| November 26, 1990 | |
| TORONTO DISTRICT OFFICE | RULINGS DIRECTORATE |
| Business Enquiries Group | F. Francis |
| Section 148-2-1 | 957-3496 |
| Attention: G. Cappella | 7-903155 |
SUBJECT: Trusts entitlement to Dividend Tax Credit on dividends flowing to non-resident beneficiaries
This is in reply to your memorandum of October 8, 1990 wherein you requested our views in respect of the following situation:
- a testamentary trust earned the following income during taxation year ending in 1989:
- 24(1)
- You state that line 41 on page 3 of the T3 return requires an addition of the gross-up amount of "Dividends retained by the trust" which you opine would be would be "NIL" In the above-stated situation. However, line 124 on Schedule 1 of the T3 requires the gross-up amount of "Dividends retained or NOT designated by the trust" to be used in the calculation of the dividend tax credit. Therefore it is your view that the trust would be entitled to a dividend tax credit in respect of the 24(1) dividends NOT designated by the trust notwithstanding that the gross-up amount is not included in net income of the trust.
- It is your opinion that the trust should not be entitled to a dividend tax credit for dividends flowing through to non- resident beneficiaries and you recommended that lines 122 and 123 of Schedule 1 be amended accordingly.
Note that the phrase "Dividends retained by the trust" as noted in line 41 on page 3 of the T3 will include the dividends that have not been designated under subsection 104(19) of the Act. By virtue of subsection 108(5) of the Act, dividends flowing through the trust to the non-resident beneficiaries lose their character and represent income from a property that is an interest in a trust. Consequently, the gross-up amount on the 24(1) dividends payable to non-resident beneficiaries will be included in the calculation of net income of the trust. It is therefore our view that the trust is eligible for the dividend tax credit under section 121 of the Act in respect of the gross-up amount included in computing trust income under paragraph 82(1)(b) of the Act.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate