Scenarios (a) and (b)
A resident trust receives a deemed dividend under s. 84(3) on a cash redemption of shares of a wholly-owned Canadian corporation, or under s. 84(2) on a winding-up of the corporation, and then distributes that cash amount as a capital distribution in the same year.
After noting that the fact that the distribution was paid in the year did not establish (e.g., under s. 104(24)) that it was payable for the purposes of s. 104(6), and that “[i]f the amount cannot be paid in accordance with the terms of the trust and the relevant trust law, the amount cannot be considered to have become payable for the purposes of subsections 104(6) and (13),” CRA indicated:
Provided the cash received as consideration from the redemption or winding-up was paid to the capital beneficiary in accordance with the terms of trust and the applicable trust law, the deemed dividend became payable to the beneficiaries for the purposes of subsections 104(6) and 104(13) … .
Scenarios (c) to (f)
In these Scenarios, the corporation instead increases the stated capital of its shares, resulting in a s. 84(1) deemed dividend, or is deemed under s. 91(1) to receive foreign accrual property income from a controlled foreign affiliate. The distribution in that year by the trust of such “phantom income” occurred pursuant to a clause in the trust deed granting the trustee the power to use other assets of the trust to distribute the deemed income (Scenarios (c) and (e), respectively), or occurred without such a clause (Scenarios (d) and (f), respectively).
CRA stated:
[W]here an amount included in the taxable income of a trust is not recognized as income or capital for trust law purposes (referred to as “phantom income”), the terms of the trust must specifically permit an amount equivalent to the phantom income to be paid or payable or, alternatively, provide the trustees with the discretion to pay out or make payable amounts that are defined as income under the Act in order for the phantom income to become payable to any beneficiary.
It indicated that this test was satisfied in Scenarios (c) and (e), but not in Scenarios (d) and (f).