Subsection 106(2) applies where a taxpayer disposes of an income interest in a trust. Paragraph 106(2)(a) requires the taxpayer to include in income an amount equal to the proceeds of disposition received for the interest less amounts included in the taxpayer’s income under subsection 104(13). Paragraph 106(2)(a) does not apply, however, if subsection 106(3) applies. Subsection 106(3) applies where the trust distributes property to the taxpayer in satisfaction of the taxpayer’s income interest.
In Mackenzie v R, 2011 TCC 289, the taxpayer had an income interest in a testamentary trust. As part of the settlement agreement, the trust agreed to pay $1.7 million to the taxpayer to terminate her income interest in the trust. The trust did this by
- selling shares it owned to a BC company (BCCo) for a note,
- issuing a note to the taxpayer in satisfaction of her interest, and
- directing BCCo to pay the taxpayer $1.7 million in satisfaction of the latter note, which BCCo did.
The Crown tried to argue that subsection 106(3) did not apply to the payment to the taxpayer because the property the trust actually distributed was the shares that had been transferred to BCCo and the cash actually paid to the taxpayer had been property of BCCo.
Regarding the latter point, the Court (per Boyle J), in allowing the taxpayer’s appeal, responded as follows:
[21] I am entirely satisfied on the evidence that the 1.7 million dollars received by the taxpayer from the trust was property of the trust. There is no evidence to the contrary. There is no reason to think that cash need to have been moved between the parties. This was not an ineffective or unimplemented transaction. Clearly the BC numbered company had the cash, the trust’s law firm was put in funds, and the law firm’s certified trust cheque was credited for cash when presented. It is difficult to see how the respondent could think there would have been a need to actually deliver cash from the trust, or think that the delivery of the trust’s promissory note to the taxpayer was in these circumstances any different than the delivery by the trust of a certified cheque or money order from the trust’s bank. Neither would actually be cash. Surely the respondent would not seriously have contested a bill of exchange involving a bank and I have been provided with no persuasive argument that enforceable promissory notes from solvent entities should be treated any differently. The respondent cannot succeed on its first argument.
