5 June 2000 External T.I. 1999-0012305 - Payment by Discretionary Trust Benefit Minor

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: whether an amount deposited into a segregated trust account by a discretionary trust for the benefit of a minor beneficiary qualifies as an amount payable to that beneficiary

Position: question of fact, but likely not, based on the scenario as described

Reasons: 104(18) does not apply to a discretionary trust by reason of (c). In the scenario described, the direction that the payment be made into a separate subtrust would come from the terms of the discretionary trust and not from either the minor or the guardian of the minor's property; accordingly, the conditions in ITTN#11 would not be met and the amount would not be payable within the meaning of 104(24).

XXXXXXXXXX 	1999-001230
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

June 5, 2000

Dear Sirs:

Re: Payments Made by a Discretionary Trust for the Benefit of a Minor Beneficiary

This is in reply to your letter of June 11, 1999 concerning the application of subsection 104(24) of the Income Tax Act (the "Act") in the context of an allocation of trust income to a minor beneficiary by a discretionary trust. We apologize for the delay in our response.

You describe a situation in which the trustees of a discretionary trust exercise their discretion to make an amount payable in a particular year to the beneficiaries of the trust but, under the terms of the trust, are precluded from actually paying any such amount to a beneficiary who is under the age of majority. You ask whether the income allocated to a minor beneficiary can be considered payable to that beneficiary where the amount allocated to the beneficiary vests indefeasibly with that beneficiary and is to be held in a segregated account until such time as the beneficiary reaches the age of majority. You included excerpts from a trust document illustrating how the terms of such a trust could be worded.

The particular circumstances outlined in your letter appear to relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R3 "Advance Income Tax Rulings", it is not our practice to comment on proposed transactions involving specific taxpayers, except by way of an advance income tax ruling. When the transactions related to the enquiry are completed, the enquiry should be addressed to the relevant tax services office. In addition, it should be noted that the tax consequences relating to a payment from a trust cannot be determined without a complete review of all the relevant facts, including the entire trust document. As a result, we are unable to comment on the tax effect of partial excerpts from a particular trust document. Nevertheless, we offer the following general comments which may be of assistance to you.

In order for a discretionary trust to obtain a deduction for an amount of income allocated to a beneficiary under subsection 104(6) of the Act, the criteria set out in subsection 104(24) of the Act must be met; i.e., the amount must either be paid in the year to the beneficiary or the beneficiary must be entitled in the year to enforce payment of the amount. This latter criterion would require that the trustees of the discretionary trust exercise their discretion before the end of the trust's taxation year and that the exercise of that discretion be irrevocable with no conditions attached to the beneficiaries' entitlement to enforce payment of the amount in the year. While an amount that is not payable to a beneficiary in a particular year solely because the beneficiary is under the age of 21 is deemed to be payable to that beneficiary if the criteria in subsection 104(18) of the Act are met, subsection 104(18) does not apply to a discretionary trust by reason of paragraph 104(18)(c) of the Act.

Administratively, as set out in Income Tax Technical News #11, the Canada Customs and Revenue Agency (the CCRA) will consider certain third party payments as being paid to a minor beneficiary, and thus deductible under subsection 104(6) of the Act and included in the minor's income under subsection 104(13) of the Act for the year. However, when neither the minor nor the legal guardian of the minor's property is entitled to direct or request how a particular amount allocated is to be applied, whether as a third party payment or as amount to be held in a separate trust, the criteria in subsection 104(24) of the Act and Income Tax Technical News #11 are not met.

In our conversation of April 18, 2000 (XXXXXXXXXX\Humenuk), you asked whether a segregated trust account held by the trustees of a discretionary trust on behalf of each minor beneficiary would qualify as either a bare trust or a trust which complies with the criteria set out in subsection 104(18) of the Act, assuming that such a segregated account was constituted as a separate trust. If so, you asked whether a discretionary trust such as that described in your letter would be entitled to a deduction under paragraph 104(6)(b) of the Act in respect of amounts allocated to a minor beneficiary and deposited into a segregated trust account for that beneficiary.

It is a question of fact and the applicable trust law governing the arrangement as to whether a segregated trust account as described in your letter is a separate trust from the discretionary trust described in your letter. It is also a question of fact and trust law as to whether a particular trust is either a bare trust or a trust the income of which meets the criteria set out in subsection 104(18) of the Act. In this regard, the CCRA generally views a trust to be a bare trust under common law where the trustee has no significant powers or responsibilities and can take no action regarding the property held by the trust without instructions from the settlor. Normally the trustee's only function is to hold legal title to the property and the settlor is the sole beneficiary and can cause the property to revert to him or her at any time. Where the terms of the trust do not permit the settlor-beneficiary to recover the property at any time or otherwise restrict the settlor's ability to determine how the property is to be dealt with, the trust would not be considered to be a bare trust even if it were a separate trust from the discretionary trust from which the capital of the trust was received.

Assuming that a separate trust is established to hold amounts which vest indefeasibly and which would be payable to a minor beneficiary at the age of majority, and that the separate trust is a trust the income of which meets the criteria set out in subsection 104(18) of the Act, the criteria in subsection 104(24) of the Act must still be met in respect of the payment from the discretionary trust to the sub-trust. Again, where neither the minor nor the legal guardian of the minor's property is entitled to either enforce payment of the amount or to direct or request how the particular amount is to be applied, the criteria in subsection 104(24) of the Act and Income Tax Technical News #11 are not met.

You also asked for our comments on the taxation of any income earned in the segregated trust accounts on amounts deposited to those accounts as a result of income allocations by the discretionary trust. The taxation of such income would depend on the terms of the trust which holds the funds so deposited. If the funds are retained by the discretionary trust, albeit in segregated accounts, the income earned on the funds would be included in the income of the discretionary trust. If the funds are held by a separate trust from the discretionary trust, the income would be included in the income of that separate trust. In either case, the entitlement of the trust to a deduction under subsection 104(6) of the Act for the amount of such income would depend on whether the amount was payable to a beneficiary within the meaning of subsection 104(24) of the Act or, in the case of a non-discretionary trust, deemed to be payable to the beneficiary by reason of subsection 104(18) of the Act.

We trust our comments will be of assistance.

Yours truly,

T. Murphy
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch