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.
Principal Issues: Are the beneficiaries of a trust required to allocate taxable income to the various provinces where a limited partnership, of which the trusts are limited partners, earned business income?
Position: No.
Reasons: Where an allocation of business income is made to the beneficiaries of a trust under subsection 104(13), the business income loses its character and becomes income of the beneficiary from a property that is an interest in the trust in accordance with subsection 108(5) of the Act. According to Part XXVI of the Regulations, property income is allocated to the province in which an individual resides on the last day of the taxation year.
October 17, 2011
Savitri McLauchlin HEADQUARTERS
Large Case Auditor Income Tax Rulings
Audit Division Directorate
Toronto Centre Tax Services Office T. Posadovsky, CMA
1 Front Street West (613) 952-8283
Toronto ON M5J 2X6
2011-041518
Provincial income allocation: amounts paid to the beneficiary of a trust.
We are writing in reply to your correspondence dated July 22, 2011, concerning the provincial income allocation ("PIA") rules and amounts paid to the beneficiaries of a trust. Unless otherwise stated, all references herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Income Tax Act, R.S.C. 1985 (5th Suppl.), c.1, (the "Act") as amended, and the regulations thereunder are referred to as the "Regulations".
You described a situation where a limited partnership (the "Partnership") earns business income from permanent establishments (PEs) located in various provinces. The net business income earned by the Partnership was allocated to the limited partners (the "Partners"), each of which is a "trust" as defined in subsection 108(1) of the Act. As a trust is treated as an individual for income tax purposes, the PIA rules for individuals in Part XXVI of the Regulations also apply to a trust. However, the business income was fully allocated out of each trust to the respective beneficiaries in accordance with subsection 104(13) of the Act. It is your understanding that the beneficiary, who may or may not reside in the same jurisdiction in which the trust is resident, is not required to allocate business income received from the trust for PIA purposes because income received by a beneficiary of a trust is deemed to be income from property under subsection 108(5) of the Act.
It is our view that where an allocation of the Partner's business income is made to the beneficiaries of a trust under subsection 104(13), the income flowed through the trust to the beneficiary will lose its character and become income from a property that is an interest in the trust in accordance with subsection 108(5) of the Act. Therefore, we agree with your interpretation that no allocation is made to the provinces in which the Partnership has a PE or in which the trust might be resident, but rather the beneficiary's property income will be allocated to the province in which he or she resides on the last day of the taxation year in accordance with Part XXVI of the Regulations.
We trust our comments will be of assistance.
Yours truly,
Guy Goulet CA, M.Fisc.
Manager
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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