XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Request for a Technical Interpretation
This is in reply to your letter dated December 14, 1992, wherein you requested our comments regarding your interpretation of paragraph 104(15)(c) of the Income Tax Act (the "Act") and paragraph 2800(3)(f) of the Income Tax Regulations (the "Regulations") and the reasons for our views stated in paragraph 21 of Interpretation Bulletin IT-394R.
Based on the particular facts and circumstances described in your letter, it is your understanding that:
(1) the capital encroachment rights for one of the beneficiaries constitute discretionary power within the meaning of paragraph 104(15)(c) of the Act;
(2) all of the beneficiaries of the trust may share in the accumulating income of the trust;
(3) there is no requirement in paragraph 2800(3)(f) of the Regulations that the entitlement of a beneficiary in the accumulating income of the trust be at the end of the year in question; and,
(4) paragraph 2800(3)(f) of the Regulations does not reduce a preferred beneficiary's share to nil only because he or she cannot receive accumulating income in a particular year.
Our Comments:
In our opinion, the right of the contingent preferred beneficiaries (the children of "Son #1"), to share in the accumulating income of the trust for any given taxation year is not dependent upon the exercise or non-exercise of a discretionary power but rather upon the happening of a future event (the death of their father). Consequently, their share in the accumulating income of the trust will be nil in accordance with paragraph 104(15)(d) of the Act.
However, the said contingent beneficiaries will be included under paragraph 2800(3)(f) of the Regulations in the number of preferred beneficiaries under the trust for purposes of calculating the share of accumulating income of the beneficiaries whose share of the accumulating income of the trust depends upon the exercise by any person of, or the failure by any person to exercise, any discretionary power, (the beneficiaries, other than the children of "Son #1"), within the meaning of paragraph 104(15)(c) of the Act.
The reference in paragraph 2800(3)(f) of the Regulations to the discretionary share of the preferred beneficiary must be read in conjunction with the preamble to subsection 2800(3), which states in part:
"For the purposes of paragraph 104(15)(c) of the Act, the discretionary share of a particular preferred beneficiary under a trust of the trust's accumulating income for a taxation year...".
As a result, the views expressed under item (3) above would not be relevant in computing the share of a particular beneficiary who falls within the ambit of paragraph 104(15)(d) of the Act.
In addition, contrary to what has been suggested in your letter, the definition of "accumulating income" of a trust for a taxation year in paragraph 108(1)(a) of the Act does not mean undistributed income of the trust. The term "accumulating income" essentially means the income of the trust for the year calculated before deducting any amount included in computing income of a preferred beneficiary pursuant to an election under subsection 104(14) of the Act.
The phrase entitled to share in the accumulating income of the trust in paragraph 2800(3)(f) of the Regulations normally includes any entitlement arising by reason of the death of an individual who would otherwise be entitled to share in the accumulating income of the trust. However, pursuant to subsection 2800(4) of the Regulations, it does not include such entitlement for purposes of paragraphs 2800(3)(a) to (e) of the Regulations; but it does for purposes of paragraph 2800(3)(f). It is for this reason that the divisor in paragraph 2800(3)(f) of the Regulations must include the contingent beneficiaries.
We trust that these comments will be of assistance in reading paragraph 21 of IT-394R.
Yours truly,
for Acting Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch