6 June 1989 Income Tax Severed Letter AC73945 - Trusts - Deduction of Amounts Paid or Payable to Beneficiaries and Flow-through of Taxable Capital Gains to Beneficiaries

Publications Division          Financial Industries Division
                                        F. Francis
                                        957-3496

SUBJECT:  Interpretation Bulletin
          Project Number 1442
          Trusts - Deduction of Amounts paid or 
          payable to Beneficiaries and Flow-Through
          of Taxable Capital Gains to Beneficiaries

This is in reply to your memorandum of May 23, 1989, wherein you requested us to review the draft bulletin on the above-noted topic. While we agree with the comments in the draft bulletin, we have noted the following points for your consideration:

1. Paragraph 104(6)(b) of the Income Tax Act (the "Act") was amended, in 1988, to permit the deduction, at the discretion of the trust, of an amount that is less than the amount of its income distributions. This amendment enables trusts to utilize in a particular year losses from prior year without affecting the ability of the trust to distribute its income currently. A designation under subsections 104(13.1) and 104(13.2) of the Act is available to prevent double taxation.

Since the draft bulletin refers to the deduction of amounts paid or payable to beneficiaries the above comment may be relevant.

2. Paragraph 3 of the draft bulletin states that for taxation years beginning before 1988, the flow-through of capital gains applies to net taxable capital gains of all trusts whether or not resident in Canada.

While the previous subsection 104(21) of the Act was silent on the residency of the trust, the Explanatory Note on the June 19888 amendments to the Act state that the amendments to subsections 104(19) to (21), (22) and (27) clarify that these provisions only apply to trusts residents in Canada. It may be preferable to omit references to residency of trusts for taxation years beginning before 1988.

3. Paragraph 19 of the draft bulletin discusses the designation available under subsection 104(13.1) of the Act. It should be noted that a similar designation is available under subsection 104(13.2) of the Act in a situation where a trust has a non- capital loss carry forward from a prior taxation year and current taxable capital gain. Furthermore, designations under subsections 104(13.1) and 104(13.2) of the Act will result in a reduction in the adjusted cost base to the beneficiaries of their capital interest in the trust under paragraph 53(2)(h) of the Act, unless that interest was acquired for no consideration where the trust is a personal trust.

We trust the above comments will be of assistance to you.

for director Financial Industries Division Rulings Directorate