| July 27, 1989 | |
| Assessing & Enquiries | Ruling Directorate |
| Directorate | Financial Industries Division |
| Returns Processing Division | F. Francis |
| 957-3496 | |
| J.M. Legault | |
| Director | File No. 7-4117 |
RE: PART XII.2 Tax
This is in reply to your memorandum of July 10, 1989, wherein you requested a technical interpretation of subsection 210.3(1) of the Income Tax Act (the "Act") in the following situation:
- A trust has 2 non-resident beneficiaries and 4 resident beneficiaries. The trustee makes an income distribution to the resident beneficiaries but does not make an income distribution to the non-resident beneficiaries.
- The taxpayer contends that the trust will be liable for tax under Part XII.2 of the Act.
It is your understanding that Part XII.2 tax is only applicable when, among other requirements, an income distribution is made to a designated beneficiary. You refer to the comments contained in the Explanatory Notes to legislation dated June 1988 wherein it states that Part XII.2 tax is not payable by a trust where the trustee certifies that none of the income distributions of the trust was made to designated beneficiaries.
It should be noted that subsection 210.3(1) of the Act clearly states that no tax is payable by the trust where the trustee has certified that no beneficiary was a designated beneficiary. We confirm your position that a designated beneficiary may exist notwithstanding that an income distribution was not made to him in the year. As a consequence thereof, the above-noted trust would be liable for tax under subsection 210.2(3) of the Act since the trust has two designated beneficiaries. Furthermore, provided the trust makes the designation under subsection 210.2(3) of the Act, the amount of the tax paid would be refunded to the non- designated beneficiaries.
21(1)(A)
The Department of Finance has indicated that they may consider amending the provisions under subsection 210.3(1) of the Act if it can be demonstrated that the existing legislation results in hardship of taxpayers.
We therefore suggest that you follow the matter up with the Department of Finance.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate