Principal Issues: [TaxInterpretations translation] 1. A trust has different features with respect to the allocation and payment of the income and capital of a trust based on the age of certain beneficiaries. Do these features have an impact on whether the conditions of subsection 104(18) of the Act are satisfied?
2. Request for information on our position of paying expenses for the benefit of a minor beneficiary.
3. Do we have a position on the tax consequences of amendments to a trust indenture?
Position: 1. Certain features could prevent compliance with the conditions such as the discretion to determine the amount of non-payable income that goes to the children, the trustee's discretion to distribute the capital if the capital includes the children's vested income account and the trustee's discretion with respect to the allocation of non-payable income among the children. On the other hand, other features would not, in and of themselves, preclude the application of subsection 104(18), such as the trust becoming discretionary once all the beneficiaries have attained 21 years of age or the trustee's discretion as to the timing of the payment of the children's vested income account.
2. The position set out in Income Tax Technical News No. 11 is still valid for determining whether income is considered paid or payable where payments have been made to a third party for the benefit of a minor child and can be applied, with the necessary adaptations, to a non-discretionary trust. This position applies to expenses incurred for the child even if the parents otherwise have a parental obligation in respect of that expense. Examples of expenses covered by the position are tuition for the education of a minor child and fees for a summer camp attended by the minor child.
3. We do not have a general position with respect to amendments to a trust indenture.
Reasons: 1. The fact that the trustee has discretion to determine the amount of income that has not become payable in a year results in the entitlement to the portion of the income that has not become payable being vested in a child by reason of the exercise or failure to exercise discretion, thereby preventing the application of subsection 104(18) of the Act. The entitlement of a recipient who has not attained 21 years of age to his or her share of unpaid income must be vested and the entitlement to that amount must not be subject to any future conditions other than the condition that the recipient live to an age not exceeding 40 years.
2. Income Tax Technical News No. 11.
3. A review of the relevant facts and documents is required.
XXXXXXXXXX Sylvie Labarre, CA
2004-010000
November 1, 2005
Dear Sir,
Purpose: Trust for the benefit of minors
This is further to your letter of October 20, 2004, in which you requested our opinion regarding certain features of an inter vivos trust with minor children as beneficiaries. We apologize for the delay in responding to this request.
You described the following situation:
- an inter vivos trust has, as beneficiaries, a Canadian-controlled private corporation, the trustee's spouse and two minor children: one 17 years old and one 12 years old;
- the trust holds all of the common shares of a small business corporation
- the trust was established in Quebec; and
- the trustee deals at arm's length with the settlor of the trust.
You listed the characteristics of the trust with respect to the distribution of income, accumulation in vested income accounts and distribution of capital, which change with the age of the children. Those features are as follows:
(a) For any taxation year of the trust prior to the year in which either child attains 18 years of age, each child shall have an equal share in the income of the trust, other than income that is paid or has become payable to any other beneficiary in the same year under the provisions of the trust.
Any amount that is part of the vested portion of a beneficiary's eligible income under the preceding paragraph is part of such beneficiary's vested income account. The civil and tax income produced by a beneficiary's "vested income account" established while the beneficiary was under 21 years of age shall be part of the beneficiary's vested income account.
No beneficiary shall receive any income or capital from the trust, or obtain the use thereof, until he or she has attained the age of 18 years, except in the event that the trust is terminated by winding-up or otherwise.
(b) All of the net annual income of the trust (other than income that is paid or has become payable to another beneficiary in the year) vests in either or both of the children for the fiscal period of the trust in which either such beneficiary attains 18 years of age and for the two succeeding fiscal periods of the trust.
(c) Thereafter, commencing at the time either child attains 21 years of age in a fiscal period of the Trust, the net income of the Trust shall be paid to him or her less any income earned, paid or payable to either beneficiary in the same fiscal period.
(d) When the children currently benefited have attained 21 years of age in any fiscal period of the trust, the trust shall thereafter be discretionary, both as to distribution and as to whether or not to pay the net annual income of the trust, and the trustee may thereafter, in his or her sole discretion, and without being bound by the rules of impartiality, elect the beneficiary or beneficiaries from among those designated in the trust indenture and determine their share, except that any amounts paid into the vested income account of a beneficiary shall vest in the beneficiary. The trustee may modify or revoke such decision for the purposes of the trust.
The trustee further has the power, in his or her sole discretion, to distribute to the beneficiaries, or any of them, all or any part of the principal of the trust. The trustee must accumulate and add to the principal of the trust all net income therefrom which has not been distributed.
Furthermore, the trust deed also provides that the trustee may pay all expenses for the maintenance, support and education of the child beneficiaries from the time the trust is established, notwithstanding any parental support obligation.
Questions
1. You wish to know whether, as a result of the above features, the conditions for the application of subsection 104(18) of the Income Tax Act (the "Act") are satisfied. In addition, one of your questions relates to the presentation in the financial statements of the "earned income account" provided for in those features.
2. You also asked as to whether the trustee can pay the vested income account to a beneficiary who has attained 18 years of age without violating the conditions of subsection 104(18).
3. In addition, you are seeking information regarding the payment by the trustee of maintenance, living and educational expenses.
4. Finally, you wish to know our position with respect to amendments to a trust indenture and the tax consequences thereof.
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 (the "CRA") not to issue a written opinion regarding proposed transactions otherwise than by 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.
You indicated in your letter that before one of the children turns 18, the children own a share of the trust income that has not been paid or become payable to another beneficiary during the year under the provisions of the trust. We do not know whether the provisions of the trust specifically provide for the share of income that will be payable or paid to other beneficiaries or whether the provisions of the trust provide that the trustee has some discretion to determine those amounts. If the trustee has discretion to determine the amounts that are paid or become payable to other beneficiaries, the trustee has discretion to determine the portion of the amount of trust income that has not become payable in a year that is earned by a child. In our view, such discretion would result in the right under paragraph 104(18)(c) being acquired by reason of the exercise or non-exercise of a discretionary power. Therefore, the conditions for the application of subsection 104(18) would not be satisfied.
The same would be true if such discretion exists for the period when either or both of the children turn 18 until they turn 21. On the other hand, if this is not the case, it is not clear whether the share of income not payable to another beneficiary that goes to each of the children during that period is determined at the discretion of the trustee or whether the child who is 18, 19 and 20 (as the case may be) is entitled to all of the income not payable to beneficiaries other than the children. If, for that period, the share of income not payable to another beneficiary that goes to each of the children is determined at the discretion of the trustee or another person, subsection 104(18) would not apply for that period because of paragraph 104(18)(c).
It is also our understanding from your letter that once one child is under 21 years of age and the other child has attained 21 years of age, all of the income not payable in the year will be vested in the beneficiary who is under 21 years of age. Thus, as with the first period, if any discretion exists to determine either the portion of the amount of income that did not become payable that would vest in the child under 21 or the portion that did become payable, the conditions of subsection 104(18) of the Act would not be satisfied.
In order for subsection 104(18) of the Act to apply, the minor beneficiary's entitlement to that child’s share of unpaid income must be vested and the entitlement to that amount must not be attributable, directly or indirectly, to the discretion of any person or subject to any future condition, other than the condition that the beneficiary live to an age not exceeding 40 years.
You indicated in your letter that the trustee has a discretionary power to distribute all or part of the trust capital to the beneficiaries. That feature could prevent compliance with the conditions for the application of subsection 104(18) (such as those set out in the previous paragraph) if the capital subject to discretion as to its distribution includes the vested income accounts of minor beneficiaries. If the capital subject to the discretion of the trustee or other person does not include the vested income accounts of the minor beneficiaries, the discretion of the trustee would not, in and of itself, prevent the application of subsection 104(18).
Subsection 104(18) will not apply in respect of any portion of the trust's income in a year in which all of the beneficiaries turn 21. Consequently, the trust will not have to comply with the condition in paragraph 104(18)(c) once the beneficiaries turn 21 and, for the year in which all of the beneficiaries turn 21 and subsequent years, the trust will be able to become discretionary with respect to both the allocation and payment of income in each of those years, without causing subsection 104(18) problems for the earlier years.
The conditions of subsection 104(18) may be satisfied even if the trust indenture contains provisions to the effect that the trustee has discretion as to the timing of the payment of income to a beneficiary who is under 21 years of age or of the accumulated income vesting in that beneficiary. Similarly, the trustee will be able to pay to a beneficiary who has attained 18 years of age, without running afoul of the conditions in subsection 104(18), all or part of the accumulated income earned by that beneficiary.
It is not our mandate to provide interpretations on financial statement presentation. However, it appears to us that provided that the accumulated income account is not payable to the recipient within the meaning of subsection 104(24), there would be no legal obligation to pay the account at the end of a particular year.
Payment of a minor's expenses
According to the information you provided, there are provisions in the trust indenture that allow for the payment by the trustee of amounts to third parties for the benefit of the minor beneficiaries. Those amounts would be paid, inter alia, for the maintenance, support and education of the minor beneficiaries. First, you asked whether amounts paid for the benefit of a minor are paid out of the accumulated income that arose over the years or whether they are considered to be a payment of a portion of the income for the particular year to which the minor is entitled. In order to answer such a question, the CRA would have to review the documents relevant to that determination including the provisions of the trust indenture.
If, under the provisions of the trust indenture (or pursuant to the exercise of the trustee's discretion, where applicable), a payment to a minor beneficiary is made in a year in satisfaction of a portion of that child's vested accumulated income that has accrued in prior years, the amount paid to the third party would not be a payment of a portion of income for the particular year for the purposes of subsections 104(6), (13) and (24). That payment would not affect the application of subsection 104(18).
If, under the provisions of the trust indenture (or pursuant to the exercise of the trustee's discretion where applicable), the amount for the benefit of a minor beneficiary is paid out of the trust income for the year to which the minor beneficiary is entitled, it should be determined whether that portion of the trust income is payable to that minor beneficiary for purposes of subsections 104(6), (13) and (24). The position in that regard set out in Income Tax Technical News, No. 11 is still valid. The purpose of this position is to determine whether income has been paid to the beneficiary when it has been paid to a third party so that the income is considered to be payable pursuant to subsection 104(24) of the Act. 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.
By virtue of that position, in order for an amount to be considered payable to the minor for the purposes of subsections 104(6), (13) and (24), it must, inter alia, be reasonable to consider that the amount paid was for an expense incurred for the child: for example, living expenses, child support, child care expenses, school fees, and any amount incurred for the enjoyment and development of the child, including basic necessities. The expenses covered by our position therefore 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.
Furthermore, you gave us some examples of expenses that could be paid by the trust and asked whether the position outlined in Income Tax Technical News, No. 11 would apply to them. 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. If the acquisition of the car is not for the benefit of the minor child, the CRA will not consider the amount of the expense to be an amount paid to the child. Under that assumption, the amount would not be deducted by the trust and would not be included in the child's income. However, if the person who receives the benefit is not an income beneficiary of the trust, the amount would be included in that person's income pursuant to subsection 105(1).
If the amount is payable to the minor beneficiary in accordance with the position published in Income Tax Technical News, No. 11 (with the necessary adaptations if the trust is not a discretionary trust), it will obviously not form part of the portion of the amount that is not payable referred to in subsection 104(18). In that regard, the amount paid for the benefit of the minor will not affect the amount deemed payable pursuant to subsection 104(18).
Modification of the trust
The CRA has not taken a general position with respect to amendments to a trust indenture. A review of the relevant facts and documents in a particular situation is almost always necessary to determine whether amendments to a trust agreement give rise to tax consequences such as the disposition of trust property or the disposition by a beneficiary of the beneficiary’s interest in the trust.
However, we are of the view that an amendment that is essentially administrative in nature and does not change the rights of beneficiaries generally has no tax consequences.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch