Principal Issues: The only asset of a trust is an Excluded Debt (i.e. a debt obligation of a mutual fund corporation or a corporation the shares of a class of the capital stock of which are listed on a designated stock exchange or a mutual fund trust). Whether the CRA can confirm that the interest income earned by the trust on the Excluded Debt, distributed to a beneficiary who is a specified individual and included in his/her income under 104(13) would be considered to be split income?
Reasons: Subsection 108(5) states that except as otherwise provided in Part I of the Act, nothing in this subsection shall affect the application of section 120.4, which means the amounts allocated by the trust do retain their character. Under paragraph (d) of the definition of split income, an amount of interest distributed by a trust to a beneficiary who is a specified individual would not be split income if the income is earned on an Excluded Debt held by the trust, because the amount was received by the specified individual in respect of an Excluded Debt.
Position: The interest income would not be split income of the specified individual.
FEDERAL TAX ROUNDTABLE OCTOBER 7, 2019
2019 APFF CONFERENCE
Question 15: Split income and interest income
The definition of "split income" in subsection 120.4(1) excludes, by virtue of paragraph (d)(i) thereof, an amount included in computing the individual's income for the year to the extent that the amount is in respect of a debt obligation that (i) is of a mutual fund corporation or mutual fund trust or (ii) of a corporation the shares of which are listed on a designated stock exchange ("Excluded Debt").
Questions to the CRA
If the sole asset held by a trust is an Excluded Debt and the trust pays to an individual, as a beneficiary of the trust, the interest earned by the trust on the Excluded Debt, can the CRA confirm that the amount included in the individual's income for the year under the provisions of subsection 104(13) is in respect of an Excluded Debt for the purposes of the definition of "split income" in subsection 120.4(1)? If not, could the CRA confirm under what circumstances this exception could apply?
CRA Response
By virtue of paragraph 108(5)(a), except as otherwise provided in Part I of the Income Tax Act, an amount included in computing the income for a taxation year of a beneficiary of a trust under subsection 104(13) or (14) or section 105 shall be deemed to be income of the beneficiary for the year from a property that is an interest in the trust and not from any other source. However, the post-amble of subsection 108(5) specifies that nothing in that subsection shall affect the application inter alia of subsection 120.4. Thus, for the purposes of section 120.4, the character of the amounts allocated by a trust will be maintained.
Paragraph (d) of the definition of "split income" in subsection 120.4(1) provides that an amount included in computing the income of a specified individual for a year is split income to the extent that the amount is in respect of a debt obligation that is of a corporation (other than a mutual fund corporation or a corporation shares of a class of the capital stock of which are listed on a designated stock exchange), partnership or trust (other than a mutual fund trust) and that is not a debt obligation described in subparagraph (d)(ii) of that definition.
The wording of the preamble to paragraph (d) of the definition of "split income" in subsection 120.4(1) includes the words "in respect of", which are very broad in scope. We are of the view that this subsection can apply to an amount of interest received from a trust and included in computing the income of a specified individual, to the extent that all other conditions for application of that paragraph are satisfied. However, where the amount of interest is in respect of an excluded obligation held by a trust, such amount does not constitute split income of a specified individual.
Yvon Beaudoin
(514) 496-6688
October 11, 2019
2019-081274
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 See in this regard Nowegijick v. The Queen, [1983] 1 S.C.R. 29.