B. Fioravanti (613) 957-8962
March 10, 1988
Dear Sirs:
This is in reply to your letter of January 12, concerning the income earned by your client's employee trust.
Since we have not had the opportunity to examine the trust agreement, we are not in a position to verify that the arrangement constitutes an "employee trust" as defined under subsection 248(1) of the Income Tax Act. Generally speaking, this type of arrangement was intended as a means of financing a legal services plan for employees. Accordingly, the following comments are based on the assumption that the arrangement is, in fact, an "employee trust".
An employee trust must each year allocate to its beneficiaries certain amounts in respect of the year including employer contributions. The amount allocated is taxed in the beneficiaries' hands in the year of allocation as income from employment pursuant to paragraph 6(1)(h) of the Income Tax Act (the "Act") regardless of the source of the income (e.g. capital gains, dividends) and must be reported on form T4A Supplementary and not form T3. Business income is excluded from the allocation and is taxed in the trust pursuant to the provisions of subsection 104(6) of the Act.
For your information please find enclosed herewith a copy of Interpretation Bulletin It-502 entitled "Employee Benefit Plans and Employee Trusts". You will note that paragraph 38 to 46 deal with employee trusts and, more specifically, reference should be made to paragraphs 38 and 44 of the Bulletin.
We trust that the foregoing will resolve the matter.
Yours truly,
for Director Financial Industries Division Rulings Directorate