| 19(1) | File No. 5-9697 |
| D.S. Delorey | |
| (613) 957-3495 |
April 19, 1990
Dear Madam,
This is in reply to your letter of February 22, 1990 and further to our telephone conversation (Delorey/19(1)) on March 29, 1990 concerning a designation by a trust under subsection 104(13.1) of the Income Tax Act (the "Act").
You cite an example of a trust that has two beneficiaries who share equally in the income of the trust, the trust's income for the year is $10,000, the trust has deducted only $5,000 and wants to make a subsection 104(13.1) on behalf of only one beneficiary. In such a situation, you have concluded that double taxation will occur to a certain extent unless D of the formula in subsection 104(13.1) can be read to mean the amount deducted by the trust in respect of the particular beneficiary.
Our Comments
It is our view that D of the subsection 104(13.1) formula refers to the total amount deducted for the year by the trust under subsection 104(6) of the Act. Thus in the above situation D of the formula would be $5,000.
As indicated in the Department of Finance's Explanatory Notes issued in June 1988, it was not intended that a subsection 104(13.1) designation be made for only one of two or more income beneficiaries. Rather, its purpose was to provide a mechanism for a trust to designate to all its beneficiaries their respective shares of that portion of the trust's actual income distributions that was not deducted by the trust in computing its income for the year. It is our view that the application of the formula to the situation described above will produce a result that is in accord with this stated intent. That is, of the $5,000 not deducted by the trust, $2,500 would be allocated to each beneficiary. The result is that the trust would be taxable on $5,000 and each beneficiary would be taxable on $2,500.
With respect to a second issue raised during the above-mentioned telephone conversation, it is our view that where an income beneficiary has agreed to bear the burden of a trust's tax liability arising out of a subsection 104(13.1) designation, the payment of the taxes by the beneficiary will not in and of itself result in either a contribution to the trust for the 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 be equal to the taxes payable by the trust on income that would have been received or receivable by the beneficiary but for the designation. The payment may be made either by
(a) reimbursing the trustee,
(b) giving the trustee a cheque made payable to the Receiver General, or
(c) receiving a net amount from the trustee; i.e., an amount equal to the beneficiary's share of the income of the trust less his share of the taxes.
The above comments are an expression of opinion only and are not binding on the Department, as explained in paragraph 24 of Information Circular 70-6R. We trust however that they are of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate