Section 104

A Liechtenstein stiftung was formed as a family foundation (later changed to a private-benefit foundation), with a capital contribution from the founder, in order to invest its funds and make distributions to beneficiaries as determined in the discretion of its foundation council. It had legal personality and owned the property allocated by the founder. Its board of curators had the irrevocable power to elect or replace members of the council. It filed a tax return, reporting the disposition of taxable Canadian property, on the basis that it was a corporation rather than a trust.

CRA first noted that separate legal personality was no longer a determinative characteristic, that “[d]escribing a trust by reference to dual ownership or equity in an international context would have the result of ignoring all civil law arrangements that have adopted the trust idea of the administration of assets for the benefit of others” and that the stifting had “characteristics common to trusts under Canadian commercial law” including those discussed in 2007-0236981I7 regarding a Pennsylvania business trust. It concluded that the stiftung had more in common with a trust than a corporation:

• It had no form of “share capital” or other ownership interests which conveyed a right to distributions of earnings or capital
• it was created by an endowment from a founder much like a trust settlement
• it had beneficiaries, named in its by-laws
• its executive bodies administered and used the property transferred by the founder for the benefit and advantage of the beneficiaries similarly to a trustee
• unlike a corporation, it was restricted to investing rather than carrying on a commercial business.

These conclusions were consistent with 2008-0266251I7 and 2010-0388611I7.

A collective investment scheme (the “Fund”) established under Swiss law is an arrangement by which investors pool their assets to be managed by and in the name of a Swiss regulated fund management company (the “Management Company’) for the account of the investors, whose proportionate entitlements to income and to cash or in-kind redemption proceeds are represented by non-voting units. The Fund was established by a contract of the investors with the Manager and the non-resident custodian of the Fund assets (the “Custodian”), and lacks legal personality. The Custodian delegated the custody of Canadian securities (being mostly listed shares of Canadian companies) to the “Canadian Sub-Custodian.” The Fund unitholders are all Swiss entities providing pension or retirement plans.

CRA effectively ruled that this arrangement would be treated like a co-ownership arrangement rather than like an entity such as a trust, so that dividends paid on the Canadian shares would benefit from the Canadian withholding tax exemption in Art. 10 of the Canada-Swiss Treaty for Canadian dividends received by Swiss pension/ retirement entities.

Where an individual has two wills (one of them not being subject to probate) so that the two wills are administered separately, does s. 104(2) apply so that one T3 return is filed for the estates created under both wills?

CRA responded that, even though the wills could be administered separately, the individual would be regarded as having only one estate and thus (since a trust is defined in s. 248(1) to include an estate unless the context otherwise required), there would only be one trust. There being only one trust, the postamble to s. 104(2) could not apply, and only one T3 would be filed for each taxation year.

Is a foundation created under the laws of a country where civil law applies treated as a trust under the Act?

After referring to its two-step approach to foreign entity classification, CRA indicated that, since the classification of a particular entity or arrangement is to be determined on a case-by-case basis, it will consider the classification of a foreign foundation in the context of an advanced income tax ruling, provided that the ruling request is supported by a complete description of the characteristics, an analysis as to the proper classification of the entity or arrangement for purposes of the Act and Regulations, a discussion of the way the relevant provisions would apply to proposed transactions involving or affecting the rights and obligations of the entity or arrangement and its stakeholders, a copy of the foreign legislation applicable, and any other relevant documents.

The will of Mr. X, a resident of Quebec, left all of his property in equal shares, to his two children, aged 10 and 15. His will included an extended administration clause that resulted in an extension of the executor’s duties and authority beyond the normal end of the administration of the estate, until all the legacies were delivered in accordance with the terms of the will (which was directed to occur on the children attaining 25). The will provided that, in the meantime, all income generated on each child’s share was to be used in the executor’s discretion for the support or maintenance of that child, with discretion to encroach on capital in the child’s favour.

Before turning to the potential application of s. 104(18), CRA indicated that if the effect of the clause was to extend the administration of the estate, then it extended the estate qua trust.

Fund

The Fund constitutes a collective investment vehicle that is not a body corporate, a partnership or a limited partnership, under which the Unitholders by contractual arrangements (set out in a deed) between a manager and a depositary, beneficially own the underlying property as tenants in common – with their Units representing proportionate interests in the Fund. Contracts entered into by the non-resident manager for the acquisition, management or disposal of property are binding on the unitholders. Pooling in relation to separate parts of the property is permitted and the Unitholders are entitled to exchange rights in one part for rights in another.

Subfund

The Deed states: “Any reference in this Deed to Units being issued “in respect of” a Sub-fund or “relating” to a Sub-fund shall be construed as a reference to Units which give the holder of them co-ownership of that part of the … Property comprising the Sub-fund in question and the entitlement … to exchange co-ownership of that part of the … Property for that part of the … Property comprising any other Sub-fund.” Each Sub-fund holds a separate group of assets to be managed by the Investment Manager, with the rulings relating to particular Sub-funds which may hold Canadian securities.

Classes within Subfund

The Units of a particular Sub-fund may be further broken down into different Classes which, although they participate proportionately in the ownership of the assets of the particular Sub-fund, may differ in other respects (e.g., management fees, functional currency; and different entitlements to gross income net of withholding tax which may arise due to different Unitholder tax profiles.) Investors with different tax profiles are required to invest in separate Classes such that investors do not benefit from the tax status of others (e.g., a lower withholding tax rate).

Depositary and Custodians

The non-resident Depositary, who deals at arm’s length with the manager, is responsible for acting as depositary of the Fund in accordance with the Deed. The Depositary has delegated its duties and responsibilities to the Custodian (a non-resident subsidiary of the Depositary) which, in turn, has delegated its Canadian duties and responsibilities (namely its duties and responsibilities respecting Canadian securities) to the Sub-custodian, a Canadian subsidiary of the Depositary.

Country A tax treatment

The Fund is regarded as fiscally transparent by Country A. For Country A capital gains tax purposes, a switch of Units in one Sub-fund for Units in any other Sub-fund is treated as a redemption of the Original Units and a purchase of New Units.

Rulings

The Fund and each of the relevant Sub-funds is treated as fiscally transparent for the purposes of the Act.

For the purposes of Part XIII and s. 116, any amount paid by a person to the Sub-custodian respecting Sub-fund Canadian securities will be considered to arise at the time of payment and to have the same character and source in respect of each Unitholder thereunder in proportion to the number of Units held by that Unitholder that represents its participation in such property.

Fund and Sub-Funds

The Fund, which is UCITS (collective investment in transferable securities) constituted under the Luxembourg law of contract as an FCP (“Fonds commun de placement” being an undivided collection of transferable securities and other liquid assets) does not have a legal personality but instead is an unincorporated co-proprietorship of transferable and other liquid financial assets. The Fund is an “umbrella fund” that enables investors (namely, pension funds) to invest in one or more portfolios (each constituted as a Sub-Fund) by acquiring a class of Units of a particular Sub-Fund issued by the Manager in accordance with the Management Regulations. In order to ensure that each Unitholder receives payments of Gross Income (e.g., dividends or interest) that reflect their applicable withholding tax rates, Unitholders with different tax profiles and country of residence will invest in different Unit Classes.

Unitholders

The Management Regulations provide that each Unit of a Sub-Fund represents the proportion of each Unitholder’s ownership interest in the assets and liabilities comprising the Sub-Fund to which each Unitholder is beneficially entitled. Ownership of Units entitles a Unitholder to participate and share in the property of the relevant Sub-Fund including interest and dividends derived therefrom. Under the applicable Luxembourg statute, the liabilities of a Unitholder are limited to the Unitholder’s participation in a particular Sub-Fund. Unitholders can redeem their Units of a Sub-Fund in the manner set out in the Management Regulations, for an amount based on the net asset value per Unit of a particular Class of Units in a particular Sub-Fund.

Proposed transactions

The Sub-Funds will issue Units to New Investors. The Fund will continue to operate as an open-ended umbrella fund, which means that there will be multiple Sub-Funds in which a New Investor may invest.

Rulings

The tax consequences to the New Investors of their investments in the Fund will be determined on the basis that the Fund, including each of its Sub-Funds, is not a person or a taxpayer for the purposes of the Act and as such, is treated as fiscally transparent for such purposes.

For the purposes of Part XIII and s. 116, any amount paid or credited by a payer to the sub-custodians in respect of property held by a Sub-Fund on behalf of the New Investors, including purchase consideration for such property, will be considered an amount paid or credited to the New Investor in proportion to its co-ownership interest in the assets and Gross Income of the particular Sub-Fund.

Current structure

The Umbrella Fund is an open-end fund with Subfunds, all of them governed by Fund Contracts under the laws of a common law jurisdiction. The Subtrusts focus on (i) bonds denominated in specified currencies, (ii) foreign currency inflation-linked bonds or (iii) domestic and foreign equities and real estate securities. The Management Company and Custodian both are non-resident.

Pursuant to the Fund Contract (to which the Management Company and the Custodian Bank also are parties), on subscribing, the Unitholders acquire, own and share in the property of a Subfund as co-owners, evidenced in the form of fund Units. As such, the Unitholders are entitled to an undivided interest as tenants in common in the assets held therein and are entitled to all income and gains derived from same as such income or gains arise in accordance with the Units they acquire. Each Unit (which is non-voting) represents a claim against the Management Company conferring entitlement to the assets and income of a Subfund. A Unit is specified to not "confer any interest or share in any particular part of the assets of the [funds]." The fund and Subfunds do not have separate legal personality. The liabilities of a Unitholder are limited to the Unit subscription amount.

The sole Unitholder of the relevant Subfunds is the Pension Fund, a tax exempt entity that meets the requirements for exemption from Part XIII on dividends paid by corporations resident in Canada tax under the applicable Tax Treaty.

Pursuant to the Fund Contract, the Management Company, among other things, manages the Subfunds at its own discretion and in its own name, but for the account of the Unitholders.

Pursuant to the Canadian Agreement, the Custodian Bank has appointed the Canadian Sub-custodian as custodian of Canadian securities received by the Canadian Sub-custodian from or on behalf of the Custodian Bank.

Proposed transactions

The arrangement will invest in publicly traded shares of Canadian public corporations as well as in shares of private Canadian corporations whose intention is to become publicly listed within 12 months.

Rulings

The fund, including each of its Subfunds, is not a person or a taxpayer for the purposes of the Act and as such, they are treated as fiscally transparent for the purposes of the Act.

For the purposes of Part XIII withholding and section 116, any amount paid or credited by a payer to the Canadian Sub-custodian in respect of the property held by the Subfund on behalf of the Pension Fund, including purchase consideration for such property, will be considered an amount paid or credited to the Pension Fund in proportion to its participation in the assets and income of the particular Subfund.

A U.S. revocable living trust is a trust that is usually controlled by and established for the benefit of those who created the trust (“grantors”) during their lifetime. … Where the grantor can change the terms of, or completely revoke the trust during their lifetime, they effectively retain control of the trust assets.

…[The] trust is an excluded trust…where the arrangement is such that the trust/trustee can reasonably be considered to act as an agent for all the beneficiaries unless the trust is described in any of paragraphs (a) to (e.1) of the definition of trust in subsection 108(1). This determination is a legal question of fact, and depending on the specifics of each case a particular grantor trust may in fact be such an excluded trust.

A U.S. resident (the “grantor”) settles a “revocable living trust” with property including taxable Canadian property. The grantor: is the sole trustee; until death is the sole beneficiary with rights to income and any encroachments of capital; and may revoke the trust at any time. The trust provisions may provide for a distribution of the trust property to named beneficiaries upon the death of the grantor. In light of De Mond, does this arrangement constitute a trust?

CRA indicated that De Mond has not altered its view (in 9518515) that a revocable living trust is recognized at the time that legal title to property is transferred to it, with such transfer being considered to occur at fair market value. The key distinction between a revocable living trust, and a bare trust, is that the former generally includes remainder beneficiaries, so that there is a change in beneficial ownership when property is transferred to the trust.

Description of CCF

"CCF" is a common contractual fund established pursuant to the Investment Funds, Companies and Miscellaneous Provision Act 2005 (Ireland) (the "Investment Funds Act"), which provides that a common contractual fund is an unincorporated body established pursuant to a deed of constitution by a management company, under which co-owners participate and share in the collective investments by virtue of holding units and with the property being entrusted to a custodian for safe-keeping in accordance with conditions imposed by the Central Bank of Ireland and with the deed of constitution (which is binding on the unitholders) specifying the conditions for the replacement of the management company or custodian. Each Unit is defined as one undivided co-ownership interest in the properties of the CCF (currently mostly equities of non-Canadian public companies), with the Unitholder holding the co-ownership interests as tenant in common with the other Unitholders. Unitholders may redeem their Units (which are non-voting) on and with effect from any dealing day at the net asset value per Unit and Units may also be converted to Units of a different class. "[T]the Custodian in its capacity as trustee, shall ensure that the sale, issue, conversion, repurchase, redemption, and cancellation of Units effected by or on behalf of the Manager, are carried out in accordance with the Investment Funds Act and the Deed of Constitution." The Custodian and Manager are non-residents.

Irish tax

The CCF is not subject to Irish tax as Unitholders are treated under s. 739I of the Taxes Consolidation Act 1997 (Ireland) as having directly earned income on the CCF properties in proportion to their Unitholdings.

Proposed transactions

CCF, which is a "single strategy" fund under Part 2 of the Investment Funds Act, will extend its investments to equities of Canadian public companies and will accept investments from Canadian residents which are exempt under s. 149(1).

Rulings include

"[E]ach "New Investor" will be treated as the co-owner of an undivided interest as tenant in common with the other Unitholders in each property held by the CCF, …any amount paid or credited by a person resident in Canada to the Custodian in relation to the properties held by the CCF will be an amount paid or credited to each New Investor in proportion to the New Investor's ownership interest in the properties of the CCF …[and s.] 94(3) will not apply to the CCF."

As the taxpayer's daughter did not qualify for a mortgage at the time of her purchase of her home, the bank required legal title to be placed in the taxpayer's name. With the mortgage now having been paid in full by the daughter, legal title will be transferred to her. CRA stated:

[Y]our daughter is likely the beneficial owner of the home. If that is the case, then the transfer of legal title of the house to your daughter would not result in any income tax consequences… .

Shareholders of a corporation use a buy-sell agreement to requires the corporation to acquire insurance on the shareholders' lives (and pay the premiums thereunder) to fund share purchase obligations under the agreement, and further agree to use a third party (the "Insurance Trustee") to hold and apply the insurance proceeds as directed under the agreement, with the corporation being required to pay any insurance proceeds over to the Insurance Trustee upon receipt. Before indicating that such proceeds would be added to the capital dividend account of the corporation as amounts received by it, CRA stated:

A trustee can reasonably be considered to act as agent for a beneficiary when the trustee has no significant powers or responsibilities, the trustee can take no action without instructions from that beneficiary and the trustee's only function is to hold legal title to the property. In order for the trustee to be considered as the agent for all the beneficiaries of a trust, it would generally be necessary for the trust to consult and take instructions from each and every beneficiary with respect to all dealings with all of the trust property.

As of June 30, 2011, all the liabilities of Succession X have been paid and all the liquidator's duties have been completed, and its only asset of Succession X is cash, which is required to be divided equally between the two heirs (Mr. X's two children). However, Mr. A, the liquidator, will wait until the year 2025 before proceeding with distributing the money to the beneficiaries and liquidating Succession X. Is the period for proceeding with the liquidation reasonable? CRA responded:

Whether the time to liquidate an estate is reasonable is a question of mixed fact and law that requires a complete analysis of all the facts in a particular situation. Generally, a succession exists as long as it is not settled.

In this case, it is possible that as of June 30, 2011, the succession will be settled and cease to exist on that date. In such a case, the tax would be subsequently imposed at the level of the legatees of the estate.

Ruling that a Liechstenstein Trust Enterprise would be a trust rather than a corporation. Although it had centralized control, continuity of management and existence, issuance of transferable coupons which might be assimilated to shares, limited liability of coupon holders and legal personality and the ownership of assets, on the other hand it had limited objects, beneficiaries who were not entitled to vote and who did not pay for their interest and who could be liable if they enriched themselves, the application to the entity of rules of equity and references to it as a trust under the Liechtenstein law.

A private foundation was created pursuant to the laws of the Netherlands Antilles and governed by Articles of Foundation. Its capital consists of assets contributed by the Founder, as well as other assets acquired from others, it may make distributions out of its assets (mostly securities) to such persons and entities as the Foundation Council may determine with the written consent of the Founder (but, in fact, the beneficiaries are listed in the Foundation’s Administrative Rules) and its Foundation Council members who commission its management are appointed by the Founder. Is the foundation a trust or corporation? The Directorate responded:

[T]he private foundation created pursuant to the laws of the Netherlands Antilles is similar, in some respects, to the civil law trust.

In order to characterize a Netherlands Antilles private foundation that displays both corporate and trust attributes, it will be necessary to determine what the distinguishing characteristics of a Canadian corporation are, as compared to a Canadian trust, and the weight that should be attached to each… . Once that is done, a characterization determination can be made by comparing those characteristics with the attributes of the Netherlands Antilles Private Foundation.

…[T]he Foundation possesses a separate legal existence from the beneficiaries of the Foundation...possesses its own capacity to acquire rights and to assume liabilities…[and t]he beneficiaries of the Foundation also are not personally liable for any of the debts incurred by the Foundation. In th[ese] respect[s], the Foundation is similar to a corporation. … [However] the Foundation does not issue share capital or something else which serves the same function… the beneficiaries do not pay for their interests in the foundation… the beneficiaries of a private foundation cannot transfer their beneficial interest in the foundation to someone else…[and] the beneficiaries of the Foundation never have the right to participate in the decisions of the Foundation. … [Accordingly] the attributes of a private foundation created pursuant to the laws of the Netherlands Antilles more closely resemble those of a trust under our common and civil law than a corporation. As such, the Foundation should be treated as a trust… . [T]he existence of a separate legal entity clause contained in the Netherlands Antilles legislation governing private foundations would not...preclude an arrangement from being considered as a trust.

Irish contractual funds, which gave the unitholders proportionate undivided co-ownership interests in the assets of each "sub-fund (i.e., portfolio) were not trusts to which s. 94(1) applied, with unitholders treated as earning or realizing directly the income or gains from the portfolio property.

Before going on to indicate that at trust could be considered to be actively engaged in the activities of a general partnership for purposes of the specified member definition on the basis of the conduct of the partnership’s management by its trustee, CRA stated:

Subsection 104(1) provides, inter alia, that, unless the context otherwise requires, a reference in the Act to a trust includes a reference to the trustee who controls the trust property. Consequently, in determining whether a trust, which is a member of a partnership, is actively involved in the partnership's activities, we are of the view that the degree of involvement of the trustee in the partnership's activities can be taken into account.

Non-resident individuals entrusted the custody of certain funds to the Quebec office of a Canadian financial institution, which held the funds in the form of corporate securities and precious metals certificates, which were entrusted to it for safekeeping purposes. Now 10 of those individuals have died, and their heirs are non-residents. Are such securities held on their behalf held under trusts and, if so, is the trusts’ residence in Canada?

CRA indicated that given that the Canadian financial institution performs only custodial and safekeeping functions, there is no trust. After quoting the definition of legal representative, it stated:

A financial institution would generally not be considered a legal representative controlling the estate's assets solely because of its role as depositary and custodian of certain estate assets.

Before finding that a Pennsylvania business trust (PBT) was a trust for ITA purposes, the Directorate stated:

Professor Waters suggests that the four elements needed to recognize the trust concept regardless of the name given to the arrangement in issue are:

(1) the trust property must be segregated from the personal assets of the trustee;
(2) the trust property must be employed for the object of the trust (a beneficiary or a purpose);
(3) the trustee holds the title of the trust property and owes duties to the beneficiary as consequences both of the terms of the trust instrument and also of the law; and
(4) the right to recover identifiable property in specie from the trustee in breach, or from a third party aware of the breach.

The terms of PBT clearly contain the four elements suggested by Professor Waters. The trustees hold the limited partnership interest for the benefit of the beneficiary, Corporation, such property being segregated from their personal assets and the trustees owe the Corporation the duties and obligations expressed in the trust agreement in respect of the trust property. As stated in 15 Pa.C.S.§ 9506, the provisions of Subchapters B relating to fiduciary duty and Subchapter D relating to indemnification of Chapter 17 are applicable to a Pennsylvania business trust. The fact that the PBT is subject to the same rules relating to fiduciary duty and indemnification as are applicable to other trusts governed by the law of Pennsylvania suggests that the fourth element is met as well.

CCF

A Common Contractual Fund ("CCF") is a type of collective investment undertaking under which Unitholders by contractual arrangement acquire, own and share in the property of the CCF as co-owners, being entitled to an undivided interest as tenants in common in the property comprising the CCF. Accordingly, Unitholders are owners of, and are entitled to all income and gains derived from, the property of the CCF as such income and gains arise. It is legally valid for a CCF to have only one unit-holder.

Proposed transactions

The Manager, which is a corporation resident in Ireland, will constitute the "Fund" in accordance with a Deed of Constitution, so that it will qualify as a "CCF" described in s. 739I(1)(a)(ii) of the Taxes Consolidation Act 1997 (Ireland) (the "TCA"). This requires that: (i) it is an Undertaking for Collective Investment in Transferable Securities ("UCITS") authorized by the European Communities UCITS Regulations (the "Regulations"), (ii) it is constituted otherwise than under trust law or statute law, (iii) each of its units is beneficially owned by a pension fund or by a person other than an individual, or is held by a custodian or trustee for the benefit of a person other than an individual, and (iv) all the investors in the investment undertaking make a declaration on acquiring units in the undertaking. On this basis, the Fund will not be chargeable to Irish tax on its profits. The Fund will be an "umbrella fund" within the meaning of the Regulations. Accordingly the Fund will consist of several Sub-Funds and Units shall be issued in respect of each Sub-Fund. Each Unit will represent a proportionate undivided co-ownership interest in the property of the Sub-Fund. The Irish Custodian has safekeeping responsibilities, and the Canadian Sub-custodian has Canadian tax reporting responsibilities respecting Canadian source receipts.. The Manager will be responsible for managing the Fund's property in accordance with the Prospectus, Deed of Constitution, Regulations and any other regulatory requirements.

Rulings include

:

For the purposes of Part I…, each Unitholder will directly earn its proportionate share of income, losses, capital gains and capital losses from the property of the relevant Sub-Fund of which it is a Unitholder.

For the purposes of Part XIII…, any amount paid or credited by a Canadian payer to the Sub-custodian in respect of the property of a particular Sub-Fund will be an amount paid or credited to each Unitholder of the relevant Sub-Fund in proportion to the Unitholder's ownership of the property of the relevant Sub-Fund.

[T]he Dutch Treaty will apply to each Unitholder that is a resident of the Netherlands for the purposes of the Dutch Treaty for the purposes of determining the withholding rates in respect of the Canadian source income it earns from its share of the property of the relevant Sub-Fund.

Regarding whether the reference to a trust or an estate in s. 104(1) is equivalent to a reference to an heir without having ownership or control of the property of the estate, the Directorate stated:

The ownership or control test relates to each of the preceding elements (trustee, executor, administrator, liquidator, heir and legal representative) and not just to the legal representative. Consequently, a reference in the Act to a trust or estate is not a reference to an heir who does not have ownership or control of the property of the estate.

Ruling that an open-end real estate fund established under the Investment Companies Act (Germany) (and to be continued under the Investment Act (Germany)) would be treated as an inter vivos trust that was not a personal trust for purposes of the Act in respect of its proposed investments in a Canadian partnership. The fund had a German manager and was required to have its real estate assets held by the manager and was deemed under the Investment Act to be an estate.

Ruling that an Irish Common Contractual Fund would be considered to constitute a co-ownership arrangement.

CCRA indicated that a trust is related to an individual if its trustee is so related:

Subsection 104(1) provides in part that, for the purposes of the Act, a reference to a trust or estate, unless the context otherwise requires, includes a reference to the trustee, executor, administrator, etc., of the estate. Given that a trustee (whether an individual or a corporation) may be related to an individual for the purposes of subsection 251(2), it is therefore possible that a trust and an individual may be related for the purposes of the Act.

The purpose of the amendment to s. 104(1) adding "unless the context otherwise requires" was not to make a fundamental change. Although a reference to "trust" generally refers to the term "trustee", the amendment recognizes that, in particular contexts, there are references to trust in the Act that are meant to indicate a trust arrangement, rather than the persons who are responsible for the operation of the arrangement

In finding that the potential tax refund resulting from the Quebec abatement to which a mutual fund trust was entitled should be paid to the trustee rather than the former unitholders where the trust had been wound up, CCRA stated.

Unlike a corporation, a trust does not constitute a legal person with legal personality. Consequently, the fact that a trust has been wound-up and its assets have been distributed will have no impact on any tax refunds owing to it after that time, which will continue to be paid to the trustee of the trust.

Would a transfer of appreciated capital property to a revocable inter vivos trust (also referred to as a revocable living trust), which is not a disposition for U.S. purposes, be a disposition for purposes of the Act? CRA responded:.

Our understanding of a revocable living trust is that pursuant to the terms of the Declaration of Trust: (1) the settlor is the trustee and, during his or her lifetime, is the sole income and capital beneficiary, (2) the settlor retains the ability to revoke, alter or amend the terms of the trust at any time, (3) the settlor has the ability to deal with the property as he or she sees fit during his or her lifetime, and (4) at the time of the settlor's death, the income and capital interests in the trust vest in other beneficiaries. …

[B]y virtue of point (4) above, the settlor would not retain all incidents of beneficial ownership. Consequently, the transfer of property to such a trust would be a disposition of the property at its fair market value.

An individual has two wills, only one of which is subject to probate. The two wills are administered separately, perhaps with different executors. Does s. 104(2) apply so that one T3 return is filed for the estates created under both wills?

CRA responded that, even though the wills could be administered separately, the individual would be regarded as having only one estate and thus (since a trust is defined in ss. 248(1) and 104(1) to include an estate unless the context otherwise required), there would only be one trust. There being only one trust, the postamble to s. 104(2) could not apply, and only one T3 would be filed for each taxation year.

CRA provided general comments respecting several situations where there are several testamentary trusts set up such that the spouse of a deceased taxpayer is the principal beneficiary of the trust property and each child is a residual beneficiary of one of the trusts, and stated:

For the purposes of determining whether the discretion in subsection 104(2) of the Act would be exercised, certain criteria are examined, including but not limited to:

• whether there was a clear intention to create separate trusts, according to the provisions of the will or trust deed;
• whether the trusts have common beneficiaries, in particular the number of common beneficiaries and the nature of their respective interests in each of the trusts;
• whether the assets of each of the trusts are administered and accounted for separately; and the powers of the trustees.

where a taxpayer dies leaving his property equally to three testamentary trusts of which his surviving spouse is the only capital and income beneficiary during her life and, upon her death, each of the three children is a respective beneficiary, the Minister likely would designate them as a single trust. The Directorate noted that "it is not necessary that each trust have the same beneficiaries; it is sufficient that the beneficiaries of each trust are of the same group or class of beneficiaries."

Before concluding that a testamentary trust can qualify as an estate beneficiary for s. 112(3.2)(b) purposes, the Directorate stated:

[A]lthough under civil law a trust does not in itself constitute a separate legal entity, Parliament has chosen, for the purposes of applying the Act, to disregard these legal effects and instead treat the trust as a separate tax entity with ownership of the property it holds. In addition, subsection 104(1) provides, inter alia, that, for the purposes of the Act, and unless the context otherwise requires, a reference to a trust or estate is to be read to include a reference to the trustee, executor, administrator, liquidator of a succession, heir or other legal representative having ownership or control of the trust property.

The combined application of subsections (1) and (2) of section 104 means that, for the purposes of the Act, both the trust and the trustee(s) (or executor(s)) of the trust may be considered to be an individual in respect of the trust property and thus to own or control the trust property, regardless of the applicable private law. The definition "beneficiary" in subsection 108(1) defines beneficiaries of a trust to include persons beneficially interested in the trust. The Act does not otherwise define "beneficiary". Therefore, for any concept not otherwise defined in the Act, including those in subsection 248(25), recourse must be had to the provisions of the CCQ dealing, for the purposes hereof, with estates constituted in Quebec.

The will of Mr. A provides for transfers to three testamentary trusts(C-1, D-1 and E-1) for each of his three children and their children, and also for a contribution to a spousal trust, whose terms provide that upon the death of the spouse (Ms. B), the residue of the spousal trust will be divided among three testamentary trust s (C-2, D-2 and E-2) with the same respective beneficiaries as the first three trusts (C-1, D-1 and E-1). Regarding whether s. 104(2) could be applied to consolidate the six testamentary trusts into three, should it be considered that the assets come from two different people, Mr. A and the spousal trust? CRA responded:

We are of the view that a trust referred to in subsection 248(9.1) would be considered to be a trust that arose on and as a consequence of the death of the individual even though that trust (for example, any of the C-2, D-2 and E-2 testamentary family trusts) does not receive the property until a specific future date such as, for example, the death of the surviving spouse, or even though it is not legally created at the date of the individual's death. …

[A]ssuming that all the property transmitted to the various trusts comes from the testator, Mr. A, we are of the view that the property that the spousal trust would transfer to the testamentary family trusts C-2, D-2 and E-2 upon Ms. B's death would originate from Mr. A. Consequently, the condition set out in paragraph 104(2)(a) would be satisfied.

Where "in-trust accounts" are set up by parents for holding mutual fund investments on behalf of their minor children, the certainty of intention to establish a trust arrangement will be difficult to establish in the absence of a formal trust document.

Discussion of background to the position in IT-129R, para. 10, respecting the deposit of funds with lawyers pending the outcome of litigation.

Where an "in trust" account is set up to hold a mutual fund investment on behalf of children, the certainty of intention to set up a trust arrangement would be difficult to prove in the absence of a formal trust document.

A courtesy interest in a deceased married woman's estate that the surviving widower elects to receive, is not a trust but, rather, an interest in land.

Where a settlor transfers property to a trust having the characteristics according with RC's understanding of a bare trust (the settlor is the sole beneficiary of income and capital during her lifetime, she retains the ability to revoke or amend the trust at any time and has the unfettered ability to deal with the property as she sees fit during her lifetime) but the settlor also stipulates that income and/or capital interest of other beneficiaries, which are contingent during her lifetime, will vest upon her death, the trust will be considered to be a bare trust until her death. Accordingly, she will report all income and losses related to the property and (subject to the availability of any rollover) will have a deemed disposition at fair market value of the property on her death.

The Crown can be constituted a trustee only by the express provisions of an Act of Parliament. Where the Crown is a trustee, the trustee will not be taxable by virtue of Crown immunity.

A trust that is a grantor trust for U.S. purposes will be treated as a bare trust for Canadian purposes, with the result that the settlor will be considered to be the owner of the property for purposes of the Act.

In order for a bare trust to exist for purposes of the Act, the declaration of trust must have been entered into at the time the property in question was acquired by the corporation and the corporation should not be empowered to perform any active duties with respect to the property other than those directly related to the business reasons for there being a bare trust.

A trust under which the trustee does not have any significant powers or responsibilities and does not take any action regarding the trust property without instructions from the settlor, and the settlor is the sole beneficiary, would be ignored for income tax purposes.

Where the parties to an arrangement intend to create a trust for tax purposes and the custodian of the property acts as a trustee under an agreement giving him the usual rights and obligations of a trustee, the fact that the arrangement would not be a trust under the civil law would not preclude it from being treated as a trust for tax purposes.

CRA ruled that s. 107(2) would apply to the distribution of the shares of two CCPCs (Zco, a holding company, and Xco, an investment company) by a discretionary family trust (Trust 2) to its beneficiaries, who were father (Mr. A), mother (Ms. A) and the two children – following which the shares of Mr. A and of the children would be transferred on a s. 85(1) rollover basis into a holding company controlled by Mr. A.

Zco was the result of an amalgamation between it and a subsidiary (Yco), whose shares Zco had received under s. 107(2) in its capacity of beneficiary of another discretionary family trust (Trust 1). After issuing its s. 107(2) ruling regarding the distribution by Trust 2, CRA issued a caution that s. 245(2) could be applied to deem s. 104(4) (the 21-year deemed realization rule) to be applicable to Trust 2 if the distribution by it of its Zco shares did not occur before the 21^st anniversary of the settlement of Trust 1.

On a date prior to 1988, the Trust was created and Mother (a U.S. resident) and each of her children (also U.S. residents) transferred their interests in the Property to the Trust. The Trust Deed provided that during the duration of the Trust, and provided that each of the Children was then living, Mother and the Children had the right to revoke the Trust , in which event the trust estate was to be distributed in specified shares to Mother and each of the Children. Upon the death of the last of the surviving Grantors of the Trust or upon the sale of its property, the trust estate was to be distributed to the then living descendants of Mother, per stirpes.

CRA concluded:

As stated in our presentation at the 1995 CTF conference…a revocable living trust should be recognized for income tax purposes at the time that legal title to property is transferred to it and that the transfer of the property is at its full fair market value… . Therefore… the Trust would be subject to the 21-year deemed disposition provisions of subsection 104(4)… .

After noting that CRA had expressed a different policy between 1988 and 1995, CRA stated "to the extent the subject transactions at issue in the current file occurred in XXX and prior, it cannot be said that at the time, the subject taxpayers relied on opinions we subsequently expressed between 1988 and 1995."

An estate administered by the Public Trustee potentially could remain in existence for more than 21 years. Accordingly, there could be a deemed disposition of gross royalty trust certificates held by the estate 21 years after the trust was created if the interest in the gross royalty trust was capital property.

A joint spousal or common-law partner trust will maintain its status after a divorce for purposes of s. 104(4)(a), so that the deemed disposition rules in s. 104(4)(a) will apply on the death of the latter of the two ex-spouses.

A non-resident trust that is not subject to taxation in Canada is not subject to the deemed disposition rule in s. 104(4), with the result that the cost of its capital properties will not thereby be increased to their fair market value on a date of deemed disposition under s. 104(4). However, where the beneficiary is a Canadian resident and a non-resident trust is a personal trust, s. 107(2)(b) is applicable in determining the cost to the Canadian beneficiary of property acquired on the wind-up of the trust.

S.104(4) will not apply to a communal organization which is deemed to be an inter vivos trust pursuant to s. 143(1) because of the exclusion in the definition of "trust" in s. 108(1).

S.104(4) also applies to non-resident trusts that own taxable Canadian property.

The deemed realization rules in s. 104(4)(b) will apply to charitable and non-profit organizations which are trusts.

Although s. 104(4) generally applies to revocable trusts, it does not apply to property held by bare trusts.

Where the will of the testator directs the executor and trustee to hold the residue of the estate in trust for the testator's child for life and on the child's death to divide the property into equal shares for the testator's grandchildren and to pay and transfer such property to another trustee, or to hold such property, in a separate trust for each grandchild, then in the absence of s. 104(5.8), the 21-year period referred to in s. 104(4)(b) will commence anew on the distribution to the grandchildren trusts. However, where the will directs the executor and trustee to hold the residue in trust for the testator's child for life and on the death of the child to continue to hold the residue in trust for the testator's grandchildren then living under certain terms and conditions, there will be considered to be only one trust created upon the testator's death which will continue to govern the property held for the grandchildren.

A designation under s. 104(13.1) or (13.2) will not affect the status of a spousal trust.

S.104(5.5)(a)(ii) would not preclude an individual from being a beneficiary under a trust where the termination of the beneficiary's interest before enjoyment of any benefit could occur on the beneficiary's death.

Re situation where one trust is a beneficiary of another.

A family inter vivos trust for resident beneficiaries (Trust 1) had distributed its common shares of an investment holding company (Holdings) on an s. 107(2) rollover basis to a corporate beneficiary (Holdco) that was held by a newly-formed trust for family members (Trust 2). CRA was then approached, who determined that GAAR applied to the rollout of the Holdings shares to Holdco, so that s. 104(5.8) should be treated as applying to the capital property of Trust 2 upon the (now imminent) occurrence of the 21^st anniversary of the formation of Trust 1 so as to result in a deemed disposition of such property pursuant to s. 104(4)(b)(ii) – and the Directorate so ruled in this ruling letter.

Most testamentary trusts to arise on the date of death of the testator, so that the 21-year rule generally is computed from that date.

Unusually, the creation date of the testamentary trust might not be concurrent with the testator’s date of death - for example, the will provides that, on the date of the death of the first-generation beneficiaries, such as the spouse, the trustee is to divide the remaining property into equal parts and hold each part as a new trust for each of the testator’s children. In that situation, the latter trust may be viewed as being created some time after the testator’s date of death. However, the deemed disposition date of those new trusts would still be based on the testator’s date of death because of the rule in s. 104(5.8), which described as intended to prevent any restarting of the 21-year clock through trust-to-trust transfers.

Does CRA have an update respecting its comments at the 2016 CTF Roundtable, Q.1 respecting a distribution from a discretionary family trust ("Old Trust") to a Canco the shares of which are held by a newly established discretionary family trust ("New Trust"), thereby avoiding the application of the 21-year deemed disposition rule?

CRA noted that the New Trust was provided with another 21 years to determine who, from among the potential beneficiaries, would receive the trust property, which could result in deferring the unrealized gain beyond the lifetime of the individual beneficiaries alive on the date of the Old Trust’s 21^st anniversary, that such planning circumvented the anti-avoidance rule in s. 104(5.8), and that CRA will apply GAAR when faced with a similar set of transactions unless substantial evidence supporting its non-application is provided.

At the 2016 CTF Roundtable, CRA also indicated that it was also considering the application in the situation whereby the realization of the accrued gains inherent in the distributed property would not be deferred beyond the lifetime of the existing beneficiaries at the time of the 21^st anniversary of Old Trust, on the basis that the deferral of the realization event, i.e. the death of the individual beneficiary, would be consistent with that achieved by a deferred rollover of property to a Canadian resident individual beneficiary pursuant to s. 107(2) (although, in fact, the trust property would continue to be held indirectly in a discretionary trust.)

CRA has now concluded its review of this second situation, and has concluded that the Act does not contemplate any deferral beyond the 21-year period while property is directly or indirectly held in a discretionary trust, so that it will not rule thereon unless substantial evidence supporting the non-application of GAAR is provided.

The transfer of all the assets of an existing inter vivos trust (which was approaching its 21^st anniversary) to a new inter vivos trust, whose terms were more-or-less the same but had been clarified to resolve key ambiguities, was ruled to be subject to s. 104(5.8).

A discretionary trust (Old Trust) that is approaching its 21st anniversary distributes property with an unrealized gain to a corporate beneficiary (Canco) that is wholly owned by a newly-established discretionary trust (New Trust – also resident in Canada) under s. 107(2). S. 104(5.8) should not affect the timing of the 21st anniversary of New Trust since the property was not transferred directly from Old Trust to New Trust. Does CRA agree?

When this issue came before it on a ruling request, the GAAR Committee concluded that this planning circumvented s. 104(5.8) contrary to its object and spirit, as well as that of the deemed disposition rule in 104(4)(b) and the scheme of the Act for the realization of capital gains. Accordingly if the distribution is made by an existing discretionary trust to a Canadian-resident corporation wholly owned by a new discretionary trust resident in Canada, CRA generally will infer that the primary purpose of the distribution is to defer the income tax otherwise applicable under s. 104(4).

CRA is further concerned that this device could be used to defer the realization of the capital gains for several generations, or even indefinitely.

A distribution to a corporate beneficiary will generally be acceptable if the individual shareholders of that corporation are resident in Canada because, ultimately, what that means is that, as the individuals are residents of Canada, there will be taxation in their lifetime or on death. As for non-resident individual beneficiaries, CRA is looking to see that there will be taxation within Canada in their lifetime.

The first deemed disposition day of a pre-1972 non-spousal testamentary trust was deferred until January 1, 1999 through an exempt beneficiary election under s. 104(5.3). On January 1, 2000, one of its beneficiaries died and its assets were transferred to a successor ("transferee") trust in a transfer to which s. 104(5.8) applied. What is the "disposition day" of the transferee trust under s. 104(5.8)?

CRA found that the day determined under s. 104(5.8)(a)(i)(A) is January 1, 2020, and the day determined under s. 104(5.8)(a)(i)(B) is January 1, 2021, so that the transferee trust's first deemed disposition day is January 1, 2020. Under s. 104(5.8)(a)(ii), the transferee trust would not also have a deemed disposition on January 1, 2021 for purposes of subsections 104(4) to (5.2).

A testamentary trust made an exempt beneficiary election under s. 104(5.3) so that its deemed disposition day was deferred until January 1, 1999. In 2000, one of the beneficiaries died and a successor trust was established. Accordingly, assets were transferred from the testamentary ("transferor") trust to the successor ("transferee") trust and s. 104(5.8) applies to the transfer.

In these circumstances, the first deemed disposition date is the earlier of:

January 1, 2020 being (under s. 104(5.8)(a)(i)(A)) the first day on or after the transfer date on which the transferor trust would have been deemed under s. 104(4) to dispose of its property, without regard to the transfer - i.e., 21 years after January 1, 1999; and

January 1, 2012 being (under s. 104(5.8)(a)(i)(B)) the first day on or after the transfer date on which the transferee trust would have been deemed under s. 104(4) to dispose of its property - i.e., 21 years after January 1, 2000.

Therefore, the transferee trust's first deemed disposition day is January 1, 2020. Under s. 104(5.8)(a)(ii), the transferee trust would not also have a deemed disposition on January 1, 2021.

For U.S. tax purposes, the trustees of an Ontario trust (“1984 Trust”) created a new Ontario trust ("1989 Trust") in 1989, with all the property of 1984 Trust (which was terminated) being transferred to 1989 Trust.

CCRA noted that the change in trustees did not necessarily give rise to a new trust, and indicated that GAAR could be considered if the purpose of the transaction was to avoid the 21-year realization rule.

Discussion of procedure for revocation of election.

Scenarios (a) and (b)

A resident trust receives a deemed dividend under s. 84(3) on a cash redemption of shares of a wholly-owned Canadian corporation, or under s. 84(2) on a winding-up of the corporation, and then distributes that cash amount as a capital distribution in the same year.

After noting that the fact that the distribution was paid in the year did not establish (e.g., under s. 104(24)) that it was payable for the purposes of s. 104(6), and that “[i]f the amount cannot be paid in accordance with the terms of the trust and the relevant trust law, the amount cannot be considered to have become payable for the purposes of subsections 104(6) and (13),” CRA indicated:

Provided the cash received as consideration from the redemption or winding-up was paid to the capital beneficiary in accordance with the terms of trust and the applicable trust law, the deemed dividend became payable to the beneficiaries for the purposes of subsections 104(6) and 104(13) … .

Scenarios (c) to (f)

In these Scenarios, the corporation instead increases the stated capital of its shares, resulting in a s. 84(1) deemed dividend, or is deemed under s. 91(1) to receive foreign accrual property income from a controlled foreign affiliate. The distribution in that year by the trust of such “phantom income” occurred pursuant to a clause in the trust deed granting the trustee the power to use other assets of the trust to distribute the deemed income (Scenarios (c) and (e), respectively), or occurred without such a clause (Scenarios (d) and (f), respectively).

CRA stated:

[W]here an amount included in the taxable income of a trust is not recognized as income or capital for trust law purposes (referred to as “phantom income”), the terms of the trust must specifically permit an amount equivalent to the phantom income to be paid or payable or, alternatively, provide the trustees with the discretion to pay out or make payable amounts that are defined as income under the Act in order for the phantom income to become payable to any beneficiary.

It indicated that this test was satisfied in Scenarios (c) and (e), but not in Scenarios (d) and (f).

When it applies, s. 104(18) deems income of a resident trust to have become payable in a taxation year to a beneficiary under 21 years of age, even though the income was not actually paid or payable to the beneficiary in the year. For s. 104(18) to apply, the entitlement of the child to that beneficiary’s share of the unpaid income must be vested otherwise than because of the exercise by any person of, or the failure of any person to exercise, any discretionary power, and the right to which must not subject to any future condition (other than a condition that the individual survive to an age not exceeding 40 years).

The will of a Quebec resident left all his property in equal shares, to his two children, aged 10 and 15. His will extended the estate administration until the children’s respective shares were distributed to them on attaining 25, with the will providing, in the meantime, that all income generated on each child’s share was to be used in the executor’s discretion for the support or maintenance of that child, with discretion to encroach on capital in the child’s favour.

CRA applied the principle that:

In the case of an estate, the conditions of subsection 104(18) may be satisfied even if the will contains provisions giving the executor discretion as to the timing of the payment of income or capital to a beneficiary under 21 years of age, provided that the executor has no discretion as to the determination of the amount of income to which such a beneficiary is entitled.

Accordingly, it appeared plausible to CRA that (subject to reviewing the details), s. 104(`8) could apply.

After referring to the common-law concept of the executor’s year, IT-286R2, para. 6 states:

In spite of such common law rules, where the initial taxation year of a testamentary trust coincides with the executor's year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the Department will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24). However, if even one beneficiary of the trust objects to this treatment with respect to the executor's year, the income of the trust for that year, to the extent that it was not actually disbursed during that year, will be taxed in the hands of the trust. In any case where the trust has been wound-up and the final T-3 return is filed for a period which terminates before the end of the executor's year, the income of the trust (including taxable capital gains) earned for that period is considered to have been paid to the beneficiaries of the trust in the calendar year in which that period ends, except for any part of the trust's income that was disbursed by the trustee to persons other than beneficiaries pursuant to the deceased's will or the operation of law e.g., the will stipulated that debts are to be paid out of income.

CRA elaborated on this position in the context of a graduated rate estate, indicating that:

• This position only applies “where the only reason that an amount of income is not payable to the beneficiaries is that it was earned in the initial 12 months of the estate” and does not apply where the income is not considered by CRA to be payable to the beneficiaries under the terms of the will.
• However, regarding the terms of the will, CRA is prepared to accept that, where the will does not specify which assets the bequests are to be paid from, “the residue of the Estate can include income” so that the income of the estate can be considered to be payable to the beneficiaries for ss. 104(6) and (23) deduction purposes.
• The quoted position allowing income in the executor’s year to be considered as payable to the beneficiaries only if they all so agree applies only where the estate has not been wound up in the executor’s year such that the estate administration continues beyond the first year (otherwise, the income would in fact have been payable in that year).
• The latter point regarding the estate having been wound up “in” the executor’s year, also applies where the end of the estate’s taxation year coincides with the end of the executor’s year.

IT-286R2, para. 6 states that the income of the trust for that year is considered to be payable to the beneficiaries where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor's year, the taxation year of a testamentary trust coincides with the executor’s year, and all of the beneficiaries agree to this treatment. CRA confirmed that where the initial taxation year of the estate is less than one year, the above comments apply to the “stub” portion of the executor’s year that is within the first estate year. In this regard, CRA indicated that the mere fact that the beneficiaries each had a fixed percentage entitlement to the net estate would not by itself result in the trust income being considered to be payable to them during the stub executor’s year.

As to the portion of the executor’s year falling in the second estate year, CRA effectively implied that the executor’s year concept was irrelevant given that the income for the second estate year could be paid or payable to the beneficiaries under the general s. 104(24) rules by the end of that year.

A father who is the trustee of a discretionary family trust reimburses himself out of the trust funds for itemized expense of restaurant meals of the children and issues T3 slips to them. Is this acceptable?

CRA noted the three requirements in ITTN 11 for trust deductibility and inclusion in the beneficiaries’ income:

• the trust must exercise discretion, pursuant to the terms of the trust or the will, to make the amount of the trust income payable to the child before the payment is made;
• either:
  
  • notification to the parent of the exercise of the discretion, along with the parent’s direction to pay the amount to the appropriate person, must occur, or;
  • the payment must be made pursuant to the parent’s request and direction, where the parent was advised of that discretion; and
• it is reasonable to consider that the payment was made in respect of an expenditure for the child’s benefit.

CRA further noted that Degrace Family Trust stated that “the expenditure by the trustee must clearly be made by the trustee in his or her capacity as trustee for a purpose which is unequivocally for the benefit of the beneficiary,” and that in a 1999 technical interpretation, where “the household expenditures [were] basically totaled and divided by the number of family members in order to determine the child’s share” CRA indicated that

[I]t would be very difficult for the trustee to substantiate that the payments are unequivocally for the child’s benefit.

A family trust paid income to the minor children in breach of a prohibition in the trust deed against making distributions to designated beneficiaries. CRA considered, notwithstanding s. 104(24), that if the amount cannot be legally payable, actually paying it will not bring it within the s. 104(6) rule. Accordingly, there was no s. 104(6) deduction to the trust, and CRA considered the distributions to be includible in the children’s income under s. 105(1) rather than s. 104(13).

CRA considers that the residue of the Estate can include income and that such income generally can be made payable to a residual beneficiary, so that such income can be deducted by the estate under s. 104(6).

However, depending on the wording of the Will, after the debts and specific bequests of the estate have been paid, the Executor may be required to pay the taxes owing on the income generated by the Estate and distribute the after tax “residue” to the residual beneficiaries. In such cases distributions to residual beneficiaries could not be considered to be income payable to a beneficiary for purposes of subsections 104(6) and 104(13).

In such a case, instead of the deduction, “the income would be taxed in the estate, and the residual beneficiaries would receive capital distributions, comprised of after tax paid capital of the estate.”

As deemed income (e.g., a capital gain deemed to arise under a s. 48.1 election on the IPO of a Canadian-controlled private corporation) is not recognized as income or capital for trust law purposes, in order for it to be distributed under ss. 104(6) and (24) its distribution must be authorized under the trust deed and the trustees must specifically distribute it (which can be accomplished by a payment in kind, e.g., distributing the shares in question).

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

In finding that the amounts distributed by the Trust likely were deductible in computing its income under s. 104(6)(b), CRA stated (TaxInterpretations translation):

[T]he acts of Father, as trustee, in causing the income to be payable to the Children and to designate those amounts under subsection 104(19), were valid. However, we consider that the repayment of those amounts by the Children to Father raises a serious doubt as to the use of those funds by the Children in their complete discretion.

If the evidence demonstrates that the amounts were payable to the Children as mandataries of Father, such amounts may be deducted by Trust in computing its income.

After the acquisition of a mutual fund trust (the "Fund") by Bidco, the Fund sells all its assets, including an interest in a limited partnership, to Bidco in consideration for the assumption of liabilities and a note of Bidco. The Fund then declares a distribution of the capital gain realized by it on such sale, and also declares a distribution of other taxable income and of a capital distribution, and satisfies the distributions by distributing the note to Bidco. Ruling that the Fund will receive a s. 104(6) deduction for the amount of income that is so distributed by it.

Trust agreements for mutual fund trusts (the "Funds") are amended to provide that the trustee shall allocate all or a portion of net capital gains realized by the Fund in the year to unitholders who have redeemed units of the Fund at any time in the year, provided that the amount of net capital gain so allocated to a particular redeeming unitholder shall not exceed the amount by which the amount payable on the redemption of the units (based on their NAV) exceeds the adjusted cost base of the units being redeemed, and to provide that proceeds of redemption otherwise payable will be reduced by the amount of such allocation. On the year's final distribution date, each Fund will make payable to its unitholders their pro rata share of the amount by which the net income and net capital gains of the Fund for the year exceed any amount previously made payable or allocated on an interim basis during the year. As an exception, a portion of net income of the Fund may be distributed to certain unitholders as a management fee distribution and a portion of net capital gains of the Funds may be distributed to the unitholders who have redeemed units of the Fund. Distributions payable to a non-redeeming unitholder are reinvested in additional units of the relevant series at the series net asset value per unit.

Rulings that the trust may deduct the taxable portion of the capital gains payable to a redeeming unitholder and make a s. 104(21) designation in respect of that amount, that the proceeds of disposition of the redeemed units will be equal to the excess of the net asset value of the units over the capital gains distribution in respect of those units, and that s. 107(4.1) will not apply.

Can the trustee allocate the taxable portion of a capital gain to an income beneficiary and the non-taxable portion of the capital gain to a capital beneficiary? CRA responded:

Absent a provision to the contrary in the trust indenture, capital gains realized by a trust are generally not part of "income" for civil law purposes. With respect to a provision to the contrary to the trust indenture, the CRA and jurisprudence do not recognize clauses that give the trustees of a trust complete discretion in determining what constitutes capital or income. However, specific clauses that clearly provide that certain types of payments will constitute income to the trust are acceptable.

Thus, if such a specific clause legally allows for the taxable capital gain to be paid to an income beneficiary and the non-taxable portion of the capital gain to be paid to a capital beneficiary, the trustee could make the allocation described herein.

A resident testamentary trust resident holds shares of a publicly traded corporation (that are not taxable Canadian property) for the benefit of a non-resident beneficiary. If no s. 107(2.11)(a) election is made, does a distribution of the appreciated property of the trust to the non-resident beneficiary necessarily result in the taxable capital gain realized on that distribution being considered to be payable to the non-resident beneficiary so that the trustee would be required to withhold Part XIII tax respecting such amount? CRA responded:

In the absence of any evidence to the contrary, a reasonable argument can be made that the taxable portion of any accrued gain on the property distributed to the non-resident beneficiary has been paid to that beneficiary as part of the capital distribution which gave rise to the gain. The absence of an election by the trustee under subsection 107(2.11) supports the view that such a result was intended in a respect of a particular trust. Thus, in the absence of an election under subsection 107(2.11), the portion of the trust's income so distributed to the non-resident beneficiary (the taxable portion of the capital gain) would be subject to Part XIII tax as a distribution of trust income.

The Declaration of Trust of a mutual fund trust is amended to provide that on redemption of units, the unitholders will be paid a proportionate share of net capital gains and net income realized on their class of units in the year to date, with the redemption proceeds being reduced accordingly. Rulings that the mutual fund will be entitled to deduct under s. 104(6)(b) the taxable portion of the capital gains distribution so paid to redeemed unitholders and that s. 104(7.1) will not apply.

Regarding the allocation of expenses (including fees under s. 20(1)(bb)) by a mutual fund trust (or mutual fund corporation) to its different sources of income before allocation to its beneficiaries (or shareholders), CCRA stated:

[T]hose expenses must be deducted from the income from the source to which they relate or, where they relate to more than one source of income, allocated on a reasonable basis among the different sources of income to which they relate. Paragraph 5 of Interpretation Bulletin IT-524, however, provides an alternative method of allocating expenses that relate directly to a trust's dividend income where there is only one beneficiary or where all the beneficiaries share pro rata in each type of income of the trust. In those cases, the trust will be able to apply those expenses against its income other than taxable dividends, including against its net taxable capital gains … in order to allow for the maximum possible flow-through of the dividend tax credit to a beneficiary or beneficiaries, provided that this method does not contravene the legislative provisions relating to trusts or the trust agreement.

The trust agreement respecting a mutual fund trust is amended to provide that where units of the fund are redeemed, a portion of the redemption proceeds will be treated as the redeeming unitholders' share of the fund's net realized capital gains in the year up until the date of redemption, and that the balance of the net capital gains realized by the fund will be allocated to unitholders at the end of the year.

Ruling that the fund may deduct from its income the capital gains distributions made to redeeming unitholders, that the proceeds of disposition of the redeemed unitholder of the redeemed units will be the amount by which the proceeds paid exceeds the amount treated as a capital gains distribution, and that s. 104(7.1) will not apply.

Income arising under s. 94.1 to a Canadian resident trust may be deducted under s. 104(6) if, under the trust indenture, the amount in question is payable.

Where preferred shares are distributed, the amount of the distribution will be the fair market value of the preferred shares.

The Estate of a Canadian resident, with two of his children as (apparently non-resident) beneficiaries (A and B), was not resident in Canada by virtue of having a non-resident liquidator, but was deemed to be resident in Canada as described in s. 94(3)(a). The Estate's income included pension and third-party investment income and a deemed dividend from shares (which were not taxable Canadian property) of a taxable Canadian corporation. The full amount of the deemed dividend was made payable to Beneficiary A. The other income of the Estate was taxable in the Estate (with Head Office noting that assuming this income was payable to Beneficiary B, the Estate might wish to make a s. 104(13.1) designation). Head Office stated:

the expression "the maximum amount that....would be deductible under subsection 104(6)" in paragraph 104(7.01)(a) refers to the maximum amount otherwise available for a deduction by the trust under subsection 104(6) and not the amount that the trust would choose to claim pursuant to paragraph 104(6)(b).

The Declaration of Trust of the Fund, which is a listed closed-end mutual fund trust (with one class of units) not holding non-portfolio property, will be amended to create a new class of preferred units, which will receive a preferential distribution up to their redemption value on liquidation, will be allocated income and net taxable capital gains of the Fund for ITA purposes in proportion to Fund distributions received by them and, insofar as the initial series is concerned, will be entitled to fixed cumulative quarterly cash distributions, will be retractable after a specified date and also redeemable after a specified date, and will be listed on the Stock Exchange.

CRA ruled that the amendments and issuance of preferred units would not result in a disposition of (existing) Units or Fund property, and that s. 104(7.1) would not apply.

An open-end mutual fund trust ("Fund 1") investing in senior floating rate and lower-rate loans around the world will add a class of units (the "Hedged Class") intended for investors who wish to invest on a currency neutral basis. Accordingly, Fund 1 will purchase currency forward contracts (the "Canadian Hedging Contracts") solely in respect of the Hedged Class, and:

The Hedged Class … will have a return that is based on the performance of Fund 1's portfolio of investments without regard for the performance, either positive or negative, attributable to changes in value of the relevant foreign currency relative to the Canadian dollar because the foreign currency exposure of the portion of Fund 1 that is attributable to the Hedged Class will be substantially hedged using the Canadian Hedging Contracts.

Accordingly, the net asset value (NAV) of the Hedged Class will be computed in the same way as that for the non-Hedged Classes except that it will be adjusted by the cost of and performance of the Canadian Hedging Contracts held by Fund 1 in relation to the Hedged Class portion of the Fund, and “the amount of distributions of net income and net realized capital gains of Fund 1 payable to Hedge Unitholders will be determined in the same way as for holders of Units of other Classes of Fund 1, except by taking into account the performance of the Canadian Hedging Contracts held by Fund 1 and by taking into account the Class Expenses [defined as “the expenses of that Fund for the relevant period that are referable specifically to that Class”] and any liabilities of Fund 1 in respect of the Canadian Hedging Contracts.” Thus, apparently, net FX gains will be distributed in cash to the unitholders of the Hedged Class.

However, "losses, if any, from the Canadian Hedging Contracts will first be allocated against income attributable to the Hedged Class and ... where losses exceed such income, the losses will then be applied against income of all other Classes of Units within the Fund." As each forward contract terminates, it will be replaced with another similar contract for the next period, so that the hedging will be continuously maintained.

Rulings re no disposition of the existing units on such amendment, no resettlement of Fund 1 and no application of s. 104(7.1).

An open end (as described in s. 108(2)(a)) mutual fund trust (the Trust), whose units (the Units) trade on an exchange, wishes to qualify as a closed-end mutual fund trust under s. 108(2)(b), in order that it can issue (non-retractable) "Preferred Units."

Following an amendment of its Declaration of Trust (not described), the Trustees will authorize the issuance of two series of Preferred Units (designated as Series A Preferred Units and Series B Preferred Units) having rights determined by the Trustees based on current market conditions. The Series A Preferred Unit provisions may provide for a fixed, cumulative preferential cash distribution payable quarterly (with a specified reset on specified anniversaries based on GOC yields), a right of the holder on each anniversary to have its units reclassified as Series B Preferred Units, a right to be repaid the subscription amount plus accumulated and unpaid distributions (the "redemption amount") on termination of Trust, a redemption right of Trust on specified anniversaries to redeem for the redemption amount, and an absence of voting rights except after specified arrears. The Series B Preferred Unit provisions would be similar except that the distributions would be based on a floating rate. The two series would rank in parity with each other (and ahead of the Units) and would both be listed.

Ruling that s. 104(7.1) will not apply to deny the deduction by Trust of any amount it otherwise is entitled to deduct under s. 104(6)(b) in respect of amounts paid or payable to its Unitholders or Preferred Unitholders.

An open end (as described in s. 108(2)(a)) mutual fund trust (the Trust), whose units (the Units) trade on a stapled basis with a second open-end mutual fund trust (FE Trust), wishes to qualify as a closed-end mutual fund trust under s. 108(2)(b), in order that it can issue (non-retractable) "Preferred Units." For the closed-end qualification steps, see the summary under s. 108(2)(b) - and a summary of one of the disposition issues, see s. 248(1) - disposition.

The Trust will amend its Declaration of Trust to provide for the issuance of the Preferred Units, which will be entitled to priority over the Units with respect to the payment of distributions (other than distributions paid through the issuance of additional units) and with respect to liquidating distributions. However, neither the Units nor the Preferred Units of any series shall have any term that gives any holder thereof an interest in the income of the trust as a percentage of any distribution received by the holder of those units that is greater or lesser than an interest in the income of the trust as a percentage of any distribution received by the holder of any other Units, or preferred Units of any series - and, similarly, the Declaration of Trust will provide that income and net taxable capital gains of the trust "will be allocated to Unitholders and Preferred Unitholders in the same proportions as the [respective] distributions received" by them.

The Declaration of Trust will be amended to provide that the Units will not be redeemable by the holders on and after a specified date. Following these amendments, the Trustees will authorize the issuance of Series A Preferred Units having rights determined by the Trustees based on current market conditions.

Ruling

that s. 104(7.1) will not apply to deny the deduction by the Trust of any amount it otherwise is entitled to deduct under s. 104(6)(b) in respect of amounts paid or payable to its Unitholders or Preferred Unitholders.

A mutual fund trust pays commissions ("DSC Commissions") to the dealer through whom its units were purchased and also pays an annual trailer fee. However, the dealer proposes to provide an investor with a rebate (the "Rebate") of a portion of such commission and trailer fees. This is accomplished by the Rebate being paid in cash directly to the investor (or, alternatively, being paid in cash to the dealer which, in turn, provides it to the investor). After noting that the arrangements could be structured so that s. 12(2.1) did not apply to the investor, with the payments to the investor being treated instead as distributions of income (or, where applicable, capital) of the mutual fund trust to the investor, CRA declined to provide definitive guidance on s. 104(7.1) although, based on past experience, it might not be applicable:

...in many of the cases we have seen subsection 104(7.1) was not applicable because it was not "reasonable to consider that one of the main purposes for the existence of any term, condition, right or other attribute of an interest in a trust (other than a personal trust)" was "to give a beneficiary a percentage interest in the property of the trust that is greater than the beneficiary's percentage interest in the income of the trust". That is, where a Dealer wishes to pass on to his clients a portion of the DSC Commission or Trailer Fee that he has earned, as a marketing tool in order to remain competitive, the main purpose test required in subsection 104(7.1) would not be met.

In order to permit some unitholders (who have US dollars to invest) to achieve a return in US dollars that is the same as the Canadian market return without being affected by the US/Cdn. FX rate, various mutual fund trusts will issue a "Series USD" (with subscriptions and distributions payable in US dollars) and purchase currency forward contracts (with resulting gains or losses being allocated to the holders of the Series USD, but with the NAV being determined in a similar manner to the existing series) to accomplish this end. Conversely, each fund will issue "Hedged Series" which, through the purchase of related currency forward contracts, will generate foreign market returns for those with Canadian dollars to invest which are neutral to fluctuations in the Canadian dollar compared to the relevant foreign currency. The costs or benefits sustained from the Hedge Contracts will only be allocated to those investors who hold either Series USD or the Hedged Series, to which the Hedge Contracts relate. Any losses from the Hedge Contracts will first be allocated against income attributable to either Series USD or the Hedged Series and, where losses exceed such income, the losses will then be applied against income of all other Series within the Fund.

Ruling that s. 104(7.1) will not apply "especially in light of the uncertainty of foreign exchange fluctuations."

A closed-end mutual fund trust intends to qualify as a REIT. The beneficial interests in the trust currently consist of only one class of units (the "Units").

The trust will amend its declaration of trust to create a new class of "Preferred Units," consisting of more than one series (including the Series A and B Preferred Units described further below). The Preferred Units of each series will be entitled to priority over the (ordinary) Units with respect to the payment of distributions (other than distributions paid through the issuance of additional units) and with respect to the distribution of assets of the trust or returns of capital in the event of the liquidation or winding-up of the trust. However, neither the Units nor the Preferred Units of any series (except as otherwise provided in the terms of of a particular series of Preferred Units) shall have any term that gives any holder thereof an interest in the income of the trust as a percentage of any distribution received by the holder of those units that is greater or lesser than an interest in the income of the trust as a percentage of any distribution received by the holder of any other Units, or preferred Units of any series - and, similarly (and except as provided otherwise by the trustees in the terms of any particular series of Preferred Units), the declaration of trust will provide that "income and net taxable capital gains for the purposes of the Act will be allocated to Unitholders and Preferred Unitholders in the same proportions as the distributions received by such holders."

By virtue of the distributions preference of Preferred Units, the trust shall not pay any amount to the Unitholders (other than through the issuance of additional Units) unless and until the distribution entitlements of the Preferred Units have been paid in full. In the event of the termination of the trust, the trust net assets will be distributed to the Preferred Unitholders in accordance with the terms of the Preferred Units, with the remaining balance being distributed proportionately on the Units.

The Series A Preferred Units will be entitled to a fixed cumulative preferential cash distribution, payable quarterly, of between X% and Y% (with the rate to be reset on the 5th anniversary of issuance based on the five-year Canada bond yield), with such distributions to be paid in priority to any amounts paid to the Unitholders (other than through the issuance of additional Units). They will have the right on termination of the trust to be paid their subscription price plus any accumulated and unpaid disttributions, in preference to the Units. On such 5th anniversary (and every 5th anniversary thereafter) they can be required by the holder to be reclassifed as Series B Preferred Units (ranking on parity with the Series A and with similar attributes to the Series A except for a floating rate); and on such anniversary dates they also will be redeemable at the option of the trust for their subscription price plus accumulated unpaid distributions. They generally will be non-voting.

Ruling that s. 104(7.1) will not apply to deny the deduction by the trust of any amount it otherwise is entitled to deduct under s. 104(6)(b) in respect of amonts paid to its Unitholders or holders of its Series A Preferred Units.

Trust agreements are amended to provide that the trustee shall allocate all or a portion of net capital gains realized by the trust in the year to unitholders who have redeemed units of the trust at any time in the year, provided that the amount of net capital gain so allocated to a particular redeeming unitholder shall not exceed the amount by which the amount payable on the redemption of the units exceeds the adjusted cost base of the units being redeemed, and to provide that proceeds of redemption otherwise payable will be reduced by the amount of such allocation: ruling that s. 107(4.1) will not apply.

Members of the public subscribe for Class A redeemable units of a mutual fund trust (the "Fund"). A holding corporation for a vendor group accomplishes an indirect sale of a business to the Fund by selling shares and limited partnership units to the subsidiary trust of the Fund (the "Trust") in consideration for Class A and Class B units of the Fund (which previously had been transferred by the Fund to the Trust in consideration for debt) and for cash. The Class B units of the Fund, for so long as subordination arrangements are in place, receive distributions of distributable cash only after stipulated amounts of distributable cash (corresponding to estimates provided to the public at the time of their subscription for Class A units) are first distributed on the Class A units, with the Class A and Class B units thereafter sharing rateably once the Class B units have received their catch-up adjustment. Adjustments to the redemption amount of the Class B units (which are exchangeable at the end of the subordination period into Class A units) also reflect the subordination arrangement.

Ruling that s. 104(7.1) did not apply to the Fund.

A unit trust whose purpose was to raise financing for a corporation has one class of units that are held by the public and another class of units that are held by the corporation. The Trust annually pays all its net distributable funds to the holders of one class of units to a maximum of the "indicated yield", and then to the holders of the other class of units as to the balance of the net distributable funds. In commenting as to why s. 104(7.1) would not apply, the Agency stated that:

"Generally, multi-class structure trusts may be permissible so long as the units are not structured with the objective of giving an interest in the capital of the trust that exceeds the income entitlement of the class. The difference in dividend rate between the two classes of capital units is to compensate for the fact that one class is redeemable after X years where the other is only redeemable on maturity."

Rulings that, where the trust deeds for mutual funds are amended to provide that, realized capital gains will be allocated first to units that were redeemed during the year, based on their pro rata share to the time of redemption, and then allocated pro-rata among unitholders of record at the end of the year, s. 104(7.1) will not apply and that the proceeds of disposition of the redeemed units will not include the capital gains so allocated to the redeemed units.

A discretionary trust received an eligible dividend in a year and immediately allocated and distributed it to a beneficiary; and later in the same year, received an ordinary (non-eligible) dividend which it immediately allocated and distributed to a second beneficiary, also in accordance with the discretions accorded by the trust deed. CRA found that the two respective dividends could be designated under s. 104(19) exclusively to the respective beneficiaries rather than being required to be designated on a pro rata basis.

If a beneficiary receives an amount to be designated under s. 104(19) as a taxable dividend (which CRA noted would be effective only on December 31 of the trust taxation year), but has died before that year-end of the trust, what is the nature of the income? CRA stated:

The taxation year of an individual is defined in subsection 249(1) as being a calendar year. There is no provision in the Act that shortens a taxpayer’s taxation year in his or her year of death so as to cause it to end as at the taxpayer’s date of death.

… Accordingly, the taxable dividend deemed to be received would need to be reported in the individual's final personal income tax and benefit return.

An estate that qualified as a graduated rate estate (GRE) was not able to convert some of the estate property into cash until late in the third year after the death of the deceased. During the 36 month GRE period, the residuary estate beneficiary becomes disabled. Can the estate continue indefinitely and elect to be treated as a qualified disability trust each year such that graduated tax rates will continue to apply?

CRA indicated, likely “no” since once the estate administration was completed (or should have been completed), there would be no estate income (as the beneficial ownership of its property had passed to the residuary beneficiary) – or if the estate somehow were viewed as still earning income, such income would be payable to the beneficiary and, therefore, be income of the beneficiary under ss. 101(24) and 104(13) rather than of the estate.

A discretionary irrevocable personal family trust (the “Trust”), had non-resident beneficiaries (“Y” and “Z”) and held common shares of a holding company (“Holdco”). When it was approaching the 21-year deemed realization date, its trustees resolved to distribute an equal share of the Trust’s assets to each of Y and Z to the complete exclusion of any other beneficiary (the “vesting”). After the vesting, Y and Z purportedly assigned their respective capital interests in the Trust under s. 85(1) to an unlimited liability company (“ULC”) incorporated by them in exchange for ULC common shares. The Trust designated under s. 104(19) taxable dividends as those of ULC. Trust assets were transferred to ULC subsequently to this assignment.

The Directorate found that ULC did not become a beneficiary under the Trust as the Trust indenture defined “Beneficiary” to mean Y, Y’s spouse (Z) and Y’s issue, and the trustees were not empowered to vary the Trust or to add new beneficiaries.

In the Directorate’s view, this meant that the dividends were includible in the income of Y and Z, stating:

As Y and Z are the sole shareholders of ULC … ULC receives the amount for the benefit of the existing income beneficiaries of the Trust, namely Y and Z.

Accordingly, such income distribution to Y and Z was subject to Part XIII tax under s. 212(1)(c).

Similarly, “the transfer of the Trust’s assets to ULC … was for the benefit of Y and Z,” and s. 107(2.1) thereby applied to deem them to be disposed of for fair market value proceeds.

Before stating that it “would not accept that the trustees may recharacterize as capital the taxable dividend income deemed received by the Trust,” the Directorate quoted its position in 2001-0076845 “that a discretionary power granted to the trustee of a trust to distinguish income and capital items cannot change the nature of an amount of income or deductible expense into a capital receipt or expenditure and vice versa.”

Is a legatee by particular title (i.e., the recipient of a specific bequest, even if not an heir by virtue of the Civil Code of Quebec ("CCQ")) a beneficiary of the succession; and what is the treatment the treatment of interest paid to the legatee by particular title that accrued from the time of death up to the payment of such legacy given that s. 743 of the CCQ provides that the fruits and revenues from the property bequeathed accrue to the legatee from the opening of the succession? After referencing s. 248(25), CRA stated:

[E]ven if not an heir within the meaning of CCQ, a legatee by particular title is a beneficiary of the succession within the meaning of the Act. ...

Questions as to whether section 743 of the CCQ applies and whether the legatee by particular title is entitled to an amount of interest as income beneficiary of the succession are legal issues on which we cannot rule. If such is the case, the succession may deduct the amount of the trust's interest income that is paid by it in computing its income under paragraph 104(6)(b). … The legatee by particular title must include it in computing income under subsection 104(13).

As a result of the death of an individual who had previously become resident in the U.S. (the "Settlor"), and who was the sole contributor to a U.S.-resident trust with U.S.-resident trustees (the "Trust"), the taxpayer and another Canadian-resident became equal beneficiaries of the remainder interest in the Trust. Upon the Settlor's death, her Estate (which is a trust for purposes of the Act and is resident in the U.S. for purposes of the Act) became the beneficiary of her IRA, a "foreign retirement arrangement." All amounts in the IRA are pre-tax amounts; all distributions from the IRA are taxable under section 72 of the IRC.

Proposed transactions

The proceeds of the IRA will be paid to the Estate, which then will pay such proceeds to the Trust. The Trust will pay cash legacies to U.S. charities. The Trust will pay the remaining proceeds of the IRA (after a holdback for possible state tax) to the Beneficiaries which, under s. 1441 of the IRC will be subject to a U.S. withholding tax of 30%, reduced to 15% under the Treaty. Under the IRC, the withholding tax of 15% is a tax payable by the Beneficiaries.

Rulings

The proceeds of the IRA paid to the taxpayer inclusive of the 15% U.S. withholding will be considered to be income from a trust that is sourced in the U.S., and will be included in the taxpayer's income under ss. 104(13)(a) and 12(1)(m). (The brief reasons cite s. 56(1)(a)(i)(C.1).) The 15% withholding tax withheld by the Trust from the taxpayer's share of the distribution described above will be a "non-business-income tax" paid to the U.S. government to the extent that it is not deducted by the taxpayer under s. 20(12).

An "evil trust" is structured to deliberately cause the application of subsection 75(2), so as to cause the attribution of dividend income to a connected corporation, where the income will not be taxable, while at the same time distributing proceeds in the form of cash by way of either a capital distribution or a loan to the intended recipient. CRA noted that:

[The] trust structures designed to purposely invoke attribution pursuant to subsection 75(2), with a view to avoiding the payment of tax on extracted corporate dividends …typically involves two Canadian corporations and a trust that acquires shares in one of the corporations ("Corp A"). In some cases, the acquisition is by subscription for the Corp A shares using cash contributed to the trust by the other corporation ("Corp B"), or the arrangement may involve having Corp B contribute shares of Corp A that it holds directly to the trust. In either case, when Corp A subsequently declares a dividend on the shares held by the trust, the scheme is intended to attribute the dividend income to Corp B, which then claims an offsetting deduction under section 112.

After noting that in some instances and based on Sommerer "subsection 75(2) will not apply to attribute income in respect of that property to the beneficiary," CRA stated:

In the alternative, if the facts are such that it may be concluded that the trust did not acquire the shares for fair market value consideration, CRA will typically challenge the arrangement on other grounds. Depending on the particular facts, assessments may be pursued to include the dividend income pursuant to paragraph 12(1)(j) or subsection 104(13), in calculating the income of the trust and/or its beneficiaries. Furthermore, CRA would typically hold the view that a strong GAAR argument would exist in support of an assessing position in such cases.

A discretionary family trust with Father, Mother and a 15-year old Child as beneficiaries, holds a building with two premises – the first leased to an arm's length tenant; and the second, to a professional corporation of Father and Mother. Could the split income tax be avoided if the trust distributed only the income from the first premises to Child, and the income from the second premises to Mother? Before providing a more apodictic answser in the body, CRA stated in the summary: "Yes, when the trust indenture allows such attribution [sic, allocation and distribution]."

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

In finding that the distributions were taxable to him rather than his children, CRA stated (TaxInterpretations translation):

In order for Children to be considered the true beneficiaries of Trust's income, they must be able to dispose of it to their full benefit. Among the circumstances to be taken into account are [quoting Poynton]:

the manner of receipt, the control over it, the liabilities and restrictions attaching to it, the use made of it by the holder, the person to whom the benefits accrue (footnote 12).

[I]t could be argued that the Children acted as accommodation parties, either as mandataries or Father's nominees. The Children would therefore have been entitled to reclaim from Trust the amounts payable as Father's mandataries and, in such capacity, to have paid over to him a large portion of the amounts paid by Trust.

The financial advisor of Mother settled a discretionary trust of which Mother and her friend (Y) were the trustees (with decisions to be made unanimously), and she, her issue and certain corporations (including Holdco) were the beneficiaries. Under an estate freeze, Trust was issued Class A shares of a corporation that became a small business corporation. Y had no real involvement in Trust decisions. Mother determined to make annual income distributions to her adult children, and then required them to repay most of those amounts to her in repayment of amounts for their personal expenses (e.g., rent) which she had paid on their behalf.

In finding that the income purportedly allocated to the children might be includible in the income of Mother rather than her children, CRA stated:

It could be argued that the Children acted as accommodation parties, either as mandataries or nominees of Mother. The Children would therefore have been entitled to claim from Trust the sums payable as Mother's mandataries and paid to her, in this capacity, a large part of the sums paid by Trust except the part that Mother wished, it would appear, to leave to them as a gift. The income payable to Son, Daughter A and Daughter B (or at least the part that has been refunded by them to Mother), should be taxed in the hands of Mother and not in those of Children. As a result, a portion of the dividends received XXXXXXXXXX by Trust would be included in Mother's income under section 3 and subsection 82(1).

A mutual fund trust pays a base level of managament fees to a fund manager, but pays a reduced effective rate in respect of unitholders with large investments. This is accomplished through a distribution of the rebate amount to the the large investors (which rebate, depending on the circumstances, might be required to be reinvested in additional units), and (presumably) with a corresponding reduction in the fees otherwise payable to the manager. Given that the trust deed provides that distributions will be paid first out of income, such distributions (whether or not reivested) generally will be treated as distributions of income of the trust that will be included in the large investor's income under s. 104(13), with a corresponding deduction to the trust under s. 104(6) - unless the distributions are paid out of trust capital.

A mutual fund trust pays commissions to the dealer through whom its units were purchased and also pays an annual trailer fee. However, the dealer proposes to provide an investor with a rebate (the "Rebate") of a portion of such commission and trailer fees. This is accomplished by the Rebate being paid in cash directly to the investor (or, alternatively, being paid in cash to the dealer which, in turn, provides it to the investor). CRA stated:

Where the Rebate is paid to the Investor through the Mutual Fund, subsection 12(2.1) may be applicable, particularly where the agreements entered into by all three parties so dictate. Where however transactions are structured and legally effective so as to make the amount paid to the Investor a distribution from trust income, subsection 12(2.1) would not be applicable. In such a case, subsection 104(6) would generally be applicable to allow the Mutual Fund a deduction for the payment to the Investor while 104(13) would bring the amount into the Investors' income. The DCS Commissions and Trailer Fees paid (net of the rebate) by the Mutual Fund to the Dealer would be business income to the Dealer.

Given that "[p]aragraph 250.1(b) of the Act generally provides that where income is to be determined under the Act for a non-resident person, it will be done in accordance with the provisions of the Act... income of [a] non-resident trust, will be determined in accordance with paragraph 3(b) of the Act," so that only 1/2 of capital gains will be included in its income. Accordingly, when the full gain is distributed by the non-resident trust to a Canadian-resident beneficiary, only half of the distribution will be included in the beneficiary's income as (in light of s. 108(5)) as income from property, being the beneficiary's trust interest.

A spousal testamentary trust with a March 31, 2013 taxation year end would include income, that became payable to it in January to March 2012 by a mutual fund trust with a calendar year, in its income for its March 31, 2013 taxation year, as the year in which the relevant trust year ended.

A family trust whose beneficiaries included Father, Mother, two sons (Son A and Son B) and the wife of Son A (Daughter-in-law A) but not the wife of Son B (Daughter-in-law B) realized a capital gain on the disposition of a qualified small business corporation shares of Holdco, and distributed a portion of those gains to the above four children who, however, immediately returned most of the distributed funds to Father and Mother and were issued “Acknowledgements of Debt” which, however, they never received and, in fact, Father requested that the auditor not mention to them that they were owed these amounts. (A variation of these transactions applied to Daughter-in-law A.) The distributed gains were reported on their returns, with Father paying all the alternative minimum tax. Father and Mother invested the “returned” amounts and reported the income thereon.

In doubting that the purported loans should be respected, the Directorate stated:

Father and Mother argue that the so-called acknowledgements of debt support a creditor/debtor relationship. These documents, which are similar in wording to demand notes, were not delivered to Son B and the two Daughter-in-laws. Pursuant to section 178 of the Bills of Exchange Act (RSC 1985, c. B-4), a note is inchoate and incomplete until delivery thereof to the payee or bearer, that is to say, that it is incomplete until it has been given to the beneficiary.

In finding that (subject to the further issue that Daughter-in-law B was not a beneficiary) such amounts were likely excluded from the children’s income as agents, included in the income of Father and Mother under s. 104(13) and deductible by the Trust under s. 104(6), the Directorate stated:

[T]o allocate income to Son B and the two daughters-in-law who acted as agents or nominees of Father and of Mother for the income to be treated as if it were payable to them for the purposes of subsections 104(13) and 104(24). Son B and the two daughters-in-law were therefore entitled to claim the sums payable as agents or nominees of Father and Mother, ensuring that they gave Father and Mother a large part of the sums paid by Trust (except the amount paid to thank them for acting as an accommodation party).

Trust could benefit from the deduction under paragraph 104(6)(b) in respect of the portion of the income allocated (referred to in paragraph 22 of the Facts) to Father and/or Mother through Son B and Daughter-in-law A .

While a trust's income is determined in accordance with the Act, the amount payable to the beneficiary is determined in accordance with the trust indenture. Accordingly, it usually will not be possible for a trust to allocate "phantom income" (for example, interest accruing to it that is not payable to it) to beneficiaries.

After an estate was settled and closed, it unexpectedly received an amount from the pension plan of the deceased, representing a refund of excess contributions and interest, that it paid to the heirs (the surviving siblings). CRA stated:

Where, in a taxation year of an estate, the estate receives [such] an amount … and subsequently transfers it to its beneficiaries, the estate must include the amount received and may deduct the amount transferred in computing its income for that taxation year pursuant to paragraphs 56(1)(a) and 104(6)(b) of the Act, respectively. In this case, there would be no tax consequences to the estate, but rather to the beneficiaries who must include the amount transferred from the estate in their income pursuant to paragraph 104(13)(a).

… Since [the estate] cannot be reopened, the amount … was received directly by the heirs. In this case, it is the heirs who must include the amount so received … in computing their income pursuant to paragraph 56(1)(a).

The corporate trustee of a non-resident trust, which under the trust terms was accorded the discretion to distribute trust capital or income to any beneficiary, chose (as recorded in a memorandum of decision) to distribute capital to a resident beneficiary. Was such distribution to be included in her income under s. 104(13) given that the trust had interest income for that year?

The Directorate concluded that “ it would be difficult to argue that the distributions made by the trustee which are stated to be capital distributions in the memoranda of decisions … are required to be included in [her] income under subsection 104(13).” Before so concluding, the Directorate stated:

[T]he trustee of a discretionary trust can normally choose whether to make a certain payment out of income or out of capital - at least, to the extent of the trust's income and capital. … In this case, [the resident beneficiary] is both an income beneficiary and a capital beneficiary and can receive either income or capital distributions in any taxation year. However, the trustee cannot change the true nature of an income distribution by merely considering it to be a capital distribution. …

As stated in … 2000-0043847 … the amount of income to be included in a beneficiary's income under subsection 104(13) is the amount of the trust's income for tax purposes that has been distributed to the beneficiary. This does not mean that the CCRA can re-characterize the nature of a distribution properly characterized as capital by the trustees; rather, to the extent that a distribution of capital for trust law purposes is income for the purposes of the Act (i.e., the taxable portion of a capital gain), the amount will be required to be included in the beneficiary's income under subsection 104(13). For example, when a trust realizes a taxable capital gain on the distribution of capital to a beneficiary, the portion of the distribution that relates to the taxable capital gain is generally income to the beneficiary under subsection 104(13) unless the trust makes an election under subsection 107(2.11).

An individual who was a non-resident capital and income beneficiary of a discretionary non-resident trust made a loan to the trust, and then immigrated to Canada. The trust then used dividend income received by it to repay part of the loan and then, in connection with winding up the trust, distributed the remaining trust property to the resident beneficiary, purportedly as an exclusively capital distribution. In finding that such Canadian-resident beneficiary thereby received a distribution of trust income equal to its dividend income, the Directorate stated:

A trustee of a discretionary trust can, in fact, choose whether to make a certain payment out of income or out of capital - at least, to the extent of the trust's income and capital. If the trustee chooses not to distribute income to the income beneficiary, then a greater amount will be available for distribution to the capital beneficiary in future. However, the trustee cannot change the true nature of an income distribution by merely considering it to be a capital distribution. …

The income of the Trust for the XXXXXXXXXX taxation year would be computed under Canadian rules pursuant to section 250.1 and would include the $XXXXXXXXXX dividends received. Given that the Trust was wound up in its XXXXXXXXXX taxation year and was not entitled to a subsection 104(13.1) designation, we agree that the income of the Trust was in fact paid to XXXXXXXXXX and is required to be included in her income pursuant to subsection 104(13). Conversely, had the Trust retained the dividends over the XXXXXXXXXX taxation year-end and wound up in XXXXXXXXXX would not have had a subsection 104(13) income inclusion as the Trust would have had no income for the XXXXXXXXXX taxation year.

In the course of a general response, CRA stated (in the context of the pre-2001 version of s. 104(13)):

Dividends received from a non-resident corporation (subject to the provisions of subsection 95(1) of the Act for dividends received from a foreign affiliate) are generally included in income as dividend income for a Canadian resident ... . Income distributions received by a Canadian resident from a non-resident trust or mutual fund trust are generally included in income as income from a trust by the beneficiary under paragraphs 104(13)(c) and 12(1)(m) of the Act. In both cases the source income to the non-resident entity is irrelevant. That is, it does not matter whether the non-resident entity has earned active business income, property income or capital gains. In addition, the period of time the interest in the non-resident entity was held by the Canadian resident would have no bearing on the taxation of distributions received from the entity.

In the course of a general discussion of the availability of s. 104(13.1) where an estate received an amount out of a registered pension plan, CRA stated:

[T]he designation under subsection 104(13.1) could ensure that amounts received by the estate in 2010 and paid or payable to the heirs in 2010 are taxed partly at the estate level and partly at the level of the heirs, to the extent that the amount designated to each heir under subsection 104(13.1) does not exceed the amount computed in accordance with the formula provided for in that provision.

If s. 75(2) were to apply respecting an alter ego trust, could the s. 104(13.1) election be made to tax the income within the trust? CRA stated:

An election under subsection 104(13.1) cannot be made to tax income earned on certain Trust property within the Trust if subsection 75(2) would apply in respect of such income. … This is so since, for the purposes of the Act, income reallocated under subsection 75(2) does not constitute income realized by the trust, paid or payable to Mr. X. …

In the event that subsection 75(2) is inapplicable … it would generally be possible to make an election under subsection 104(13.1) to tax income earned in a taxation year in the Trust. …

First, an election under subsection 104(13.1) could be made where the income for the year would be distributed to Mr. X. In the event that the trust tax attributable to such income would be paid by Mr. X, the payment of such tax would generally not constitute a contribution to the trust. The payment of the Trust tax by Mr. X could be made [by] …:

• reimbursement of the trustee by Mr. X,
• payment by cheques by Mr. X to the tax authorities in payment of Trust tax, or
• payment by the trustee to Mr. X of an amount representing the Trust's income for the year net of taxes payable.

Furthermore, all income earned by the Trust during the year may be distributed to Mr. X. In such a case, the payment of the tax attributable to such income by the Trust would result in an encroachment on its capital which may not be in compliance with the terms of the Trust Indenture.

Second, an election under subsection 104(13.1) could be made where Mr. X renounces the income payable to him by the Trust for the taxation year. In that situation, Mr. X would be considered to have made a capital contribution to the Trust. This contribution could subsequently lead to the application of subsection 75(2) in respect of Mr. X.

"Subsection 104(13.1) permits a trust to deduct less than the full amount of its income payable to a beneficiary and thus choose to have that income taxed at the trust level rather than the beneficiary level ... . Subsection 104(13.1) does not explicitly require that the beneficiary's share of income be an amount payable to the beneficiary in the year. Thus, in our opinion, a designation under subsection 104(13.1) would be available with respect to amounts deemed payable pursuant to subsection 104(18)."

S.104(13.1) permits different amounts to be designated for each beneficiary, but only to the maximum amount determined by formula. This is illustrated by an example.

Where a designation has been made under s. 104(13.1) in respect of an amount payable to the beneficiary, that amount is considered not to have been paid to the beneficiary for purposes of s. 104(13) and also for the purposes of s. 212(1)(c).

Where a spouse is entitled to receive all the income of a testamentary spousal trust but revokes in writing his or her right to receive such income in a given year, a valid designation may be made under s. 104(13.1). "It is not necessary for the spouse to give up the right to receive actual distributions from trust income during the year in order for a designation... to be made."

In response to a suggestion that "if no amount is paid to the beneficiaries, no 104(13.1) designation would be possible because the formula would always produce a nil amount", the Department indicated that s. 104(13.1) indicates that the trust's income for the year should be determined in accordance with the terms of the trust document, rather than the provisions of the Act and that the beneficiary's shares of that income would be dictated by those terms.

"Where a trust is a spousal trust the designation under subsection 104(13.1) ... would not in and by itself, disqualify the trust as a spousal trust ... . Furthermore, it is not necessary for the spouse to give up the right to receive actual distributions from the trust income during the year in order for a designation pursuant to subsection 104(13.1) of the Act to be made.

In a situation where a trust has two equal beneficiaries who share income equally, and of the trust income of $10,000, the trust has deducted $5,000 under s. 104(6), the trust will not be permitted to effectively make an s. 104(13.1) designation on behalf of only one beneficiary. The purpose of the provision is to enable the trust to designate to all its beneficiaries their respective shares of the portion of the trust's actual income distributions that are not deducted at the trust level. Accordingly, each beneficiary will be taxable on $2,500.

Discussion of various consequences where a beneficiary makes a payment to the trustee to enable the trustee to pay the tax liability of a trust caused by a designation under s. 104(13.1).

A trust carries back an allowable capital loss realized in a subsequent year and files a late s. 104(13.2) designation to include in its income a taxable capital gain realized for that previous year that was previously allocated out to the beneficiaries. Their returns for that year would then be amended to remove the capital gain. Is that permissible?

CRA, after confirming that a trust can make a late s. 104(13.1) or (13.2) designation as long as the application of the loss results in nil taxable income of the trust for the previous year, indicated that it will reassess the beneficiaries’ returns for that year to remove that gain provided that their returns are not statute-barred.

CRA further indicated that:

• the T3A loss carryback request, and the T3 adjustment request for the previous year, should be filed together so that they can be processed concurrently;
• the trust should issue amended T3s; and
• the beneficiaries would need to file T1 adjustment requests.

In the course of a general discussion of when a graduated rate estate might be subject to tax on income that was not considered to be payable in the year in the context of its executor's year policy, CRA stated:

The Department of Finance’s Explanatory Notes indicate that subsection 104(13.3) ensures that subsection 104(13.1) or (13.2) designations “are made only to the extent that the trust’s tax balances (e.g., loss carry-forwards) are applied, under the rules that apply in Division C, against all of the trust’s income for the year determined after the trust claims the maximum amount deductible by it under subsection 104(6).” Therefore, where an estate’s taxable income would be greater than nil after a subsection 104(13.1) or (13.2) designation is made, subsection 104(13.3) will render the designation invalid. Subsection 104(13.3) may impact the ability to make a subsection 104(13.1) or (13.2) designation in any year of the estate.

After confirming that, by virtue of the new s. 104(13.3), “the option to include [a] CPP/QPP death benefit in income on a T3 return will no longer be available by making a designation under subsection 104(13.1) if the estate’s taxable income (determined as though the designation were valid) for the year is greater than nil,” CRA then reaffirmed its statement in 2011-0401851C6 that:

where the initial taxation year of a testamentary trust coincides with the executor year and where the sole reason for the rights of a beneficiary being unenforceable is the existence of an executor’s year, the CRA will consider the income of the trust for that year to be payable to the beneficiary or beneficiaries of the trust pursuant to subsection 104(24).

Accordingly, depending on the terms of the will, CRA would be amenable to considering that such income receipt could be flushed out to be beneficiaries.

The definition of split income includes trust income distributions under s. 104(13) but not preferred beneficiary amounts under s. 104(14). Accordingly, where a services partnership that was set up by the partners of an accounting firm earns income from the provision of back office services to the firm, and that income is then allocated in part to a limited partner that is a trust with a preferred beneficiary, the income included in the preferred beneficiary’s income under s. 104(14) will not be subject to the tax on split income.

Each of four grandparents of a disabled grandchild establishes a trust for the grandchild individual under their will, with one of the trusts being intended to be a qualified disability trust (“QDT”). In this context, is it possible for a preferred beneficiary election to be made for each of the four testamentary trusts created for the benefit of the grandchild individual?

After confirming that only one of the trusts could be a QDT by virtue of the joint beneficiary making a joint election with one of the trusts in a given taxation year, CRA indicated that the introduction of the QDT provisions does not restrict the availability of the preferred beneficiary election.

The will of Mr. X, a resident of Quebec, left all of his property in equal shares to his two children, aged 10 and 15. His will included an extended administration clause that resulted in an extension of the executor’s duties and authority beyond the normal end of the administration of the estate, until all the legacies were delivered in accordance with the terms of the will (which was directed to occur on the children attaining 25). The will provided that, in the meantime, all income generated on each child’s share was to be used in the executor’s discretion for the support or maintenance of that child, with discretion to encroach on capital in the child’s favour. CRA indicated that if the effect of the clause was to extend the administration of the estate, then it extended the estate qua trust. Regarding the potential application of s. 104(18), it stated:

[I]t appears that the executor would have discretion as to the timing of the payment of income or capital to a beneficiary under the age of 21, or to a third party for the benefit of such a beneficiary, but would have no discretion as to the determination of the amount of income to which such beneficiary is entitled.

Consequently … it is possible that the conditions of subsection 104(18) could be satisfied in respect of the child or children of the deceased who are beneficiaries of the estate and who have not attained 21 years of age at the end of a particular taxation year. The application of subsection 104(18) would, for any taxation year to which that subsection applies, cause the portion of the amount that would, but for subsections 104(6) and 104(12), be income of the estate for the year to be deemed for the purposes of subsections 104(6) and 104(13) to have become payable in the year to the relevant beneficiary or beneficiaries to whom the entitlement to that portion would have accrued.

The beneficiaries of a family discretionary trust are secondary trusts each of which has an infant beneficiary. The income of a secondary trust is not payable in the year to the beneficiary but the right thereto vests in the year. Before indicating that s. 104(18)(c) might be considered to be satisfied on a review of the trust terms, CRA noted (TaxInterpretations translation):

[T]he wording of paragraph 104(18)(c) is sufficiently broad to encompass the discretionary power held by any person, whether trustee or not, so as to include a discretionary power exercised otherwise than under the trust terms. ...

However, in the given situation, to the extent that the discretion of the Principal Trust trustee does not affect the determination of the right to the amount of income earned that has not become payable to the beneficiary under 21 years of age of each of secondary trusts, paragraph 104(18)(c) could be satisfied with respect to the income of each secondary trust.

Where pension income received by an estate is paid pursuant to a court order into the court for the benefit of the deceased's minor children, s. 104(18) does not apply because that provision applies only where the income of the trust would, if the beneficiaries were not minors, otherwise be payable to them. Here, the amounts were not payable by the estate to the children but were paid into court.

A discretionary trust received an eligible dividend in a year and immediately allocated and distributed it to a beneficiary; and later in the same year, received an ordinary (non-eligible) dividend which it immediately allocated and distributed to a second beneficiary, also in accordance with the discretions accorded by the trust deed. CRA found that the two respective dividends could be designated under s. 104(19) exclusively to the respective beneficiaries rather than being required to be designated on a pro rata basis. It stated:

[W]here 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.

A personal trust (the "Trust") wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco" with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which pays that amount to Holdco.

(a) If the Trust designates the $5,000 amount to Holdco pursuant to s. 104(19), when must Opco be connected to Holdco for Part IV tax computation purposes?

(b) What is the effect on Holdco's Part IV tax liability if, after September 20, 20X1 and before December 31, 20X1, the Trust disposes of Opco a third party?

(c) What is the effect if Holdco is no longer a beneficiary of the Trust on December 31, 20X1?

(d) What is the effect if, for an indefinite period commencing after September 20, 20X1, Holdco is still a beneficiary but ceases to be controlled by a person who does not deal at arm's length with the person controlling Opco?

Q.17(a)

After noting its position that a s. 104(19) designation cannot be made before the end of a trust's taxation year, so that the beneficiary is deemed to have received the dividend at the end of that year, CRA indicated that, as the designation pursuant to s. 104(19) is effective on December 31, 20X1, whether Opco is connected with Holdco is tested at that time.

Q.17(b)

Accordingly, if on December 31, 20X1, all the Opco shares are held by a third party, Opco will not be connected with Holdco pursuant to s. 186(4)(a), and Holdco will be liable for Part IV tax on the $5,000 assessable dividend deemed to be received by it.

Q.17(c)

After noting that it “generally accepts that the time at which an amount becomes payable to a recipient is the earlier of the time of payment or the time at which the recipient is entitled to enforce payment of it,” and that “a taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13),” CRA found that since:

the $5,000 was paid on September 20, 20X1 by the Trust to Holdco, who was a beneficiary of the Trust at that time, that amount may therefore be considered to have become payable to Holdco on that date for the purposes of paragraph 104(13)(a). The amount of $5,000 will therefore be included in the computation of Holdco's income for its taxation year ended September 30, 20X2, i.e., the taxation year in which the Trust's taxation year ends … .

[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.

Finally, if Opco is connected with Holdco per s. 186(4) at the end of the Trust's taxation year, i.e. December 31, 20X1, Holdco will be subject to the application of paragraph 186(1)(b) for the purpose of computing Part IV tax on the amount of the $5,000 assessable dividend. If Opco is not connected with Holdco, then Holdco will be subject to paragraph 186(1)(a) in computing its Part IV tax.

Q.17(d)

After noting that by virtue of s. 251(1)(b), the Trust and Holdco are deemed not to deal with each other at arm's length, CRA went on to note that since more than 50% of the fully-voting Opco shares belonged to the Trust, which did not deal at arm's length with Holdco, Holdco controlled Opco per s. 186(2), so that Opco was connected to Holdco under s. 186(4)(a).

If the Trust makes a s. 104(19) designation of the amount of the taxable dividend for its taxation year ending December 31, 20X1, Holdco will be required to include the dividend income in computing its income for its taxation year ending September 30, 20X2 and will be subject to s. 186(1)(b) for Part IV tax purposes – or if the Trust does not make the designation, such amount will not be a taxable dividend and Holdco will not be subject to Part IV tax on the $5,000..

A Canadian resident personal trust receives a dividend from ACo., and distributes the dividend to B Co (a beneficiary) to which A Co is connected – but they cease to be connected corporations by December 31 of that year. CRA indicated that the connected-corporation Pt. IV tax exemption did not apply to the dividend received by B Co since the s. 104(19) designation is considered to be effective only at the end of the trust’s taxation year – at which time they were no longer connected.

On June 23, 2017, a discretionary family trust receives a dividend on its shares of Opco and immediately on-pays that amount to a family corporation beneficiary (Holdco) to which Opco is connected at that time. However, a few days later (and, crucially, before the current taxation year end of the trust and also before the (June 30) taxation year end of Holdco) there is an acquisition of control of Opco resulting in it ceasing to be connected to Holdco. The trust designates the dividend under s. 104(19) for its 2017 year.

Headquarters indicated that such dividend was subject to Part IV tax in the hands of Holdco because the time at which it was considered to have received the s. 104(19) dividend (the calendar year end of the Trust) was in the taxation year of Holdco (commencing on July 1, 2017) throughout which Opco was no longer connected to Holdco, stating:

[T]he amount designated to the beneficiary by a trust in accordance with subsection 104(19) is deemed to be received as a dividend by the beneficiary of the trust at the end of the taxation year of the trust in which the trust received the dividend. This position is based inter alia on the fact that the trust cannot make the designation under subsection 104(19) before the end of its taxation year.

As noted re Q.13, CRA considers that the exclusion from para. (c) of the “split income” definition of amounts included in a preferred beneficiary’s income does not apply where a s. 104(19) designation is made respecting the preferred beneficiary income amount, so that the amount is included under subpara. (a)(i) of the split income definition. There is thus, in CRA’s view, the absence of a legislative exclusion from the tax on split income for such dividend amounts.

In order to avoid making the s. 104(19) designation when preparing a T3 slip, the amount should simply be included in Box 26 (“other income”).

On May 31, 20X1 (the last day of its taxation year), Opco pays a dividend of $10,000 to a family trust, which immediately distributes that amount to Holdco (a beneficiary), which has a calendar year end and is connected to Opco as per s. 186(4)(a). The $10,000 distribution is designated as a dividend under s. 104(19). On June 1, 20X1, the family trust sells all the shares of Opco to a third party. Is the dividend subject to Part IV tax?” In finding that this amount is subject to Part IV tax, CRA stated (TaxInterpretations translation):

[T]he amount designated in respect of the beneficiary (taxpayer) in accordance with subsection 104(19) should be considered to be deemed to be received as a dividend by the beneficiary of the trust at the end of the trust’s taxation year in which the trust received the dividend. This position is based on the fact that the trust cannot make the designation before the end of its taxation year and that the requirement that the trust is resident in Canada throughout the year cannot be satisfied until the end of the taxation year of the trust. …

Thus…Holdco is deemed to have received the dividend on the shares in the capital of Opco on December 31, 20X1. At that time, Opco and Holdco were not connected corporations given the sale…of Opco… .

An employee trust (the "Trust") holds shares of a taxable Canadian corporation (the “Corporation”) that then redeems shares that had not been allocated to employees, with the resulting deemed dividend being designated under s. 104(19) to the Corporation. Would the Corporation be entitled to the s. 112(1) deduction?

After noting that one of the conditions for the application of s. 104(19) was that the amount be includible under s. 104(13)(a), 104(14) or 105 in the taxpayer’s income and before concluding that s. 104(19) would not apply, so that the s. 112(1) deduction would be unavailable, CRA stated:

An employee trust … is a trust referred to in paragraph (a) of the definition of "trust" in subsection 108(1). Consequently, such an employee trust is not described in paragraph 104(13)(a) and no amount is to be included in computing a beneficiary's income under that paragraph. Similarly, subsection 104(14) and section 105 do not apply … .

A similar analysis would apply if the Trust was no longer an employee trust but instead was a trust governed by an employee benefit plan to which the corporation had contributed as an employer.

A trust cannot make an s. 104(19) designation until its year end (December 31) since it is only then that it can be determined that it has been resident in Canada throughout the year. The "Trust" designates a taxable dividend it received on June 30, 2013 from Opco to its beneficiary, Holdco, whose year-end is June 30. 2013. Should the dividend be included in Holdco’s June 30, 2013 or 2014 fiscal year under s. 186(1)(b), taking into account the dividend refund received by Opco for its June 30, 2013 fiscal year?

[T]he amount of the taxable dividend received from Opco by the Trust and distributed and designated by it to Holdco would, pursuant to subsection 104(19), be deemed to have been received by Holdco in its taxation year ending on June 30, 2014.

Thus, we are of the view that Holdco should include the amount of the taxable dividend in Schedule 3 on its income tax return for its taxation year ended June 30, 2014 and pay the applicable Part IV tax, where required.

In response to an inquiry "as to when a taxable dividend will be considered to have been received by a beneficiary of a trust where the dividend is initially received by the trust and, for the purposes of subsection 104(19), is designated by the trust in favor of the beneficiary in the trust's return of income for the taxation year in which the trust received the dividend," CRA stated "that the amount of a taxable dividend designated in favor of a particular beneficiary pursuant to subsection 104(19) will be deemed to have been received by the beneficiary at the time that is the end of the particular taxation year of the trust in which the trust received the dividend."

Where a Canadian-controlled private corporation (“Corporation A”) pays a dividend to a trust which distributes that amount to a corporate beneficiary (a CCPC) that is connected with the corporate payer and with a s. 104(21) designation being made, should the dividend paid by Corporation A be reported in column D "Taxable dividends paid to connected corporations" or in the total on line 450 for total taxable dividends paid in the taxation year to other than connected corporations? CRA responded:

[A] corporation paying a dividend (the "Payer Corporation") to a trust [is generally expected] to report the dividend in the total in line 450 of Section 3 of Schedule 3 to its T2 for the taxation year in which the dividend is paid, even if the trust designated such dividend, pursuant to subsection 104(19), to one of its corporate beneficiaries to which the Payer Corporation is Connected.

A Canadian-controlled private corporation paid a capital dividend to its sole shareholder, a trust, in 20x1. The beneficiaries of the trust were Mrs., minor children of Mr. and Mrs., and any corporations controlled by Mr. This capital dividend was not distributed by the trust in 20x1 as the children and Mrs. were designated persons and no corporation controlled by Mr. yet existed. Such a corporation was formed in 20x2.

CRA noted that as the dividend was not payable to a beneficiary in 20x1, no s. 104(20) designation could be made in that year. As for 20x2, no s. 104(20) designation could be made for any distribution to the new corporate beneficiary in respect of a capital dividend received by the trust in the preceding year.

An inter vivos Canadian resident trust pays an amount equal to its net taxable capital gains for the year to a Canadian private corporation that is a beneficiary and designates that amount pursuant to s. 104(21). CRA indicated that a valid s. 104(21) designation would result in that amount being deemed to be a taxable capital gain realized by the corporation even though the non-taxable half of the gains was distributed instead to other beneficiaries. However, by virtue of the wording of s. (a)(i.1) of the capital dividend account definition, there would be no addition to the corporation’s CDA – whereas there would be such an addition if both portions of the capital gains were distributed to the corporate beneficiary.

The addition to the corporation’s CDA would be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation, given that the s. 104(21) designation cannot be made before the end of the trust’s taxation year.

A personal trust realizes a capital gain for a particular taxation year and would like to designate it as the taxable capital gain of a beneficiary for that year under s. 104(21). Is it sufficient for the amount of the taxable capital gain so designated to be paid or made payable in the year, rather than also the non-taxable portion of the gain? CRA stated:

[S]ubsection 104(21) do[es] not require that any additional amount, other than the net taxable capital gain so designated, be paid or made payable by the trust to the beneficiary such as an amount reflecting the non-taxable portion of any capital gain realized by the trust. … [A]ny amounts that the trust pays or makes payable to beneficiaries must be authorized or permitted by the trust instrument and the applicable law … [and] we have assumed that the amounts that are paid or payable to the beneficiary, and designated under subsection 104(21), are for the beneficiary’s own account and benefit … .

Would a s. 39(4) election apply even if a mutual fund trust was a "day trader" that used margin? CRA stated (TaxInterpretations translation):

[T]he election under subsection 39(4) does not apply to a disposition of a Canadian security by a taxpayer who, at the time of the disposition, is a trader or dealer in securities… . These exceptions do not apply to a MFT or a mutual fund corporation. The election made by a MFT under subsection 39(4) thus is always applicable even where the trust has one or other of the statuses listed in paragraphs 39(5)(a) to (g)... .

…[S]ubsection 104(21) expressly provides for the preservation of the nature of net taxable capital gains that a trust allocates to its beneficiaries… . [T]he election and allocation of a taxable capital gain in accordance with subsections 39(4) and 104(21) determines the nature of the amount allocated to a holder of units of a MFT. In context, the latter generally need not examine the facts and circumstances respecting the given situation to determine the nature of an amount allocated by the trust.

CRA noted that 2014-051719117 concerned a discretionary family trust (of which father and the adult children were capital and income beneficiaries) which after filing its T3 return for a taxation year, identified an overlooked a capital gain for the year, and sought a late designation under ss. 104(21) and (21.2) in respect of the children beneficiaries. The amount of the gain was actually paid to their father. CRA stated:

It was our view that a late or amended designation under subsection 104(21) of the Act was not available to the trust. It was noted that in respect of the adult children, one of the requirements under subsection 104(21) is that the amount designated can reasonably be considered to have been included in computing their respective incomes for the year pursuant to paragraph 104(13)(a) or section 105.

Following the filing of its T3 return, a discretionary family trust purported to make 104(21) and (21.2) designations respecting the net taxable capital gain associated with an overlooked disposition, with the adult children beneficiaries filing amended personal returns reported their share thereof and claiming a capital gains deduction. In concluding that such late designations were not available, CRA noted that "amounts included in income pursuant to paragraph 104(13)(a) must have become payable in the trust's taxation year."

Ruling that following the redemption of all the outstanding units of an income fund, any document that the fund is required to file under the Act will be considered to have been filed by the fund on the date that it is filed by its trustees.