to the beneficiary, or if the trustee may, under the trust indenture, pay or make payable an amount equal to the amount deemed to be income under the I.T.A., if the trustee exercises that discretion irrevocably and unconditionally before the end of the trust's taxation year.

A resident testamentary trust, which was created to hold shares of a publicly traded corporation, distributes the shares (which are not taxable Canadian property) to its non-resident beneficiary. Can this be treated as a distribution of the taxable capital gain which was realized on such distribution, if no election is made under s. 107(2.11)(a)? CRA responded:

In the absence of any evidence to the contrary, a reasonable argument can be made that the taxable portion of any accrued gain on the property distributed to the non-resident beneficiary has been paid to that beneficiary as part of the capital distribution which gave rise to the gain. The absence of an election by the trustee under subsection 107(2.11) supports the view that such a result was intended in a respect of a particular trust. Thus, in the absence of an election under subsection 107(2.11), the portion of the trust's income so distributed to the non-resident beneficiary (the taxable portion of the capital gain) would be subject to Part XIII tax as a distribution of trust income.

"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."

For an estate governed by the Civil Code of Lower Canada (CCLC), the will did not create a trust within the meaning of the CCLC that was separate from the estate. Income generated by movable property bequeathed to the residuary legatee was not considered, in light of Hall, to have become payable to that legatee except where it had been generated after the administration of the estate was completed, which the Agency considered to have occurred at the later of the date of delivery of the last specific bequest and the date of settlement of the last debt of the estate.

Given that the will provided that any division must be recorded in a notarized deed, the TSO could determine and request a copy of the notarized deeds confirming the delivery of specific bequests and written confirmation of the date on which all debts of the estate were settled, in order to determine the date of completion of administration.

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).

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."

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 through an issuance of units, 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. RC further stated:

[O]rdinarily a promissory note is given and received as acknowledgement of the existence of and/or the conditional payment of a debt and does not itself create the debt. Where the trustee allocates the income of the trust to the beneficiary, as described above, then it is our view that the beneficiary will become entitled to legally enforce payment of the amount at that time under subsection 104(24) of the Act only where the promissory note is made payable on demand.

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.

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).