14 November 1996 External T.I. 9606825 - DEATH BENEFIT AND 104(13.1)

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:

Is a designation under subsection 104(13.1) possible in respect of a death benefit received by a trust?

Position:

no

Reasons:

Capital beneficiary who received a death benefit includes it under subparagraph 56(1)(a)(iii) of the Act. Subsection 104(28) does not refer to subsection 104(13) of the Act and there is no designation of amount in subsection 104(28). Also see Prentice-Hall Canada Inc. #52,579

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Attention: XXXXXXXXXX

November 14, 1996

Dear Sirs:

We are writing in reply to your letter dated February 20, 1996, wherein you requested our comments on whether a death benefit paid or payable to a beneficiary of a testamentary trust could be taxed at the trust level pursuant to a designation under subsection 104(13.1) of the Income Tax Act (the "Act"). We apologize for the delay in responding to your inquiry.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Where a testamentary trust receives an amount upon or after the death of an employee in recognition of the employee's service in an office or employment, subsection 104(28) provides that the payment of such amount retains its character when flowed to a beneficiary. The flow-through is possible where it is reasonable to consider that all or part of the amount received by the trust may, having regard to all the circumstances including the terms and conditions of the trust arrangement, be paid or payable at a particular time to a particular beneficiary. Subsection 104(28) of the Act provides that such an amount will be deemed not to have been received by the trust and to have been received by the beneficiary upon or after the death of the employee in recognition of the employee's service in an office or employment.

Where the terms of the trust arrangement do not specify that the death benefit received by the trust is income, then the death benefit received by a trust will be considered capital under trust law. Where the capital of the estate is held in an ongoing trust, subsection 104(28) of the Act does not apply unless the trustees have the power to encroach on capital and distribute all or a portion of the death benefit to a particular capital beneficiary. Where subsection 104(28) of the Act applies, the portion of the death benefit will be deemed to have been received by the capital beneficiary and not by the trust. Thus, the death benefit, as determined under subsection 248(1) of the Act, will have to be included in the capital beneficiary's income under subparagraph 56(1)(a)(iii) of the Act. Alternatively, where the trustees do not have the power to encroach on capital, the trust will determine its entitlement to a deduction under subsection 248(1) and will include the resulting death benefit in its income under subparagraph 56(1)(a)(iii) of the Act.

Subsection 104(13.1) of the Act provides, in part, that where a trust designates an amount in respect of a beneficiary under the trust not exceeding the amount determined by the formula therein, the amount so designated will be deemed for the purposes of subsections 104(13) and 105(2) of the Act not to have been paid or to have become payable in the year to the beneficiary. Subsection 104(28) of the Act is different from the other "flow-through" provisions contained in subdivision k of Division B of the Act, for example, subsections 104(19), 104(21) or 104(22) of the Act. Under these provisions, a payment by a trust to its beneficiary will retain its character if it is reasonable to consider that the amount is included in the beneficiary's income under subsections 104(13), 104(14) or section 105 of the Act and if the trust designates the amount to its beneficiary. Unlike the other "flow-through" provisions, subsection 104(28) applies automatically when all the conditions are met. In addition, the trust does not have to make any designation and there is no requirement for an inclusion in the beneficiary's income under subsection 104(13) of the Act. Thus, it is our opinion that a death benefit cannot be taxed at the trust level under subsection 104(13.1) of the Act.

As mentioned in the Technical Notes to Bill C-139 issued by the Department of Finance on June 30, 1988, the introduction of new subsections 104(13.1) and (13.2) of the Act and the amendments to paragraph 104(6)(b) were made to "enable trusts to utilize in a particular year losses from prior years without affecting the ability of the trust to distribute its income". Therefore, it is our opinion that the wording of subsection 104(28) of the Act does not interfere with the purpose of subsection 104(13.1) of the Act.

As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch