Some points of interest from a recent CRA technical interpretation (2017-0683021I7, June 8, 2018) respecting a reorganization involving a trust with non-resident beneficiaries:
- The trustees of a trust purported to add a ULC as a beneficiary. The CRA, however, noted that the trust deed did not provide for the addition of a company as a beneficiary and the deed referred to distributions to persons “living” from time to time. The CRA took the position that this entailed that only natural persons (ie individuals) could be beneficiaries of the trust.
- A deemed dividend is ‘phantom income’ for trust law purposes. A trust cannot allocate a deemed dividend as income and claim a 104(6) deduction unless the trust deed defines ‘income’ to include income for the purposes of the Income Tax Act (Canada).
- A power to distinguish between income and capital items does not permit recharacterizing an income receipt as a capital receipt. See Succession Terrill, 87 DTC 492 (TCC), and Munro (1992) 47 ETR 5 (QCSC).
- Under general trust principles, a stated capital increase is a capital item and should be allocated to capital beneficiaries unless ‘income’ is defined to include ‘income’ for tax purposes.
Rhonda Rudick and Reuben Abitbol “Risks of Assigning a Trust Interest” Canadian Tax Highlights 27:6 (June 2019)