Revenue Canada Revenu Canada Taxation Impôt
Head Office Bureau principal
Your file Votre reference Our file Notre reference O. Laurikainen (613) 957-2125
MAR - 7 1989
Dear Sirs:
Re: Income of Trusts ---------------------
This is in reply to your letter of October 5, 1988, in which you requested our opinion as to whether subsection 94(1) of the Income Tax Act (the "Act"), would apply in the situation described in the following paragraph.
In 1987 an individual ("Mr. X"), resident in Canada receives a substantial court settlement from an Australian insurance company as a result of an injury he suffered while he was a resident of Australia. The funds are placed in trust for the benefit of Mr. X with a large Canadian trust company acting as trustees. In the following year however, the Canadian company resigns as trustee and the funds are transferred to a new trust in the Channel Islands. It is your view that subsection 94(1) of the Act would not apply in this case because the trust acquired the funds from an insurance company resident in Australia and not any of the persons described in subclause 94(1)(b)(i)(A)(I) of the Act.
From the information you have submitted it is unclear where the trust is resident. For the purposes of our response however, we have assumed that it is a non-resident trust. Firstly, to respond to the question you have asked. It is our position that the case you have described should be looked upon as two or more transactions. That is, Mr. X first receives the insurance settlement and then invests the funds in the trust. Accordingly, the source of the funds for the purposes of subclause 94(1)(b)(i)(A)(I) of the Act would be Mr. X. Since it would appear that a11 the other requirements of subparagraph 94(1)(b)(i) of the Act have been met, paragraph 94(1)(d) of the Act does have application. However, from the details provided, we note that the circumstances appear to be such that the provisions of subsection 75(2) of the Act could also apply. Accordingly, since subsection 75(2) of the Act overrides subsection 94(1), the provisions of subsection 75(2) of the Act would deem any property income and taxable capital gains of the trust to be those of Mr. X.
Income earned by the trust on retained income which is not taxable under subsection 75(2) of the Act will still be subject to tax by virtue of paragraph 94(1)(d) of the Act. Accordingly, the result in this case would be no different had subsection 75(2) been inapplicable because amounts taxable under subsections 91(1) to (3) and 75(2) of the Act are all added to the adjusted cost base of Mr. X's capital interest in the trust pursuant to paragraphs 94(5)(a) and 53(1)(d.1) of the Act.
Capital distributions made by the trust to the extent of the adjusted cost base of his capital interest, will generally be received by Mr. X free of tax by virtue of subsection 107(2) of the Act.
We hope that our comments will clarify our position.
Yours truly,
for Director Reorganizations and Non-Resident Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch