Principal Issues: Where a trust is deemed to have received a dividend by virtue of subsection 84(2) and the trust indenture does not provide a definition of “income” that would include a deemed dividend as determined under the Act, whether such deemed dividend can be deducted in computing the income of the trust under subsection 104(6)?
Position: Question of fact.
Reasons: Where the terms of the trust indentures are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend under subsection 84(2), a deduction under paragraph 104(6)(b) will generally be allowed if the trustee exercises his power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in return of his or her capital interest in the trust.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 2
Spousal trust and availability of subsection 104(6)
Facts
- In 2015, Mr. X died and left a legacy of all the shares of Canco Investments to a spousal trust for Mrs. X.
- In 2017, Mrs. X died.
- Mr. X's will provided that on the death of Mrs. X, the residue of the trust was to be divided equally between the two children of Mr. and Mrs. X.
- Mr. X's will did not provide any extended definition of "income".
- Canco Investments and the spousal trust for Mrs. X have no loss carryforward so that the conditions for making an election under subsection 104(13.1) will not be satisfied.
- The only asset of Canco Investments for more than five years has been a GIC.
Proposed Transactions
- In the 2017 taxation year of the trust ending on the death of Mrs. X, the trust will be taxable on the capital gain realized on the deemed disposition of the shares of Canco Investments. No election will be made to have the gain be taxable in the hands of Mrs. X.
- Canco Investments will then be wound-up. The winding-up will result in a taxable deemed dividend, that is an ineligible dividend, to the trust as well as a capital loss.
- The trust will claim the carry-back of the capital loss against the capital gain realized in the previous taxation year.
- It is in the best interests of the beneficiaries (the children) to be taxable on the deemed dividend rather than it being taxable in the trust.
Questions to the CRA
(a) Assuming that the beneficiaries have an indefeasibly vested right to the capital and income of the trust subsequent to the death of Mrs. X, can the trust obtain a deduction under subsection 104(6) in light of the position of the Ministry in Technical Interpretation 2007-0259841E5 (footnote 1) and the fact that Mr. X’s will did not provide any extended definition of “income” in order to qualify the deemed dividend as “income in its civil or common law sense?
b) Would the response be different if the beneficiaries did not have an indefeasibly vested right to the capital and income of the trust so as for the trustees to be required to pay the deemed dividend in order to obtain a deduction under subsection 104(6)?
CRA Response
The situation set out in Technical Interpretation 2007-0259841E5 above differs from that stated in your question. Therefore, we will not consider that interpretation as part of our response. We are, however, prepared to provide the following general comments, which may be helpful to you.
In general, paragraph 104(6)(b) provides that such amount as the trust claims not exceeding the portion of its income for the year that became payable to a beneficiary may be deducted in computing the income of the trust for a taxation year. Subsection 104(24) stipulates inter alia that for the purpose of subsection 104(6), 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.
It should be noted that the income of a trust pursuant to paragraph 104(6)(b) is its income for tax purposes, which includes a deemed dividend under subsection 84(2). Furthermore, in order to determine whether a beneficiary is entitled to a payment within the meaning of subsection 104(24), reference must be made to the trust indenture and the principles of civil law or common law applicable in the particular situation.
The questions of whether a deemed dividend pursuant to subsection 84(2) is income of the trust and whether the income became payable to a beneficiary in the year pursuant to paragraph 104(6)(b) are questions of fact and law that can only be resolved after a thorough examination of all the facts, actions, circumstances and relevant documents surrounding each situation.
In a situation such as that stated in your question, if the terms of the trust indenture are such that the trustee may pay or make payable to the beneficiary an amount equal to a deemed dividend for the purposes of subsection 84(2), we will generally allow a deduction by virtue of paragraph 104(6)(b) in respect of that deemed income. However, this deduction will be permitted to the extent that the trustee exercises this power irrevocably and unconditionally before the end of the trust's taxation year and the amount equal to the deemed dividend is not paid or made payable to the beneficiary in satisfaction of the beneficiary’s interest in the capital of the trust.
Marie-Claude Routhier
(613) 670-8921
5 October 2018
2018-076890
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 CANADA REVENUE AGENCY, Technical Interpretation 2007-0259841E5, 7 October 2009.