| 7-922555 | |
| Franklyn S. Gillman | |
| 957-9768 |
September 22, 1992
A. ShieldsMerchandising, Manufacturing DirectorPartnerships and Trusts SectionHamilton District Office
Attention: Len Coughlan
Business Files Audit
19(1)
This is in reply to your memo of August 21, 1992 wherein you requested whether the issuance by the Trust of 24(1) promissory notes to the Trust beneficiaries was sufficient to shift the capital gains realized by the Trust in its 24)1( taxation year to the 24(1) beneficiaries?
Facts 24(1) 24(1)
Following a review of the Trust documents, it is our understanding that we are dealing with a total discretionary trust, where the Trustees have the ability to encroach upon the trust capital for the benefit of the beneficiaries and allocate Trust income or capital in any proportion and for any amount that the Trustees in their discretion consider advisable. The 24(1) beneficiaries of the Trust are both income and capital beneficiaries.
Rulings Opinion
The Department's view is that a promissory note that is payable upon demand without allowing any delay in payment is sufficient to demonstrate that an amount is payable for purposes of subsection 104(13) of the Act.
As a further commentary, in a situation such as this where :
A. The beneficiaries participate in both the capital and income of the trust,
B. The trust is a discretionary trust,
C. The terms of the trust are such that the trustees may encroach (in their discretion) upon the capital of the trust in favour of all the beneficiaries, and
D. There is no mention in the terms of the trust as to whether taxable capital gains are to be treated as income or capital for trust purposes, a taxable capital gain may be allocated to any or all of the beneficiaries of the Trust. This is due to the discretionary power of encroachment on the trust capital by the trustees. The encroachment on the capital, that was made in favour of the 24(1) beneficiaries is income to them pursuant to subsection 104(13) of the Act and therefore deductible by the Trust pursuant to subsection 104(6) of the Act.
for DirectorManufacturing Industries, Partnership and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch