17 April 1990 Income Tax Severed Letter ACC9164 - Trust Designations in respect of Beneficiary

DATE April 17, 1990

TO  Current Amendments and            FROM  Financial Industries
      Regulations Division                   Division
                                            D.S. Delorey
                                            957-3495
    B. Bryson, Director

SUBJECT:  Subsection 104(13.1) Designations   
                                        FILE  EACC 9164

Where a trust makes a designation under subsection 104(13.1) of the Act, the trustee will in most instances have the particular income beneficiary pay the trust's tax liability arising form the designation, This is done sot hat, for example, the interests of other beneficiaries in the trust are not reduced. We preciously expressed the view that the payment of the trust's taxes by the beneficiary represented a contribution to the trust. this had the effect of "tainting" a testamentary trust by virtue of the exception in subparagraph 108(1)(i)(ii) of the Act, thus making the trust subject to the tax rate set out in subsection 122(1) of the Act.

On receiving a number of representations from taxpayers

                              23
                            21(1)(b)
The following position has been adopted by the Department:

"Where an income beneficiary has agreed to bear the burden of a trust's tax liability arising our of a subsection 104(13.1) designation, it is our view that the payment of the taxes by the beneficiary will not in and of itself result in either a contribution to the trust for the purpose of subparagraph 108(1)(i)(ii) of the Act or a gift to the trust for the purpose of paragraph 122(2)(d) of the Act. The amount paid by the beneficiary must be equal to the taxes payable by the trust on income that would have been received or receivable by the beneficiary but for the designation. The payment may be made either by

(a) reimbursing the trustee,

(b) giving the trustee a cheque made payable to the Receiver General, or

(c) receiving a net amount form the trustee; i.e., an amount equal to the beneficiary's share of the income of the trust less his share of the taxes."

Would you please obtain Finance's written confirmation that the adopted position is not offensive in policy terms.

Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch