20 March 2007 External T.I. 2006-0173711E5 F - Paiement des impôts d'une fiducie
Principal Issues: [TaxInterpretations translation] 1. A trust makes an election under subsection 104(13.1). The father of the minor beneficiaries pays the trust's tax directly to the government on a personal and voluntary basis. The trust does not reimburse him for that payment. Does subsection 105(1) apply? Does subsection 246(1) apply?
2. Would the answers to the previous questions be the same if the only difference was that the trust was discretionary and decided not to allocate and make payable the income?
Position: 1. Subject to review of the trust deed, subsection 105(1) would not apply. However, subsection 74.1(2) and subsection 74.3(1) (if applicable) could apply as the case may be in respect of income from property of a value equal to the trust tax paid by the father. All of the facts relevant to a particular situation would have to be considered to determine the correct application of those subsections.
2. Subject to review of the trust deed, subsection 105(1) would not apply. However, subsections 74.1(2) and 74.3(1) could apply in respect of income from property of a value equal to the trust tax paid by the father. All of the facts relevant to a particular situation would have to be considered to determine the correct way to apply this subsection.
Reasons: The trust is not impoverished by the payment of tax by the father. It therefore confers no advantage. Subject to a review of the trust deed, if the father voluntarily pays tax in his own right without any provision to that effect in the trust deed, the benefit is not conferred under the trust. However, depending on the circumstances, the father could be considered to have made an indirect transfer either to his children or to the trust of which his minor children are beneficiaries, as the case may be. Therefore, the conditions for the application of the attribution rules would be satisfied in those circumstances.
XXXXXXXXXX 2006-017371 Sylvie Labarre, CA March 20, 2007
Dear Sir,
Subject: Payment of taxes by a trust
This is in response to your letter of February 22, 2006, in which you asked for our opinion as to whether there is a tax consequence for the beneficiaries of a trust when their father who is also a trustee pays income tax for and on behalf of the trust.
Facts
An inter vivos personal trust is established for the benefit of Mr. A's minor children. Mr. A acts as one of the two trustees of the trust.
The trust deed contains a clause that makes all income payable to the beneficiaries. The trust elects under subsection 104(13.1) of the Income Tax Act (the "Act") to be fully taxed on the amounts allocated to its beneficiaries.
Following the distribution of all the income covered by the subsection 104(13.1) election to the beneficiaries, Mr. A decides to personally and voluntarily pay the income taxes owed by the trust.
Mr. A does not claim any reimbursement from the trust or the beneficiaries for the income taxes he personally paid for and on behalf of the trust.
There is no clause in the trust deed obliging the incumbent trustee(s) to personally pay the income taxes due by the trust.
Questions
1. Does subsection 105(1) apply to the beneficiaries so that the beneficiaries are taxed on the income taxes paid by the trustee personally for and on behalf of the trust?
2. If subsection 105(1) does not apply, does any other provision of the Act provide for the taxation of such taxes in the hands of the beneficiaries?
3. Does Mr. A's payment of the trust's income taxes personally, as stated in the facts, trigger the application of the attribution rule in subsection 74.1(2), and how would that subsection be applied?
4. Would the answers to the preceding questions be different if the trust were discretionary as to the distribution of income and the trustees decided not to distribute or make payable the income of the trust?
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Our understanding of the facts is that Mr. A pays the tax owed by the trust directly to the governments and that the trust does not reimburse Mr. A. Subsection 105(1) provides for the taxation of benefits conferred by or under a trust. It is our view that no benefit would be conferred by the trust. However, it must be determined whether the benefit was conferred under the trust. Since we do not have the trust deed, it is difficult for us to make that determination. On the other hand, if Mr. A voluntarily pays the tax in his personal capacity without any provision to that effect in the trust deed, it seems to us that a benefit would not be conferred under the trust.
In response to question 2 above, it should be noted that the amount of tax paid by Mr. A does not represent income on which a taxpayer would have been taxed if he had received it directly. Therefore, the beneficiaries would not be taxed on the amount of tax paid by Mr. A under subsection 246(1).
On the other hand, depending on the circumstances of the particular situation, we may be faced with a situation where we would apply the attribution rules in subsection 74.1(2) (and subsection 74.3(1) if applicable) to attribute to Mr. A the income derived from an amount equaling the amount of tax paid by Mr. A. It is difficult to offer a definitive view in a hypothetical situation. We would have to consider all the relevant facts of the particular situation to determine how we would apply the attribution rules.
The answers set out in the preceding paragraphs with respect to subsections 105(1) and 246(1) would not be different in the case of a discretionary trust with respect to the attribution of income. On the other hand, in a situation where the income of the discretionary trust is not payable and is not allocated to income beneficiaries, one would also have to consider all the relevant facts to determine whether and how the allocation rules apply.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch