12 April 1994 External T.I. 9403155 - PREFERRED BENEFICIARY ELECTION

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:

Who can make preferred beneficiary election.

Position TAKEN:

Only income beneficiaries.

Reasons FOR POSITION TAKEN:

Interpretation of law.

XXXXXXXXXX 940315

Attention: XXXXXXXXXX

April 12, 1994

Dear Sirs:

Re: Preferred Beneficiary Election

This is in reply to your letter of January 31, 1994 concerning the preferred beneficiary election calculated pursuant to paragraph 104(15)(c) of the Income Tax Act S.C. 1970-71-72, c.63 as amended consolidated to June 10, 1993 (the "Act") and paragraph 2800(3)(f) of the Income Tax Regulations (the "Regulations").

Pursuant to paragraph 108(1)(a) of the Act:

'accumulating income' of a trust for a taxation year means the amount that would be the income of the trust for the year if this Act were read without reference to ....

Pursuant to paragraph 104(15)(c) of the Act:

The share of a particular preferred beneficiary under a trust in the accumulating income of the trust for a taxation year is...the amount determined in prescribed manner....

Pursuant to paragraph 2800(3)(f) of the Regulations:

...the discretionary share of a preferred beneficiary alive at the end of the year is the amount obtained by dividing the accumulating income of the trust for the year by the number of preferred beneficiaries under the trust alive at the end of the year who may be entitled to share in the accumulating income of the trust.

In order for a particular preferred beneficiary to be able to elect on a share of the accumulating income of the trust which is greater than nil, that particular beneficiary must be an income beneficiary. As explained in paragraph 14 of Interpretation Bulletin IT-394R, a capital beneficiary may share in the accumulating income of a trust as an income beneficiary in certain circumstances.

A statement in a trust indenture to the effect that certain preferred beneficiaries are "not entitled to share in the accumulating income of the trust as that term is defined in the Act" would mean that those beneficiaries are capital beneficiaries. As only income beneficiaries are entitled to receive current distributions of income from a trust under
general principles of the law of trusts, it would not be possible to make current distributions of income to capital beneficiaries.

Where the trust indenture specifies that capital gains are income for trust purposes, capital preferred beneficiaries who are not otherwise income preferred beneficiaries could never share in the accumulating income of the trust. They would therefore be excluded from the divisor in paragraph 2800(3)(f) of the Regulations. If the trust indenture does not so specify, then capital preferred beneficiaries would be included in the divisor. However, if no capital gain were realized in the year, such a beneficiary's share in the accumulating income would be nil.

By virtue of paragraph 2800(4) of the Regulations, contingent capital preferred beneficiaries will be included in the divisor. However, because their right to share in the accumulating income is dependent upon the potential happening of a future event, i.e., the death of another preferred beneficiary, their share of the accumulating income will be nil where that preferred beneficiary is alive at the end of the year (see ATR-30).

The "tax-paid income" of a trust is added to the capital of the trust. Any capital distributions by a trust would be governed by the terms of the trust indenture.

This opinion represents our opinion of the law as it generally applies. It is provided in accordance with the comments in paragraph 21 of Information Circular 70-6R2.

Yours truly,

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