| 19(1) | File No. 5-8476 |
| F. Francis | |
| (613) 957-3496 |
October 16, 1989
Dear Sirs:
This is in reply to your letter of August 2, 1989 wherein you requested our opinion in respect to the following situation:
- a Canadian resident individual is an income beneficiary of a non-resident testamentary trust
- Under the terms of the trust, the income of the trust is to be accumulated in the trust for 10 fiscal years of the trust.
- On the first day of the eleventh year, the accumulated income is to be paid out to the income beneficiary. The income for the eleventh and subsequent years is to be paid out to him annually thereafter.
- You have obtained an opinion that the accumulated income is not capital of the trust.
- The trust may or may not be subject to tax on the accumulating income. The preferred beneficiary election is not available.
- You have asked us to assume that sections 94, 94.1 and 245 of the Income Tax Act (the "Act") do not apply.
It is your opinion that the distribution of accumulated income is received as proceeds of a part disposition of the beneficiary's income interest in the trust. You therefore contend that no income would be included under subsection 104(13) of the Act because of the exclusion noted in subparagraph 104(13)(c)(i) of the Act and that subsections 106(2) and 106(3) of the Act would be applicable.
It is our opinion that the accumulation of income in the trust does not, in and by itself, result in the income beneficiary disposing of any part of his income interest in the trust. As a consequence thereof, the distribution of the accumulated income would generally be included in the beneficiary's income under subsection 104(13) of the Act except for any amount paid as a distribution of capital.
The same result would apply to an inter vivos trust except that an inter vivos trust which does not qualify as a personal trust under subsection 248(1) of the Act will not get an exclusion under subparagraph 104(13)(c)(ii) of the Act for amounts paid as a distribution of capital.
You further enquire as to whether the beneficiary could claim any income tax paid by the trust as a foreign tax credit under section 126 of the Act. It should be noted that the flow through provisions for foreign tax credits under subsection 104(22) of the Act are only operative for trusts resident in Canada.
We trust that the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate