Principal Issues: [TaxInterpretations translation] 1. What documents could demonstrate that an amount is payable to a beneficiary of a trust?
2. Can a trustee allocate a taxable capital gain to an income beneficiary and allocate the non-taxable portion of the capital gain to a capital beneficiary?
Position: 1. A resolution in writing signed by the trustees of a trust (or the minutes of a meeting of the trustees), by which the trustees confer an irrevocable right on a beneficiary of the trust to receive part of the income of the trust, is a means of establishing that the beneficiary has the right to enforce payment.
2. Yes, if the trust deed contains a specific clause that legally allows it to be paid in this way.
Reasons: 1. Previous position.
2. In the absence of a provision to the contrary in the trust indenture, capital gains realized by a trust are generally not part of "income" for civil law purposes. The CRA and the jurisprudence do not recognize clauses that give the trustees of a trust complete discretion in determining what constitutes capital or income. However, specific clauses that clearly provide that certain types of payments will constitute income to the trust are acceptable.
XXXXXXXXXX 2004-009366
September 30, 2005
Dear Sir,
Subject: General questions on trusts
This is in response to your request of September 1, 2004 for an opinion on various trust issues. We apologize for the delay in responding to your request.
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 not, however, apply to your particular situation in certain circumstances.
Question 1
For the purposes of your first question, you quoted the following comment by one of the justices of the Federal Court of Appeal in Sachs, 80 DTC 6291 in relation to the preferred beneficiary designation:
"...The authority to pay income to beneficiaries, in my opinion, 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 and to the exclusion of the possibility of their being deprived of it upon the happening of events referred to in the trust deed."
You asked how the trustee can designate or report an amount to a beneficiary so that it is considered by CRA to be payable to that beneficiary.
Our Comments
The issue in Sachs was whether subsection 104(14) of the Income Tax Act (the "Act") applied in a particular situation. The Federal Court of Appeal justice made the above comment in the context of the preferred beneficiary election. The CRA has not relied on these comments to establish a position with respect to the term "payable" as defined in subsection 104(24).
Subsection 104(24) deems an amount not to have become payable by a trust in a taxation year unless the trust paid it in the year to the beneficiary to whom it was payable or that beneficiary had the right in the year to enforce payment of it.
We have an indication in paragraph 8 of Interpretation Bulletin IT-286R2 of the type of document that might be appropriate to show that an amount, as income of a trust, becomes payable to a person when the trustee of the trust exercises discretion or when acting in accordance with the trust indenture. This paragraph reads as follows:
“…Any income allocation must be accompanied by a valid resolution or declaration of the trustees whereby the unit-holders acquire an irrevocable right to enforce payment. […] A clause in the trust agreement, conferring on the unit-holders a legal right to enforce payment of the trust's income in the year, would have the same result.”
It follows that 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.
Question 2
Paragraph 1 of Article 1282 of the Civil Code of Quebec states that the settlor may reserve the right to receive the fruits and revenues or even, where such is the case, the capital of the trust, even a trust constituted by gratuitous title, or share in the benefits it procures.
If the settlor leaves complete discretion to the trustee or a third party to determine the beneficiaries' shares of the income and capital of the trust, and the trustee or third party irrevocably determines the beneficiaries' interests in the trust in writing, you asked whether the CRA considers that the interests in the trust are not dependent on the exercise or non-exercise of discretion by any person from the time of the irrevocable determination by the trustee or third party. You also wonder what our response would be where the irrevocable determination of interests is made only for a specified period. Furthermore, you wish to know the conditions for the CRA to recognize the above written determination as valid.
Our Comments
We are unable to express an opinion on this issue as it does not relate to a specific provision of the Act. In a particular situation, all relevant facts and documents, including the trust deed and the writing in question, should be reviewed and, if necessary, our legal services should be consulted to determine whether a specific provision of the Act applies in that situation. Such document review and consultation is only done in the context of an audit of an actual situation or an advance ruling request. Furthermore, we do not give a legal opinion on the legality or validity of a document.
Question 3
A trust realizes a capital gain of $20,000. The trustee has the power to deem the taxable portion of any capital gain to be income of the trust. The determination of the trust's income and capital interests is in the sole discretion of the trustee.
You wish to know if the trustee can allocate the taxable portion of the capital gain to an income beneficiary and the non-taxable portion of the capital gain to a capital beneficiary.
Our Comments
Subsection 108(1) of the Act defines "income interest" as a right (whether immediate or future and whether absolute or contingent) of the taxpayer as a beneficiary under a personal trust to, or to receive, all or any part of the income of the trust. For the purposes of this definition, the income of a trust is its income calculated without reference to the provisions of the Act by virtue of subsection 108(3). It is therefore its income for civil law purposes.
Absent a provision to the contrary in the trust indenture, capital gains realized by a trust are generally not part of "income" for civil law purposes. With respect to a provision to the contrary to the trust indenture, the CRA and jurisprudence do not recognize clauses that give the trustees of a trust complete discretion in determining what constitutes capital or income. However, specific clauses that clearly provide that certain types of payments will constitute income to the trust are acceptable.
Thus, if such a specific clause legally allows for the taxable capital gain to be paid to an income beneficiary and the non-taxable portion of the capital gain to be paid to a capital beneficiary, the trustee could make the allocation described herein.
We hope that these comments will be of assistance, and best regards.
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Planning and Policy Branch