Principal Issues: Can a trust allocate an eligible dividend under 104(19) to a beneficiary and another taxable dividend (non-eligible) to another beneficiary?
Position: Question of fact.
Reasons: Subject to the trustees power in the trust indenture, a trustee may allocate two dividends to two distinct beneficiaries, one dividend being eligible and the other not being eligible, under 104(19) of the ITA.
XXXXXXXXXX 2018-074674 Chantale Bouchard
June 22, 2023
Dear Mr. XXXXXXXXXX,
Subject: Designation of taxable dividends
This letter is further to your email dated March 2, 2018 in which you requested our opinion regarding the ability of a trust to designate, pursuant to subsection 104(19) of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) (the "Act"), an eligible dividend to one of its beneficiaries and an ordinary dividend to another beneficiary. We apologize for the delay in responding to your request.
Unless otherwise indicated, all legislative references herein refer to the provisions of the Act.
In your request, you briefly described a hypothetical situation where a trust received an eligible dividend at a particular time in the year and immediately allocated and paid it to one of its beneficiaries. This same trust received a second taxable dividend, this time, an ordinary dividend, at another time in the year and immediately allocated and paid it to another beneficiary. You wish our opinion as to whether these allocations are permitted under subsection 104(19), or whether each of the beneficiaries should instead be allocated, at the end of the trust's year, a pro rata share of the eligible dividends and ordinary dividends received by the trust during the particular year.
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R12, Advance Income Tax Rulings and Technical Interpretations.
For a taxable dividend to qualify as an eligible dividend, it must meet the criteria of the definition of eligible dividend in subsection 89(1). Under subsection 89(1), the taxable dividend must be received by a person resident in Canada, be paid after 2005 by a corporation resident in Canada and be designated as an eligible dividend pursuant to subsection 89(14).
Subsection 104(19) provides that, under certain conditions, all or part of a taxable dividend received by a trust resident in Canada in a particular year is deemed, for the purposes of the Act other than Part XIII, to be a taxable dividend received by the beneficiary of the trust in the beneficiary's taxation year in which the particular year of the trust ends. Provided that the conditions in the definition of eligible dividend set out above are satisfied, the taxable dividend so deemed received by the Canadian beneficiary would qualify as an eligible dividend.
For subsection 104(19) to apply in respect of all or part of a dividend received by a trust, an amount must be designated by the trust to its beneficiary in the trust's return of income for the year. The designated amount must also reasonably be considered to be part of the amount paid or payable to the beneficiary and included in computing the beneficiary's income (generally pursuant to paragraph 104(13)(a)) for the beneficiary's year in which the particular year of the trust ends. For the purposes of this determination, all of the circumstances, including the terms of the trust indenture, must be taken into account.
Where the trust indenture grants the trustee the power to make the trust's income payable in the manner described, for example under a so-called discretionary trust, it is our view that where there are two separate taxable dividends, one designated as an eligible dividend and the other not, each of the taxable dividends could be made payable and designated, within the meaning of subsection 104(19), by the trust to a different beneficiary. Pursuant to subsection 104(19), this designation would have to be made by the trust in its return of income for the taxation year in which it received the dividends. Where applicable, the respective characteristics of each of these taxable dividends would carry over to the beneficiaries to whom these dividends were allocated. In other words, in the circumstances presented, the beneficiaries would not have to share the characteristics of the eligible and ordinary dividends in proportion to the value of the taxable dividends received out of all the taxable dividends allocated by the trust.
We hope you find our comments of assistance.
Best regards,
Mélanie Beaulieu
Manager
For the Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch