| 19(1) | 5-9105 |
| D.S. Delorey | |
| (613) 957-3495 |
December 1, 1989
Dear Sirs
Re: Designations Under Subsections 104(13.1) and (13.2) of the Income Tax Act (the "Act") and Qualifying Spouse Trusts
This is in reply to your letter of November 15, 1989 requesting our views as to whether or not a designation under subsection 104(13.1) or (13.2) of the Act could result in the tainting of what would otherwise be a qualifying "spouse trust" described in paragraph 70(6)(b) of the Act.
Where a subsection 104(13.1) or (13.2) designation is made by a trust and the trust pays the resulting tax liability out of trust income, rather than out of trust capital, the requirement in subparagraphs 70(6)(b)(i) and 104(4)(a)(iii) of the Act would not be met. However, as stated in paragraph 10 of Interpretation Bulletin IT-305R3, the "trust income" for the purposes of those subparagraphs is described in subsection 108(3) of the Act to exclude amounts that are income for income tax purposes but not for trust purposes (e.g., taxable capital gains). Thus, payment of the taxes out of taxable capital gains of the trust would not in and of itself preclude the trust from qualifying under paragraph 70(6)(b) as a spouse trust. Also, as indicated in paragraph 7 of IT-305R3, payment of the taxes out of trust income would not affect the status of a previously qualified spouse trust. It may, however, bring into play other provisions of the Act such as subsections 106(2) or 107(4).
As you note in your letter, the preamble to subsection 108(4) of the Act limits its application to subparagraphs 70(6)(b)(ii), 73(1)(c)(ii) and 104(4)(a)(iv) of the Act. We therefore agree with your view that the exception in paragraph 108(4)(b) of the Act would not apply for the purposes of subparagraph 70(6)(b)(i) of the Act.
The above comments reflect only expressions of opinion which, as stated in paragraph 24 of Information Circular 70-6R, are not binding on the department. We trust however that they will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate