Principal Issues: For the purpose of paragraph 104(6)(b), would CRA accept that a trust allocates the amount of its income for tax purposes that exceeds its income for accounting purposes (which is attributable to non-deductible expenses under the Act) when, because of cash flow, only the income for accounting can be paid to the beneficiaries?
Position: No.
Reasons: In a situation where a trust cannot pay out the difference between its income for tax purposes and its income for accounting purposes, this difference is not considered as an amount payable pursuant to subsection 104(24).
Financial Strategies and Financial Instruments Roundtable, October 9, 2015
2015 APFF Conference
Question 6
Accounting Income vs. taxable income of a trust partner of a partnership
A trust ("Trust") is a member of a partnership (the "Partnership") for the entire fiscal period of the Partnership. At the end of the Partnership’s fiscal period ("Fiscal Period End"), the Trust is allocated its share of the Partnership’s annual profits, namely a hypothetical amount of $500,000 ("Accounting Income”).
The taxable income of the Trust, as reported on the T3 return, however, is $525,000 (the "Taxable Income"). This difference between the Accounting Income and the Taxable Income is attributable to certain expenditures that are non-deductible or whose accounting and tax treatment differs.
The Trust wishes to allocate all of the Accounting Income and Taxable Income to one or more of its beneficiaries. However, as stated above, the Trust has only $500,000 in cash while the Taxable Income is $525,000.
Pursuant to subsection 96(1), the computation and allocation of the profits generated in a partnership is made at the end of the partnership's fiscal period and the profits are allocated to the partners in proportion to their respective shares held in the partnership property.
Under subparagraph 104(6)(b)(i), a trust may deduct, from its income, amounts that have become payable or are paid to its beneficiaries.
Under subsection 104(24), for the purposes inter alia of subsections 104(6) and (13), an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.
Under subsection 104(13), a beneficiary of a trust is required to include in income for a particular year the amount that became payable to the beneficiary in the trust’ year.
Question to CRA
In the situation described above, would the CRA be amenable to accepting that the Trust had allocated all of its Taxable Income, namely, $525,000, to one or more of its beneficiaries if the Partnership paid out its entire Accounting Income, ir order to avoid a balance of $25,000 remaining unallocated by the Trust?
CRA Response
In general, a trust to which paragraph 104(6)(b) applies can deduct, in the calculation of its income for a taxation year, an amount which does not exceed the amount of income for the year which is payable to a beneficiary in the course of the year.
Subsection 104(24) provides that, for purposes of subsection 104)6), an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.
For purposes of paragraph 104(6)(b), we are of the view that income payable to a beneficiary refers to income determined in accordance with the provisions of the Income Tax Act. However, in order to determine if an amount of income has become payable for purposes of subsection 104(24), it is necessary to refer to the trust deed of the trust and the applicable private law.
In the case where the Trust is not able to pay the balance of $25,000 of taxable income in the course of the year, we are of the view that this balance will not be considered to be payable by virtue of subsection 104(24).
Lucie Allaire
October 9, 2015
2015-059585