Principal Issues: [TaxInterpretations translation]
For taxation years before 2000, is a beneficiary resident in Canada who receives a portion of the capital gain realized on the sale of an asset of a non-resident personal trust taxed on that portion pursuant to paragraph 104(13)(c) of the Act?
Position:
The portion of the proceeds of disposition distributed in the same year that represents the taxable capital gain for Canadian tax purposes is not considered to be a capital distribution amount and would be taxable under 104(13)(c).
Reasons:
The income of a trust for the purposes of subsection 104(13) is the income of the trust as computed for Canadian tax purposes. Paragraph 104(13)(c) does not refer specifically to the trust's income. However, we are of the opinion that the expression “distribution of capital” used in subparagraph 104(3)(c)(ii) must be interpreted as being a distribution that is not a distribution of income, that is, a distribution of amounts that would not constitute income of the trust calculated for Canadian tax purposes.
November 1st, 2000
Laval Tax Services Office Headquarters 3131 St-Martin Blvd. West Sylvie Labarre, CA Laval QC H7T 2A7 (613) 957-8953
Attention: André Turgeon 2000-004384
Distribution by a non-resident trust
This is in response to your fax dated August 22, 2000 regarding the taxation of a Canadian beneficiary of a non-resident personal trust when the beneficiary receives a portion of the capital gain realized on the sale of an asset of the trust in the same taxation year.
You have submitted to us an opinion given by a chartered accountant regarding the Canadian and U.S. tax consequences to a Canadian beneficiary of the distribution of all or part of the proceeds of disposition of a property sold in the year. This opinion concerns the tax consequences for years prior to 2000.
According to this opinion, subparagraph 104(13)(c)(ii) of the Income Tax Act (the “Act”) would apply to the distribution so that the Canadian beneficiary would not include any amount in income in respect of that distribution. According to this view, the capital gain is considered to be added to the capital of the trust under the law governing trusts in most of the United States and does not form part of the income of a trust under that same law unless the trust indenture provides otherwise. For that reason, according to the accountant, the distribution would be a distribution of capital.
The example referred to in this opinion involves the distribution of a portion of a capital gain. In that situation, the accountant indicated that the beneficiary would not be taxed in Canada for two reasons: the beneficiary is entitled to receive the capital of the trust according to the legal definition of that term but is not entitled to receive the income, and in the year of the distribution, the trust has no income according to the principles of the law governing trusts.
You asked whether this opinion represents the position of the Canada Customs and Revenue Agency (CCRA) for years prior to 2000.
Our Comments
For the purposes of these comments, we have assumed that section 94 does not apply in this situation. A definitive determination of the tax consequences of a particular situation would require a review of all the relevant facts and documents, including the trust indenture. However, we can offer the following comments regarding the interpretation of subparagraph 104(13)(c)(ii) of the Act.
For taxation years prior to 2000, paragraph 104(13)(c) applied to all amounts that became payable in the year by a non-resident trust to the beneficiary in respect of the beneficiary's interest in the trust, otherwise than as proceeds of disposition of the beneficiary's interest or part thereof or an amount paid as a distribution of capital by a personal trust.
The income of a trust for the purposes of subsection 104(13) is the income of the trust as computed for Canadian tax purposes. Paragraph 104(13)(c) does not refer specifically to the income of the trust. However, we are of the view that the expression “distribution of capital” used in subparagraph 104(3)(c)(ii) must be interpreted as being a distribution that is not a distribution of income, that is, a distribution of amounts that would not constitute income of the trust computed for Canadian tax purposes. Consequently, we are of the view that the portion of the proceeds of disposition of the asset that would represent the taxable capital gain realized by the trust on the disposition of the asset and that was distributed to the Canadian beneficiary in the same year as it was realized, would be considered to be an amount that became payable on a distribution of the trust's income and not on a distribution of capital. That amount would be taxed pursuant to paragraph 104(13)(c).
We hope you find these comments helpful. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
Marc Vanasse, CA
for the Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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