Principal Issues: [TaxInterpretations translation] What is the basis for the requirement to issue a promissory note and to notify beneficiaries of a trust of the portion of income to which they are entitled?
Position: Canada Revenue Agency's ("CRA") long-standing administrative position on beneficiary notification. The issuance of a promissory note payable on demand and without any restriction on the right of the beneficiaries to demand payment is a means of evidence accepted by the CRA demonstrating that an amount is payable to a beneficiary.
Reasons: CRA document 9816525 and application of 104(24) of the Income Tax Act.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 33
Amounts paid or payable by a trust
The CRA has stated that it has elevated requirements for distributions from a trust to its beneficiaries to be deductible in computing the trust's income (income paid or payable). By way of example, the CRA has stated that in cases where amounts of distributed income are not paid in cash to the beneficiaries, 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.
Question to the CRA
What is the legal basis for the requirement to issue a promissory note and notify the beneficiaries of the trust?
CRA Response
For the purposes of our response, we have assumed that we are dealing with a discretionary trust and that subsection 104(18) does not apply.
Paragraph 104(6)(b) allows inter alia a trust to deduct in computing its income the amount claimed by the trust that became payable in the year to a beneficiary under the trust.
For its part, subsection 104(13) provides inter alia that a beneficiary under a trust shall include in computing income for the year such part of the amount of the income of the trust as became paid or became payable to the beneficiary in the year in question.
Subsection 104(24) provides that, for the purposes of subsections (6), (7), (13), (16) and (20) and subparagraph 53(2)(h)(i.1), an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.
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. However, if the beneficiary cannot demand payment of the promissory note because of a contingent element or some other restriction, it is our view that the conditions of subsection 104(24) are not satisfied because the beneficiary is not entitled to demand payment of the promissory note before the end of the year.
Lucie Allaire
(613) 957-2046
October 8, 2010
2010-037343