Principal Issues: For the purpose of clause (c)(ii)(C) of the definition of « split income » of subsection 120.4(1), whether it is possible for a trust to pay to one beneficiary the part of the income from one source which respect clause (C) of that paragraph and the other part, which does not respect it, would be paid to another beneficiary.
Position: Yes, when the trust indenture allows such attribution.
Reasons: The Act.
FEDERAL TAXATION ROUND TABLE 11 OCTOBER 2013
2013 APFF CONFERENCE
Question 6
Rental income earned by a trust and tax on split income
A discretionary family trust holds a commercial rental property. The beneficiaries of the trust are Mr. A, Mrs. A (his spouse) and Child A (child of the couple, aged 15). The building consists of two premises: the first leased to a third party that is not related to any of the beneficiaries of the trust and a second that is leased to Mr.and Mrs. A’s professional corporation.
The split income tax applies to the "split income" of the individual (minor child) for the year. The concept of "split income" is defined in subsection 120.4(1). Among the elements that make up "split income" are any income a trust derives from the provision of property or services to, or in support of, a business, where the business is carried on by one of the following persons:
- a person who is related to the minor child at any time of the year;
- a corporation of which a person who is related to the minor child is a specified shareholder at any time of the year;
- a professional corporation of which a person related to the minor child is a shareholder at any time of the year.
Thus, in the situation described above, the income from the premises rented to the third party does not fall within the definition of "split income", whereas the income from the rental of the second premises to Mr. A and Mrs. A’s professional corporation meets the definition of "split income".
If the trust allocates to a single beneficiary, being the minor child, both the rental income received from the unrelated third party and that received from the professional corporation of the parents of the minor child, logically only those from the professional corporation should be considered "split income" which may result in the application of the split income tax (as per the CRA's position in Technical Interpretation 2011-0422531E5 dated March 28, 2012), even if the income comes from a single source of income.
On the other hand, in Technical Interpretation 2001-0112945 dated March 19, 2002, the CRA expressed the opinion that it is possible for a fully discretionary trust to distribute to a minor child only taxable dividends not subject to the split income tax (i.e. received from publicly traded corporations) and to designate to other beneficiaries, dividends received from private corporations, in order to avoid the application of the split income tax. In such a case, the income designated to each beneficiary clearly comes from two separate properties.
Question to CRA
In our example, although the building held by the trust is composed of two premises, it may be a single source of income for the trust; since the building is a single property, is it possible to allocate to two separate beneficiaries the income from that property by ensuring that only the net rental income from the unrelated third party is designated to the minor child and that the net rental income paid by the professional corporation is designated to another beneficiary, for example, Mrs. A (by separately calculating the net income for each of the premises in the same building), so that the tax on split income does not apply?
CRA Response
The definition of "split income" in subsection 120.4(1) reads in part as follows:
"[...] split income, of a specified individual for a taxation year, means the total of all amounts, [...] each of which is
[...]
(c) a portion of an amount included because of the application of subsection 104(13) or 105(2) in respect of a trust (other than a mutual fund trust) in computing the individual’s income for the year, to the extent that the portion
[...]
(ii) can reasonably be considered
[...](C) to be income derived from the provision of property or services by a partnership or trust to, or in support of, a business carried on by
(I) a person who is related to the individual at any time in the year,
(II) a corporation of which a person who is related to the individual is a specified shareholder at any time in the year, or
(III) a professional corporation of which a person related to the individual is a shareholder at any time in the year. (revenu fractionné)”
The question of whether it is reasonable to consider a portion of an amount to be income described in subclause (c)(ii)(C) of the definition of "split income" in subsection 120.4(1) is a question of fact. Section 120.4 does not provide any rule respecting the allocation of income. Therefore, all of the facts must be analyzed to determine whether a portion of an amount designated to a beneficiary of a trust is split income within the meaning of subsection 120.4(1).
In some instances, the deed of trust permits the allocation to two separate beneficiaries of the income derived from a building, so that one portion of the income, which complies with the conditions in clause (c)(ii)(C) of the "split income" definition in subsection 120.4(1), can be distributed to a specified individual even though the other portion of the income does not so comply. In such a situation, we are of the view that only the part of the income distributed to a specified individual that it is reasonable to consider as income described by clause (c)(ii)(C)of the definition of "split income" in subsection 120.4 would be considered as "split income" for the purposes of subsection 120.4(1).
Isabelle Landry
(450) 623-0193
2013-049565