| 19(1) | File No. 5-9413 |
| Maureen Shea-DesRosierss | |
| (613) 957-8953 |
January 26, 1990
Dear Sirs:
Re: Non-spousal trust
This is in reply to your letter of November 20, 1989 concerning the above-mentioned subject.
You describe the following situation:
A testator died prior to December 31, 1971 and left his wife a life interest in his estate with the Trustees directed to pay the "net annual interest income" to her. The Trustees have the right to encroach on capital for her benefit. Upon the death of the surviving spouse the residue of the estate is to be divided equally among the children of the deceased and should the children predecease the surviving spouse, their children would share in the residue.
The issue you raise is whether the Trustees can make a preferred beneficiary election to allocate gains among the spouse and residuary beneficiaries with respect to capital gains realized in the 1989 taxation year, assuming the surviving spouse is alive at the end of the trust taxation year.
Since the trust in question is not a "spousal trust" having been created prior to January 1, 1972, it is not subject to the provisions of paragraph 104(4)(a) of the Income Tax Act (the "Act") and it is your view that it could make a preferred beneficiary election in order to tax the capital gains (the accumulating income of the trust for the year) in the hands of the spouse and residuary beneficiaries.
The comments that follow are based solely on the points you raise in your letter and do not take into account your discussion with Mr. Eric Range of the Toronto District Office.
Our Comments
Since the trustees can currently encroach on capital for the spouse, it is our view that the spouse would fall within the provisions of paragraph 104(15)(c) of the Act in a taxation year in which a capital gain is realized by the trust (assuming that the trust does not otherwise provide that capital gains are to be treated as income for trust purposes). Accordingly, the spouse could elect on up to 100% the trust's accumulating income for the year. With respect to the children, it is our view that they are contingent preferred beneficiaries whose rights to accumulating income are not contingent upon the exercise or non-exercise of a discretionary power but rather on the death of another capital beneficiary. Accordingly, they would fall within the provisions of paragraph 104(15)(d) of the Act if the other beneficiary (the spouse) is alive at the end of the year. While these contingent preferred beneficiaries can elect pursuant to subsection 104(14) of the Act, the maximum amount that they can elect upon is NIL. As a practical matter, such an election would have no tax consequences.
The foregoing comments are an expression of opinion only and are not binding on the Department however, we trust they are of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate