NO: IT-286R2
DATE: April 8, 1988
SUBJECT: INCOME TAX ACT
Trusts – Amount Payable
REFERENCE: Subsection 104(24) (also subsections 52(6), 104(4), (5), (5.1), (6), (13) and (18) and 107(4), paragraph 149(1)(o.4) and subparagraphs 110(1)(a)(i) to (vii))
Application
This bulletin cancels and replaces IT-286R dated October 4, 1982. Current revisions are designated by vertical lines. Proposals contained in the Department of Finance press release of October 1, 1987 on trusts and their beneficiaries are not considered in this release
Summary
Certain trusts, in computing their income for a taxation year, are permitted to deduct any income payable in the year to a beneficiary. This bulletin deals with the meaning of “an amount payable in a taxation year” for purposes of the deduction. It also discusses specific situations where amounts are payable and other situations where they are not.
Discussion and Interpretation
1. Subsection 104(6) of the Act, which permits a trust to deduct certain amounts in computing income, applies to an “employee trust” and a “trust governed by an employee benefit plan” in paragraphs 104(6)(a) and (a.1) respectively while paragraph 104(6)(b) applies to any other trust. This bulletin deals only with income deductions allowed under subsection 104(6) to trusts to which paragraph 104(6)(b) applies. “Employee trusts” and “trusts governed by employee benefit plans” are dealt with in IT-502. See IT-342 for information concerning amounts to be included in computing the income of a beneficiary of a trust to which paragraph 104(6)(b) applies.
2. Subject to the limitations on spouse trusts as explained in 3 below, a trust to which paragraph 104(6)(b) applies can, by virtue of that paragraph, deduct from its income for a taxation year such part of its income, including its net taxable capital gains, as was payable in the year to a beneficiary. However, the amount so deducted must, by virtue of subsection 104(13), be included in the income of the beneficiary to whom it was payable. The meaning of “an amount payable in a taxation year” is defined in subsection 104(24) as an amount
(a) that is paid in the year to the person to whom it was payable, or
(b) with respect to which the person to whom it was payable is entitled in the year to enforce payment.
3. In computing income for a taxation year a trust described in paragraph 104(4)(a) (i.e., a spouse trust) is, by virtue of paragraph 104(6)(b), prevented from deducting such part of its income as was payable in the year to a beneficiary out of taxable capital gains or other income arising as a consequence of a disposition of property under subsection 104(4) or (5) or 107(4) unless
(a) the trust was created before November 13, 1981, and
(b) the disposition was made to a person referred to in any of subparagraphs 110(1)(a)(i) to (vii) or to Her Majesty in right of Canada or a province.
Applicable with respect to taxation years ended after September 30, 1983 and before 1986, paragraph 104(6)(b) imposed the same restriction with respect to taxable capital gains arising as a consequence of a deemed disposition, under subsection 104(5.1), of indexed securities owned under an indexed security investment plan.
4. Although the beneficiaries of a trust may have the power to amend the trust deed at any time so as to cause the income to be payable to them, the mere presence of this unexercised power is not a basis for treating trust income as being payable for purposes of subsections 104(6) and (24). An amount becomes payable only when the power has in fact been exercised and the trust deed amended accordingly. Furthermore, even though some or all of the beneficiaries are themselves tax exempt, the trust is nevertheless taxable on its income except to the extent that such income is payable to its beneficiaries. However, for the 1987 and subsequent taxation years, a trust will be exempt from Part I tax on its taxable income if it is a prescribed master trust that holds investments exclusively for registered pension funds or plans and elects to have the provisions of paragraph 149(1)(o.4) apply.
5. Where a beneficiary can enforce payment of an amount in respect of trust income by forcing the trustee, in accordance with the terms of the trust deed, by common or statute law or by some other authority, to wind up the trust, it is the Department’s view that no amount becomes payable until such time as the beneficiary exercises the authority and in fact causes the trust to be wound-up, except to the extent that an amount is otherwise paid or payable at an earlier date. This view also applies where the right of a beneficiary to demand a payment of income is subject to the approval of a third party provided for in the trust deed to deal with such matters; no amount is payable until a demand for payment of income has been duly approved by the third party. If a trustee has been given the discretion to distribute any part of the income of the trust, then no amount is payable until the trustee’s discretion has been exercised.
6. Under common law rules, the initial 12 month period for a testamentary trust, commencing with the date of the settlor’s death, is referred to as the “executor’s year” and the right to income of the trust is, during the executor’s year, unenforceable by a beneficiary of the trust. 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).
7. Pursuant to subsection 104(18) income is considered to be payable for purposes of subsections 104(6) and (13) where
(a) the income is held in trust for a minor whose right thereto has vested, and
(b) the only reason that it was not payable was because the beneficiary was a minor.
The right referred to in (a) does not have to vest indefeasibly. The requirement in (b) will be complied with where the terms of the trust provide that the amount be withheld solely because the beneficiary is a minor. However, where the terms of the trust agreement provide that the payment may be withheld for any reason other than that described in (b) above, subsection 104(18) does not apply. This would be the case where, for example, a trustee is given discretionary power by the terms of a trust agreement to withhold trust funds and chooses to withhold income of the trust because either the beneficiary or the beneficiary’s guardian is not in need of funds.
Mutual Fund Trusts
8. The mere right of a unit-holder to redeem units on demand would not be sufficient to meet the payment enforcement requirements of subsections 104(6) and (24). Any income allocation must be accompanied by a valid resolution or declaration of the trustees whereby the unit-holders acquire an irrevocable right to enforce payment. By this means the income allocated is subject to tax in the hands of the unit-holders. A clause in the trust agreement, conferring on the unit-holders a legal right to enforce payment of the trust’s income in the year, would have the same result.
9. The amount payable does not have to be paid in cash. An allocation of additional units in relation to the unit-holder’s interest in the trust income would also be an amount payable in the year for the purposes of subsection 104(6).
10. Special rules are provided in subsection 52(6) in order to avoid double taxation when an amount payable was not paid in fact, but capitalized by the trust. See IT-390, “Unit Trusts – Costs of Rights and Adjustments to Cost Base”.
Link to Source: https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/it286r2/archived-trusts-amount-payable.html