Dear Sirs:
Re: Subsections 104(13.1) and (13.2) of the Income Tax Act (the "Act")
This is in reply to your letter of August 1, 1991 wherein you requested the Department's policy regarding the application of the above mentioned subsections of the Act.
You are concerned that the payment of a trust's tax liability arising as a result of a subsections 104(13.1) or (13.2) of the Act designation may adversely affect the status of the trust if it is a testamentary trust or an inter-vivo trust described in subsection 122(2) of the Act or may prevent the trust from qualifying as a "spousal trust" described in subsection 70(6) of the Act.
Whether or not the above results occur where a trust's tax' liability arising out of a subsection 104(13.1) or (13.2) designation has been paid cannot definitively be determined without first reviewing the particular trust documents. Such a review would be made by the relevant district taxation office in respect of an existing situation, or this office where the designation in the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R. Nevertheless, we offer the following general comments with respect to the issues raised in your above mentioned letter.
It is our view that a subsection 104(13.1) or 104(13.2) designation will not in and of itself affect the status of a trust described in paragraphs 70(6)(b) or 104(4)(a) of the Act (i.e., a spousal trust), whether the trust's tax liability arising out of the designation is paid by the trust or the relevant beneficiary.
Where an income beneficiary has agreed to bear the burden of a trust's tax liability arising out of a subsection 104(13.1) or (13.2) designation, it is our view that the payment of the tax by the beneficiary will not in and of itself result in either a contribution to the trust for purpose of subparagraph 108(1)(i)(ii) of the Act or a gift to the trust for the purpose of paragraph 122(2)(d) of the Act. The amount paid by the beneficiary must equal the taxes payable by the trust on income deemed not to have been paid or payable to the beneficiary by virtue of the designation. The payment may be made by one of the following methods:
a. reimbursing the trustee;
b. providing a cheque made payable to the taxing authority; or
c. receiving a net amount from the trustee reflecting the beneficiary's share of the income of the trust less the relevant taxes payable by the trust.
A beneficiary of a trust should receive a duly completed T3 Supplementary for each fiscal year end of the trust for the full amount of the trust's income that is allocated or designated to the beneficiary which is in accordance with the trust documents less any amount designated under subsections 104(13.1) or (13.2) of the Act.
With regards to your last query, as to whether the tax effect would be different than that described above if the taxes were paid by the trust out of trust capital, it is the Department's opinion that a capital payment by the trust under the conditions described in and by itself would not produce an immediate tax effect.
We trust that our comments will be of assistance to you.
Yours truly,
for DirectorManufacturing Industries,Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch