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.