24 March 1994 Internal T.I. 9402626 - CUSTODIANS AND INFORMATION RETURNS

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.

			March 24, 1994

	T2 and T3 Programs Division	Trusts Section
W. A. Mizuik	(613) 957-8953
	Chief, T3 Programs Section

	Attention:  J. Hartwick
			940262

Subsection 204(1) of the Income Tax Regulations

This is in reply to your memorandum dated February 2, 1994, referring our letter of December 15, 1993, concerning the above-noted provision. To summarize, XXXXXXXXXX has queried whether subsection 204(1) of the Income Tax Regulations (the "Regulations") would require a custodian to file the T3 Trust Return and Information Return (the "T3 Return") and, if so, whether there is any administrative policy to relieve the custodian of the responsibility to file such a return. The custodian would be appointed under a court order to have custody of the property of a member of a professional organization or a professional corporation for the purposes of managing, winding-up or selling the professional practice of the member or the professional corporation.

There seems to be some confusion about the type of return that the custodian may be required to file. It must be noted that there is a distinction between an income tax return prescribed by section 150 of the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act") and an information return prescribed by Part II of the Regulations. The confusion stems from the fact that the T3 Return is both an income tax return and an information return.

XXXXXXXXXX states that the custodian is not a trustee; i.e., that a trust is not created upon the appointment of the custodian. We are not in a position to agree or disagree with that statement. A trust is essentially the relationship between the trustee and the beneficiary. The trustee has ownership and control of the trust property, and is under obligation to deal with the trust property for the benefit of the beneficiary. The question of whether a trust comes into existence is a matter of fact and trust law. In order that a trust exist, three elements must be present: certainty of intention, certainty of subject matter (the trust property) and certainty of objects (the beneficiaries). The trust, once created, is beyond later intervention by the settlor, unless powers have been reserved for some express purposes, and the beneficiaries have no authority to instruct the trustee how to employ his or her powers.

With respect to the requirement to file an income tax return under section 150 of the Act, paragraph 150(1)(c) of the Act is only applicable to an estate or a trust. Consequently, if a trust is not created upon the appointment of the custodian there would be no requirement for the custodian to file a return under that paragraph. There still, however, may be a requirement for the custodian to file an income tax return under subsection 150(3) of the Act where the circumstances specified therein are present (and, if the custodian were the legal representative of the professional, the custodian would be subject to paragraph 150(1)(d) of the Act).

The requirement to file information returns is in Part II of the Regulations. Subsection 204(1) of the Regulations requires an information return in prescribed form to be filed by every person having the control of, or receiving the income gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity. The list of prescribed forms includes the T3 Return.

XXXXXXXXXX states that the custodian occupies a fiduciary position. However, in their view, subsection 204(1) of the Regulations only applies to trusts and estates and thus they conclude that the custodian is not required to file a T3 Return.

In our December 15, 1993 memorandum we stated that the wording in subsection 204(1) of the Regulations is broad enough to require the custodian to file the T3 Return. In your February 2, 1994 memorandum you queried the legal extent of the custodian's obligation.

XXXXXXXXXX

Consequently, we can only advise that if the custodian is having the control of, or receiving the income gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity, then the custodian is required to file the T3 Return in accordance with subsection 204(1) of the Regulations. This could result in a situation where the custodian would file a T3 Return in respect of the business and the professional would file a T1 return (T2 return in the case of a professional corporation) in respect of the business and any other items of income.

Committees

In your memorandum you refer to our 1978 memorandum to Audit Support Division with respect to a committee appointed pursuant to the Ontario Mental Incompetency Act ("OMIA") as authority for a T1 (as opposed to a T3) return being filed by a committee. The apparent concern in the underlying fact situation was that if the committee were viewed as creating a trust, the individual on whose behalf the committee was appointed would not be able to carry-back allowable capital losses incurred subsequent to the appointment of the committee. That memorandum thus dealt with the income tax returns required to be filed under section 150 of the Act and did not comment on the information returns required pursuant to subsection 204(1) of the Regulations.

XXXXXXXXXX

Summary

The determination of "fiduciary capacity" is a question of fact determination which would depend on the specific duties of the custodian relative to the particular fact situation.

If the custodian is having the control of, or receiving the income gains or profits in a fiduciary capacity, or in a capacity analogous to a fiduciary capacity, then the custodian is required to file the T3 Return in accordance with subsection 204(1) of the Regulations. This could result in multiple returns being filed in respect of the business of the professional.

We trust our comments are of assistance to you. Should you have any further questions, contact T. Murphy. Please send us a copy of your reply to XXXXXXXXXX with respect to any administrative policy developed with respect to the custodian.

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch

Attachment