| June 21, 1990 | |
| Appeals and Referrals Division | Financial Industries Division |
| W.M. Lynn | D. Duff |
| Acting Director | (613) 957-3498 |
| Attention: M.S. Lalonde | File No. 900957 |
SUBJECT: Canadian Residents in Receipt of U.K. Trust Income
At the request of Christine Savage, Acting Director, Provincial and International Relations Division, we are writing to you regarding the above mentioned issue as discussed in her memorandum to you of May 29, 1990.
Because the U.K. Trust was taxed on its income before distributing it to the beneficiaries you were concerned that the Canadian resident beneficiary 19(1) may be receiving a non-taxable capital distribution. It is a question of fact whether a beneficiary has a capital or income interest in a trust. From the information provided 24(1) The fact that the trust has previously been taxed on this income is not relevant in this determination.
The Income Tax Act provides a deduction for Canadian resident trusts if their income is paid or payable to a beneficiary. As a result this income is not taxed in the trust but is taxed in the hands of the beneficiary. If it is not paid or payable to a beneficiary it is taxed in the trust and forms part of the trust capital. When it is subsequently paid to a beneficiary it is not subject to tax. Although income taxed in the trust will form part of the trust capital, it does so, not because it was taxed, but because it was not paid or payable to a beneficiary. Trusts resident in the U.K. do not get the deduction for amounts paid or payable to beneficiaries but this will not convert such amounts from income to capital.
Regarding the other issues, we had written directly to 19(1) on May 10, 1983 (copy enclosed) explaining our position regarding the treatment of such income. As explained therein, and as explained in the memorandum from K.B. Harding of November 9, 1982, the income retains its identity and flows through a U.K. resident trust. The beneficiary reports the gross amount as income and calculates a foreign tax credit based on the amount of tax paid by the trust, to the extent it is not refunded by Inland Revenue.
We trust our comments will be of assistance.
for DirectorFinancial Industries DivisionRulings Directorate
c.c. Christine SavageActing DirectorProvincial and InternationalRelations Division