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UBC Theses and Dissertations

The taxation of trust income : some inherent problems and comparative perspectives Johnson, Patricia Anne 1985

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THE T A X A T I O N OF TRUST  INCOME:  SOME I N H E R E N T PROBLEMS AND C O M P A R A T I V E  PERSPECTIVES  By  B.A., L L . B . ,  P a t r i c i a Anne J o h n s o n The U n i v e r s i t y o f V i c t o r i a ,  1982  A T H E S I S S U B M I T T E D I N P A R T I A L F U L F I L L M E N T OF THE R E Q U I R E M E N T S FOR THE DEGREE OF MASTER OF LAWS in THE F A C U L T Y OF GRADUATE S T U D I E S (THE FACULTY OF LAW)  We a c c e p t t h i s t h e s i s a s c o n f o r m i n g to the required standard  THE U N I V E R S I T Y OF B R I T I S H March, 1985 ©  Patricia  COLUMBIA  Anne J o h n s o n , 1985  In presenting  this  thesis i n partial  f u l f i l m e n t of the  r e q u i r e m e n t s f o r an a d v a n c e d d e g r e e a t t h e of B r i t i s h Columbia, I agree that it  freely  t h e L i b r a r y s h a l l make  a v a i l a b l e f o r r e f e r e n c e and s t u d y .  agree t h a t p e r m i s s i o n f o r extensive for  University  s c h o l a r l y p u r p o s e s may  for  financial  of  L  a  w  (  The U n i v e r s i t y o f B r i t i s h 1956 Main M a l l V a n c o u v e r , Canada V6T 1Y3 Date  DE-6  (3/81)  F e b r u a r y 58  Columbia  1985  my  It is thesis  s h a l l n o t be a l l o w e d w i t h o u t my  permission.  Department  thesis  be g r a n t e d by t h e h e a d o f  copying or p u b l i c a t i o n of t h i s  gain  further  copying of t h i s  d e p a r t m e n t o r by h i s o r h e r r e p r e s e n t a t i v e s . understood that  I  written  i i  Abstract The  t a x a t i o n of  p r o b l e m s due the  to  the  separation of  creation  of  what  as  nature  the  held  i s subject  of  trust  the  and  in trust. be  should  inherent which  equitable interests  on  taxed,  areas  trust and  on  allows and  i n income  Problematic  taxed  be  to  itself  equitable interests  t o whom s h o u l d  rate persons  income  legal  differing  from p r o p e r t y tions  trust  the  arising  include  ques-  i n c o m e , when and  at  what  be  they  should  taxed. Taxation the  trust  income under C a n a d i a n  of  the  income as  accumulating,  and  on  or  nature  of  inter  trust  vivos.  or  of  permitted  to  the  the  currently  nature  of  the  retain  their  depends  distributable trust  P r o v i s i o n i s made f o r t h e beneficiary.  law  as  or  as  testamentary  t a x a t i o n of  C e r t a i n types  of  on  income  character  i n the  hands of  a  system  f o r the  the are  the  bene-  ficiary. An of ent in  attempt  trust  income  i n such  to devise reveals  a system.  determining  the  logical  in detail  the  type  Conceptual  and  practical  appropriate  taxation  are  considered  interest  and  i t s significance  taxation  of  problems.  trust  as  taxpayer,  i s the  nature  of  problems  rate, of  the  for tax purposes.  income does not  completely  taxation inher-  difficulties and  timing  of  beneficial The  resolve  Canadian these  The  proposals  law  i n the United  and  contrasted  rules  of the Royal Commission States  with  Canadian  o f t h e ..various  they deal  with  and  the United law.  inherent  the  current  Kingdom are  Differences  systems, r e f l e c t  the problems  and  compared  among  the  d i f f e r e n c e s i n the  way  i n the t a x a t i o n of  trust  income. The in the  problems  and  their  Canadian s o l u t i o n s are reviewed  comparison w i t h methods adopted e l s e w h e r e . existing  changes. effected attendant  r u l e s would  require  I t i s not c l e a r t h a t are j u s t i f i a b l e on  their  given  a number o f  improvements the  introduction.  increased  Any  change  interrelated which might complexity  be  to  iv Table  of  Contents Page  Abstract  i i  Introduction Chapter I.  1:  Canadian  4  Distributable  8 8 19  2.  21  Limitations  on Amounts P a y a b l e  B.  Benefits  C.  Upkeep o r Maintenance  Accumulating  24  The P r e f e r r e d  B.  Income A c c u m u l a t i n g Preferred  Multiple  of Trust Property  Income  A.  C.  Income  Amounts P a y a b l e t o a B e n e f i c i a r y 1. A m o u n t s Deemed t o be P a y a b l e  a  III.  Taxation of Trust  Income C u r r e n t l y A.  II.  1  26 26  Beneficiary  Election  27  and Not t h e S u b j e c t o f  Beneficiary  Election  35  Trusts  37  The N a t u r e o f t h e Income A l l o c a t e d B e t w e e n T r u s t a n d B e n e f i c i a r y -- T h e F l o w - T h r o u g h R u l e s A. Dividends 1. Taxable Dividends 2. Non-taxable Dividends B. I n t e r e s t Income  38 40 40 41 42  C.  Taxable  43  D.  C a p i t a l Cost Allowance, Recapture Terminal Loss  C a p i t a l Gains and  44  E.  Depletion Allowance  44  F.  F o r e i g n Taxes  45  G.  Pension Benefits  46  H.  Death B e n e f i t s  47  Page Chapter I.  II.  2:  Problems  Determining A.  Trust  B.  Trustee  B.  C.  Chapter I.  the Appropriate  Income  Taxpayer  52  or Beneficiary?  54  Difficulties  of 60  who  not i n Receipt  The U n a s c e r t a i n e d  Proposals  62  Beneficiary  68 70  The G e n e r a l  B.  Exceptions  72  t o the Canadian System  of the Royal  A.  by  o f Income  i n Summary  Alternatives  Rule:  60  i s Ascertained  o f t h e Income  The P r o b l e m s  49 51  or Trustee?  The B e n e f i c i a r y  The N a t u r e  3:  Trust  T h e B e n e f i c i a r y who i s A s c e r t a i n e d and i n R e c e i p t o f Income  but  IV.  i n Taxing  Imposing Tax L i a b i l i t y : Timing and Rate A.  III.  Inherent  76  Commission  76  Taxation  78  to the General  of the Trust  Rule:  the Beneficiary  C.  Calculation  D. E.  Multiple Trusts The N a t u r e o f t h e Income Flow-Through Rules  Elections 81  o f t h e Tax C r e d i t  87 88  Taxed: 89  vi  Page  II.  III.  American Taxation A.  General  B.  Distributable  C.  Simple  D.  Complex T r u s t s  E.  Excess  British A.  B.  IV. Chapter  II. III. IV.  Net  Income  of Trust  101 The T h r o w b a c k R u l e Income  Taxation of the Trustee 1. The G e n e r a l R u l e : Liability for B a s i c R a t e Tax 2. A c c u m u l a t i o n and D i s c r e t i o n a r y T r u s t s : L i a b i l i t y f o r A d d i t i o n a l R a t e Tax 3. Combined Rate A d j u s t m e n t s on Discretionary Distributions Taxation of the B e n e f i c i a r y 1. A c c u m u l a t i o n T r u s t s and Discretionary Trusts 2. C a p i t a l Payments as Income Summary  Conflicting  97 99  Distributions:  Taxation  90 90  Trusts  A Comparative 4:  Income  Rules  Difficulties I.  of Trust  Objectives o f Change  107 112 113 115 117 119 120 123 124 126  and 129  The T a x p a y e r  130  The R a t e o f T a x a t i o n  133  The T i m i n g  135  The  Bibliography  Subject  of Taxation of Taxation  138 141  1 Introduction It trust may  i s the thesis  income  be  will  incapable  of t h i s  meet w i t h  work  certain  of p e r f e c t  vivos  trust  beneficiary  has  election  By  than ones  a settlor under  any  t o above;  practical as w e l l posed,  Canadian  arising  rates  ing  receipt  of  of  inherent  and  because the  answered.  held  income  with  be  They  subject  in trust; be  the  as t o t h e n a t u r e  i t s passage  i n the nature  related  are  law.  of the  t h e y and  foundation  t h e ways  m u s t be  on  income  questions  as  to  match-  liability;  taxed  and  the  relationship.  of p e r f e c t  relationship  solution and  objectives  systems of  rules  is  i n the of  a d d r e s s e d , however,  i n which they are resolved  f o r the complex  simply  interrelated  of tax  income  incapable  of the t r u s t  They  taxation  payable; problems of  imposition  those  and  t h e y c a n be  to taxation  perhaps at times c o n f l i c t i n g ,  trust  such as  include  through the t r u s t  these problems  differing,  legislation.  systems of  problems, while  at which tax should  That  tion  simply  t o whom s h o u l d  and p r o b l e m s effect  These  from p r o p e r t y  the  rules  an  preferred  problems which are both t h e o r e t i c a l  a s o u r own.  problems as  problems  f o r purposes of the  the current  which  such as whether  a n d w h i c h a r e common t o o t h e r  c a n n o t be  problems  "general"  W h a t jj> m e a n t a r e p r o b l e m s w h i c h u n d e r l i e alluded  attempt to tax  general  solution.  a r e meant p r o b l e m s more b a s i c inter  that  taxai f only  provide  enacted to  2  ensure ways add  taxation  i n which further  of trust  these problems  and unnecessary  inconsistent  and a t times  remembered however, tem  income.  c a n be made;  that  that,  I t may w e l l  are dealt  with  imperfections  illogical no e a s y  perhaps,  i n Canadian law  t o an  system.  already  I t must  comparisons no i d e a l  be t h e t h a t t h e  be  t o an i d e a l  system  sys-  c a n be  devised.  The vast,  in this  distinctions  sitions  satisfaction  tion  rules  tion  of trust  organization  In dian  ignored.  perhaps not  assumptions  are there-  between  problems  interest  and from  of such  interests.  omitted:  these  income and  arising  limits  from  Consideration  capital  the dispo-  the distribution  the focus here  income as i t a r i s e s With  for tax  L i k e w i s e a r e q u e s t i o n s as t o  of  capital  of attribu-  i s on t h e t a x a -  and i s then d i s t r i b u t e d  i n mind,  a brief  or  comment o n  s h o u l d be made.  Chapter  One, t h e r e l e v a n t  legislation are described.  although the  limiting  f o r t a x purposes  i s also  accumulated.  though  t h a n c a n be c o m p l e t e l y encom-  Certain  and i n p a r t i c u l a r ,  of such  of trusts  Questions of the residence of trusts  are largely  interests  in  work.  necessary.  purposes the  of the taxation  i s nevertheless wider  passed fore  subject  the rules  parts  of the existing  I t s h o u l d be n o t e d  of other jurisdictions  p r i m a r y .focus o f t h i s  work  here  a r e examined  i s on t h e C a n a d i a n  Canathat  later,  r u l e s and  3 t h e way under  i n which  discussion.  above are is  further  to attempt  income. it  they resolve In Chapter revealed.  to determine  dian  system  lems  that  described  form  alternatives discussion tion,  and  place  both  their  a  One  problems  referred  in this  to  chapter  for taxing  rules  o f how  deals with  trust  the  these  In Chapter  are considered.  the Royal Commission trust and  discussed  and  Canaprob-  Three, Under on  income c u r r e n t l y  Taxain  i n the U n i t e d Kingdom.  the problems  in other  and  chapter.  for taxing  solution  system  the  are of course encountered  this  i n the United States  adopted  course taken  i n Chapter  Four  the problems  logical  the proposals of  i n Chapter  to resolve  these problems  the body of  the systems  Canadian  solutions  The  to the e x i s t i n g  are  fail  Two,  In doing so, problems  i s the examination of  Finally,  or  are summarized  i n comparison  jurisdictions.  with  and the  4 Chapter Canadian -Under C a n a d i a n  Taxation  income t a x p u r p o s e s  ter  o f l a w , an e n t i t y  income and t a x a b l e to  the rules  no  residence  even  though a t r u s t  quarters  A  trust's  income a r e t h e r e f o r e c a l c u l a t e d  One s u c h  of a trust.  accepted  individual  i s n o t , as a mat-  b u t r a t h e r an o b l i g a t i o n . ^  exception Although  p r o v i s i o n expressly governing  generally  Income  i s t r e a t e d as an  applicable to individuals  some e x c e p t i o n s . the  of Trust  law a t r u s t  for  One  —  although  generally, subject to  i s the determination of the l e g i s l a t i o n  trust  residence,  not without  -- t h a t , b y i m p l i c a t i o n  according  at least,  contains  i t has been  criticism a trust  i n some  i s resi-  1 A t r u s t i s defined f o r the purpose of the s u b d i v i s i o n of the A c t d e a l i n g w i t h t r u s t s as " i n c l u d [ i n g ] an i n t e r v i v o s t r u s t and a testamentary t r u s t " : Income Tax A c t , S t a t s . Can. 1952, c. 148, as amended, s. 1 0 8 ( 1 ) ( j ) . F u r t h e r s t a t utory references i n this chapter are to this Act unless otherwise indicated. F o r commentary on t h e n a t u r e o f t h e t r u s t o b l i g a t i o n , s e e c h a p t e r 2, i n f r a . 2 One w a y i n w h i c h t h e t a x a t i o n o f t e s t a m e n t a r y t r u s t s d i f f e r s from t h a t o f i n d i v i d u a l s g e n e r a l l y i s ,that a testament a r y t r u s t need n o t use t h e c a l e n d a r year as i t s t a x a t i o n year: s . 104 ( 2 3 ) ( a ) . 3 A c o n s i d e r a t i o n of the s p e c i a l rules p e r t a i n i n g t o non-resi d e n t t r u s t s i s beyond t h e scope o f t h i s work and i t s h o u l d be a s s u m e d u n l e s s o t h e r w i s e s t a t e d t h a t t h e d i s c u s s i o n refers to resident trusts. With respect to non-resident t r u s t s , r e f e r e n c e s h o u l d b e made t o t h e f o l l o w i n g m a t e r i a l : L l o y d F. R a p h a e l , C a n a d i a n I n c o m e T a x a t i o n o f T r u s t s ( D o n M i l l s , O n t . : CCH C a n a d i a n L t d . , 2 n d e d . , 1 9 8 2 ) , c h a p t e r s 1 a n d 6; C u l l i t y , " N o n - R e s i d e n t T r u s t s " ( 1 9 8 1 ) , 33 C a n . T a x F d n . R e p t . P r o c . T a x C o n f . 6 4 6 ; G o l d b e r g , "U.S. T r u s t s C r e -  5 dent where  the trustee i s resident.  Certain their  calculation  among t h e s e the to  deductions  o f income a r e a p p l i c a b l e t o t r u s t s .  are deductions  beneficiary^ have t a x e d  for  as h i s income.  available.  designated extent trust  such  f o r amounts p a y a b l e  and f o r amounts which  t h e upkeep o f t r u s t  also  not applicable to individuals i n  i n the year t o  a beneficiary elects  A deduction  property  Chief  f o r amounts  paid  used by a b e n e f i c i a r y i s  T h e c h a r a c t e r o f t h e i n c o m e d e d u c t e d may b e  by t h e t r u s t designations  as being  of a certain  type.  a r e made, amounts d e d u c t e d  To t h e from  income and i n c l u d e d i n t h e income o f a b e n e f i c i a r y a r e  considered ciary's  t o be income  interest  from  a source  i n the trust.  other  As a r e s u l t ,  than  the benefi-  rules  governing  ated by and f o rCanadians Lose T r e a t y Exemption f o r C a p i t a l G a i n s " ( 1 9 8 0 ) , 28 C a n . T a x J . 2 1 8 ; N o b l e , "Some T a x A v o i d a n c e A s p e c t s o f N o n - R e s i d e n t T r u s t s " ( 1 9 7 9 ) , 5 E.T.Q. 81; M a u r i c e C. C u l l i t y a n d R o b e r t E . F o r b e s , T a x a t i o n a n d Estate Planning (Toronto: R i c h a r d De B o o L t d . , 1 9 7 8 ) , p p . 1 3 2 - 1 3 4 , 5 2 6 - 5 3 0 ; R.A. F r i e s e n a n d D.Y. T i m b r e l l , C a n a d i a n T a x a t i o n o f Income A r i s i n g i n N o n - R e s i d e n t C o r p o r a t i o n s a n d Trusts (Toronto: CCH C a n a d i a n L t d . , 1 9 7 5 ) ; K e l l o u g h , " B a s i c Tax C o n s i d e r a t i o n s o f T r u s t s and an E x a m i n a t i o n o f Some P a r t i c u l a r T y p e s o f T r u s t s " ( 1 9 7 5 ) , 27 C a n . T a x F d n . Rept. Proc. T a x C o n f . 478 a t p p . 495-497; B r a d l e y , "Shareh o l d e r s o f F o r e i g n A f f i l i a t e s and B e n e f i c i a r i e s o f Non-Resi d e n t I n t e r V i v o s T r u s t s " ( 1 9 7 4 ) , 26 C a n . T a x F d n . R e p t . Proc. Tax Conf. 225; S a r k a r i , " T a x a t i o n o f Non-Resident T r u s t s " ( 1 9 7 4 ) , 22 C a n . T a x J . 5 8 4 ; M a r s h a l l A. C o h e n , Income T a x a t i o n o f I n t e r V i v o s T r u s t s ( T o r o n t o : C a n a d i a n T a x F o u n d a t i o n , 1 9 6 4 ) , c h a p t e r 5. 4 The somewhat l u d r i c r o u s r e s u l t o f a l i t e r a l interpretation of s u b s e c t i o n 104(1) w h i c h p r o v i d e s i n p a r t t h a t "a r e f e r e n c e t o a t r u s t ... s h a l l be r e a d a s a r e f e r e n c e t o t h e t r u s t e e " i s n o t e d a n d c r i t i c i z e d b y G r e e n , "The R e s i d e n c e o f T r u s t s f o r Income T a x P u r p o s e s " ( 1 9 7 3 ) , 21 C a n . T a x J .  6 particular and  types  taxable  income  taxed  Certain culation the  of  personal  unavailable first  capital i n the  trust  income, gains  taxable  an  and  inter  trust,  the  viduals.  inter  vivos  mum  rate  of  approximately  will  apply  interest to  trust  beneficiary.  i n d i v i d u a l s i n the  i n a p p l i c a b l e to  deductions  vivos  trust  trusts,  for dependants.^ i s a deduction  cal-  namely Also  for  the  income.  taxable  testamentary An  the  a p p l i c a b l e to  interest  with  among o t h e r s ,  income are  exemption to  f o r example, d i v i d e n d s ,  hands of  deductions  $1000 o f  A  of  income  rates  i s subject  are  trust,  those  to  tax.  For  applicable to  however, pays  tax  at  a  india  mini-  50%.  217 a t p p . 2 2 1 - 2 2 2 w h e r e he s t a t e s t h a t " [ t j h i s p r o v i s i o n i s , to say the l e a s t , q u i t e d e v a s t a t i n g , f o r i f taken l i t e r a l l y , i t makes a b s o l u t e nonsense of i m p o r t a n t p a r t s o f the A c t . " He s u g g e s t s t h a t i n s p i t e o f t h e e x p r e s s p r o v i s i o n to the c o n t r a r y , a reference to the t r u s t should be r e a d as a r e f e r e n c e t o the t r u s t e e o n l y where the context allows. He a l s o p o i n t s o u t t h a t i f a n i n f e r e n c e i s t o b e drawn from the p r o v i s i o n , the i n f e r e n c e t h a t the t r u s t i s r e s i d e n t where the t r u s t e e i s r e s i d e n t i s the wrong one, the a p p r o p r i a t e r e s u l t being t h a t the t r u s t e e i s the t a x a ble e n t i t y and t h u s i t i s h i s r e s i d e n c e t h a t i s important, i t b e i n g i n c o r r e c t t o s p e a k o f r e s i d e n t and non-resident t r u s t s (p. 222). Further d i s c u s s i o n of the q u e s t i o n of the r e s i d e n c e o f t r u s t s c a n be f o u n d i n R a p h a e l , s u p r a , n o t e 3, a t pp. 16-25; M o r r i s , " J u r i s d i c t i o n t o Tax: An U p d a t e " ( 1 9 7 9 ) , 31 C a n . T a x F d n . R e p t . P r o c . T a x C o n f . 414 a t p p . 4 2 0 - 4 2 3 ; A m i g h e t t i , "Income Tax E v e n t s T r i g g e r e d by D e a t h : An E x a m i n a t i o n o f S e l e c t e d P r o b l e m s " ( 1 9 7 9 ) , 31 C a n . Tax Fdn. R e p t . P r o c . T a x C o n f . 652 a t p p . 6 5 7 - 6 5 9 ; C o h e n , s u p r a , n o t e 3, a t p p . 3 8 - 4 2 ; : S c o t t - H a r s t o n , "Residence of T r u s t s " ( 1 9 6 1 ) , 15 C a n . T a x F d n . R e p t . P r o c . T a x C o n f . 244. See a l s o I n t e r p r e t a t i o n B u l l e t i n I T - 4 4 7 " R e s i d e n c e o f a Trust or Estate."  7  Although  a trust  i s expressly treated  as a  individual  Pi  for  tax purposes,  the  nature  trustee  of a trust  currently  in  that  income  preferred  for  rather  is  treated  is  t a x e d upon  as an  other  rules  those with  income  trust conduit  income o f  By v i r t u e can  of  of certain under a  discre-  income  of the d i f f e r i n g  In the f i n a l types  of  trust and  rules  distributable  to specific  known  i s accumulating  respect to that  follows.  a  occur  d e s c r i b e d above, the  i s currently  applicable  as a  as b e i n g  beneficiaries  examination  i s accumulating  chapter,  i s treated  t h e same r e s u l t  where  the  income o f t h e  f o r the benefit  than  individual  i t . An  where  of the t r u s t .  election,  t o income t h a t  income t h a t this  than  recognize  a c o n d u i t between  f o r tax purposes  Alternatively,  beneficiaries  of the Act  the trust  or of p o t e n t i a l  trust.  applicable  Thus  i s accumulating  beneficiaries  are  i s viewed  beneficiary  income  tionary  as e s s e n t i a l l y  distributable,  beneficiary,  where  provisions  and t h e b e n e f i c i a r y .  is  the  certain  and  pages  of  income  considered.  5 D e f i n e d as " i n c l u d [ i n g ] a person [in the t r u s t ] " : s. 108(l)(b). 6 Subsection  104(3).  7 Subsection  110.1(1).  8 Subsection  104(2) .  beneficially  interested  8 I.  Currently  Distributable  Income r e f e r r e d includes  both  terms  the  of  income w h i c h  to here  income which trust  Income as  the  instrument  is distributed  "currently trustee  distributable"  i s required  to d i s t r i b u t e  i n the  by  i n the  year pursuant  the  year  to a  and  discre-  et  tion is  exercised  treated  received trust  as  under  by an  the  a trust,  below.  by  The  or  an  result  of  i n the  be  from  income of  the  trust  ies, A.  the  is currently trust  itself  Amounts P a y a b l e As  deducted  indicated,  i n computing  such  income o f the  p a y s no  a  income  benefit  f o r the upkeep  treatment  i s that  the b e n e f i c i a r y  of are  these and  When a l l i n c o m e  to resident  income  this  These c a t e g o r i e s  trust.  distributable  to a an  to a beneficiary,  the b e n e f i c i a r y .  included the  tax purposes,  amount p a i d  amounts a r e deducted  For  amount p a y a b l e  p r o p e r t y used  discussed  trustee.  may of  beneficiar-  tax.  Beneficiary  amount p a y a b l e trust  income, ^ 1  to a beneficiary and  m u s t be  may  included  be in  9 Such income does not i n c l u d e amounts d i s t r i b u t e d as a r e s u l t o f t h e e x e r c i s e o f a power o f e n c r o a c h m e n t on c a p i t a l , such amounts p r o b a b l y b e i n g d i s t r i b u t i o n s i n s a t i s f a c t i o n o f a c a p i t a l i n t e r e s t and t h u s r e c e i v a b l e by t h e benef i c i a r y free of tax under s u b s e c t i o n 107(2): see Fuke, "Tax A c c o u n t i n g P r o b l e m s f o r E x e c u t o r s and T r u s t e e s " ( 1 9 7 2 ) , 20 C a n . T a x J . 189 a t p p . 1 9 7 - 1 9 8 ; C u l l i t y a n d F o r b e s , s u p r a , n o t e 3, a t p . 130. 10  Subsection  104(6).  9 computing unlike takes so  the  income  the deduction,  i s mandatory,  the appropriate  can  result  The differ  trust  mechanics  somewhat.  nor  amount t h a t  Failure  trust,  of which  and  w o u l d be  I f , during  other person  inclusion  the  t o be 3  trust,  the l i f e t i m e  is entitled  trust,  the trust  does  the  spouse  i s a spouse  rule,  income  included  amount  essentially,  do  i s made  of  the  trust,  calculated a l l the  i s , or  was,  the spouse  of the  sett-  of the  not q u a l i f y  are  who  of the spousal  t o any  is  ben-  i n the  i s a trust  i s payable to a beneficiary  the  to  provisions  Where d e d u c t i o n s  the notional  the case of a testamentary t r u s t ,  lor.  of the trust  trust  t a k e n f o r amounts p a y a b l e t o  beneficiary.^  A spouse  inclusion,  or not the  as a g e n e r a l  f o r amounts e l e c t e d  made f r o m a s p o u s e  income  deduction,  of a p r e f e r r e d  differently.  whether  of the deduction The  The  taxation.  i f no d e d u c t i o n s w e r e  eficiaries income  deduction.  i n double  from the n o t i o n a l  in  of the beneficiary.  beneficiary,  income  or c a p i t a l  as a spouse  the deduction  trust.^  any of If  4  i s taken from  the  11  Subsection  104(13).  12  An a r g u m e n t t h a t t h e t r u s t c a n e l e c t n o t t o d e d u c t t h e i n c o m e i n w h i c h c a s e i t n e e d n o t be i n c l u d e d i n t h e i n c o m e of t h e b e n e f i c i a r i e s f a i l e d i n t h e c a s e o f Brown v . The Q u e e n , [1980] F.C. 356, [1979] C.T.C. 476 ( T . D . 1 9 7 9 7 7 S e e a l s o t h e c o m m e n t o n t h i s c a s e b y M c D o n n e l l , ( 1 9 7 9 ) , 27 Can. Tax J . 344. -  13  Subsection  14  Paragraph  104(6). 104(4)(a).  10 notional no  amount t h a t  be  income of  d e d u c t i o n s w e r e made f o r t h e  also  as  i f a m o u n t s deemed t o be  c e r t a i n ..property of income."'-k T h e ceeds  but  effect  dates  must  than  the  or  remain  arising  Whether or deduction the  not  events i n the  from the  i s the  trust  this  deemed  the b e n e f i c i a r y ,  tially  t r u s t ^  of  of d i s p o s i t i o n  certain  of  would  to the  trust  instrument  were not  included  rule on  i s that  passed  to the the  i s a spouse  to the  of  trust,  pro-  rather poten-  however,  this  of  proceeds.^  to the b e n e f i c i a r y extent of  of  beneficiary  gains  such  but  trust  the  trust,  taxable capital receipt  in  the o c c u r r e n c e  subjecting  amount p a y a b l e  only i f  of d i s p o s i t i o n  be  t h e deemed  not  proceeds  to arise  trust,  trust  amounts d e s c r i b e d above,  special  cannot  the  the  by  virtue  notional  income.  15  " C a p i t a l p r o p e r t y (other than d e p r e c i a b l e p r o p e r t y ) , prope r t y r e f e r r e d t o i n any o f p a r a g r a p h s 5 9 ( 2 ) ( a ) t o (e) o r land included i n the i n v e n t o r y of a business of the trust": s. 1 0 4 ( 4 ) ; " d e p r e c i a b l e p r o p e r t y o f a p r e s c r i b e d c l a s s of the t r u s t " : s. 1 0 4 ( 5 ) ; " i n d e x e d s e c u r i t i e s owned under the [indexed s e c u r i t y investment] p l a n " : s. 104(5.1).  16  Subsection  17  P r o p e r t y d i s p o s i t i o n s g i v i n g r i s e t o t h e deemed r e c e i p t o f p r o c e e d s by t h e t r u s t a r e deemed t o o c c u r on t h e day on w h i c h t h e s p o u s e who i s t h e b e n e f i c i a r y u n d e r t h e s p o u s e t r u s t d i e s , on t h e day t h a t i s t h e t w e n t y - f i r s t a n n i v e r s a r y o f t h a t d a y , a n d a t s u b s e q u e n t 21 y e a r i n t e r v a l s : s u b s e c t i o n s 1 0 4 ( 4 ) , 1 0 4 ( 5 ) , a n d . 1 0 4 ( 5 . 1 ) ; and on t h e d i s t r i b u t i o n d u r i n g the l i f e t i m e of t h a t spouse t o a b e n e f i c i a r y o t h e r than the spouse, i n s a t i s f a c t i o n of h i s c a p i tal interest: s. 1 0 7 ( 4 ) .  104(6).  11 The mirror  counterpart  to this  image a l t h o u g h  i tdoes p r o v i d e 1  income o f t h e b e n e f i c i a r y . by  a-notional trust  amount  ° The i n c l u s i o n  income.  t o be i n c l u d e d  notional trust  may a p p e a r  case  payable  19 20  cost  i s the  deductions f o r amounts benefici-  allowance  t o the b e n e f i c i a r y to the extent of  and t h e i n c l u s i o n  because of t h e d i f f e r e n t  income  limiting  each,  f o rterminal loss  this  or inclusion  i s being  notional  i s not ultimately  and f o r c a p i t a l  to the beneficiary i s constant,  Subsection  limited  t h e amount o f t h e i n c l u s i o n  c a n b e made b y t h e b e n e f i c i a r y .  a deduction  i nthe  income.  to differ  as claims  allowance  i f no  t h e quantum o f t h e d e d u c t i o n  amounts o f t r u s t  18  n o t i o n a l amount  to beneficiaries,  As b e f o r e ,  t h e amount p a y a b l e  i s again  i n t h e income o f a p r e f e r r e d  by t h e t r u s t .  Although  the  This  nor f o r terminal losses or capital  claimed  this  f o r an i n c l u s i o n  t h a t w o u l d be income o f t h e t r u s t  elected  is  p r o v i s i o n i s not i t s  Pi  w e r e made f o r a m o u n t s p a y a b l e  ary,  deduction  cost  The a c t u a l amount  r e g a r d l e s s of whether  calculated.^  104(13).  Ibid. I t must be remembered t h a t t h e s e s u b s e c t i o n s a r e d e a l i n g w i t h two d i f f e r e n t m a t t e r s . Involved i n determining income f o r t r u s t p u r p o s e s a n d t h u s t h e amount p a y b l e t o a b e n e f i c i a r y i s the q u e s t i o n o f whether o r not the t r u s t e e s are e n t i t l e d t o s e t aside a reserve f o r d e p r e c i a t i o n . I n v o l v e d i n d e t e r m i n i n g income f o r t a x p u r p o s e s and thus the a p p r o p r i a t e d e d u c t i o n s from and i n c l u s i o n s i n income, is the question of the a l l o c a t i o n of capital cost allow-  12  The in  deduction  which t h e income  received  and t h e i n c l u s i o n both i spayable.  by t h e b e n e f i c i a r y of reporting  amounts e a r l i e r  reported  t o the year  Whether payment  i n that  Where t h e y e a r s  apply  year  i sactually  i si r r e l e v a n t .  and r e c e i p t do n o t c o i n c i d e ,  are excluded  from  income  i n the year  ? 1  of a  receipt. taxation  year  In order  such  a case,  beneficiary they  year  other  than  i s a testamentary  the calendar  year,  o f t h e t r u s t and o f t h e b e n e f i c i a r y w i l l  same. in  Where t h e t r u s t  f o rthe deduction benefits  are paid,  even  i fthis  year  having  the taxation n o t be t h e  and i n c l u s i o n t o c o i n c i d e  are included  f o rthe taxation  trust  i n t h e income o f t h e  of the trust during  differs  from  the taxation  which year o f  ance. W i t h r e s p e c t t o t h e f i r s t q u e s t i o n i t seems t h a t w h e t h e r a t r u s t e e may s e t a s i d e a n a m o u n t f o r d e p r e c i a t i o n i s a m a t t e r f o r t r u s t l a w a n d may d e p e n d i n p a r t o n whether t h e t r u s t i s c a r r y i n g on a b u s i n e s s : see W i l l i a m son, " C a p i t a l Cost A l l o w a n c e s and A l l o c a t i o n Problems i n an E s t a t e o r T r u s t " ( 1 9 6 6 ) , 16 U . T . L . J . 3 1 0 ; R a p h a e l , s u p r a , n o t e 3 a t p p . 2 1 7 - 2 2 4 ; C o h e n , s u p r a , n o t e 3, a t pp. 2 8 - 3 2 . Where t h e t r u s t e e p r o p e r l y d e d u c t s an amount f o r d e p r e c i a t i o n , t h u s r e d u c i n g t h e amount p a y a b l e t o a b e n e f i c i a r y , t h e b e n e f i c i a r y need i n c l u d e o n l y t h a t r e d u c e d amount i n h i s income, h a v i n g n e i t h e r r e c e i v e d n o r been e n t i t l e d t o r e c e i v e t h e amount p r o p e r l y s e t a s i d e : Goldman v. M i n i s t e r o f N a t i o n a l Revenue ( 1 9 5 3 ) , 9 Tax A.B.C. 2 5 1 . A number o f o t h e r c a s e s h a v e b e e n decided, under e a r l i e r v e r s i o n s o f t h e Act, on t h e ground that t h e t r u s t e e was n o t e n t i t l e d , a s a m a t t e r o f t r u s t l a w , t o s e t a s i d e amounts f o r d e p r e c i a t i o n . Such amounts were t h e n i n c l u d e d i n t h e income o f t h e b e n e f i c i a r i e s f o r t a x p u r poses, those b e n e f i c i a r i e s being e n t i t l e d t o receive such amounts: Hebert v. M i n i s t e r o f N a t i o n a l Revenue (1955), 13 T a x A . B . C . 6 5 , 55 D.T.C. 3 0 5 ; N o . 2 4 9 v . M i n i s t e r o f N a t i o n a l R e v e n u e ( 1 9 5 5 ) , 12 T a x A . B . C . 4 3 3 , 55 D.T.C. 229. Cases decided i n favour o f t h e taxpayer, i n that the  13 the  beneficiary The  ferring to  rules  i n which discussed  they  above e s t a b l i s h  income t a x l i a b i l i t y  a beneficiary  from  in  the year,  ficiary  As  The  includes  but also  a prerequisite i t seems t h a t  income; deemed point  respect  to that  however,  J  a method o f  trans-  t o amounts  payable  beneficiary.  has given  not only  rise  What i s t o some  amounts a c t u a l l y  amounts t h e payment o f w h i c h  was e n t i t l e d i n t h e y e a r  ficiary, of  The term  with  the trust  meant by "amounts p a y a b l e , " questions.  are received.  paid  t h e bene-  to enforce.^  t o a n amount b e i n g  payable  t o a bene-  t h e t r u s t must a c t u a l l y be i n r e c e i p t  receipt  was d e t e r m i n e d  under  the Act being  insufficient.  i n the case o f Pichosky  v. M i n i s t e r  d e d u c t i o n t a k e n b y t h e t r u s t e e s was h e l d t o be p r o p e r , i n c l u d e Manning v. M i n i s t e r o f N a t i o n a l Revenue, [1956] E x . C R . 3 5 0 , [ 1 9 5 6 ] C . T . C . 1 6 7 , 56 D.T.C. 1 0 9 9 ; N o . 2 1 6 v . M i n i s t e r o f N a t i o n a l R e v e n u e ( 1 9 5 4 ) , 11 T a x A.B.C. 454, 5 5 D.T.C. 5 5 1 . With respect t o the second question, the provisions of subsection 1 0 4 ( 1 3 ) do n o t r e s u l t i n a g r e a t e r amount b e i n g i n c l u d e d i n t h e income o f t h e b e n e f i c i a r y t h a n was d e d u c t e d i n c o m p u t i n g t h e income o f t h e t r u s t . In both t h e d e d u c t i o n a n d i n c l u s i o n p r o v i s i o n s , t h e amount p a y a b l e t o a b e n e f i c i a r y w h i c h depends i n p a r t on whether a r e s e r v e f o r d e p r e c i a t i o n h a s b e e n t a k e n , i s t h e same. What i s p r e c l u d e d , i n s u b s e c t i o n 104(13), i s a reduction f o r t a x p u r p o s e s o f t h e income p a y a b l e t o t h e b e n e f i c i a r y b y t h e u s e o f c a p i t a l c o s t a l l o w a n c e w h i c h may b e t a k e n b y t h e t r u s t i r r e s p e c t i v e o f a n y amount s e t a s i d e f o r d e p r e ciation. Thus t h e t r u s t m i g h t , f o r t a x p u r p o s e s , be e n t i t l e d t o c l a i m c a p i t a l c o s t a l l o w a n c e i n t h e amount o f , f o r example, $20,000, y e t n o t s e t aside any r e s e r v e f o r d e p r e c i a t i o n , i n s t e a d d i s t r i b u t i n g t h e e n t i r e t r u s t income o f , f o r example, $100,000 t o t h e b e n e f i c i a r y s o e n t i t l e d . I f t h e amount i n c l u d e d i n t h e income o f t h e b e n e f i c i a r y was  14 of  National  to  apply the  personal  Revenue  when an  attribution  rules  c o r p o r a t i o n and  thus  which.was a s h a r e h o l d e r of  Where ficiary,  income  in order  the b e n e f i c i a r y  i s not  this  t o e n f o r c e payment;  the  right;  and  the method,  also  r e c e i v e d by  paid t o be  "entitled  have  made  the  a  trust  corporation.  amount  Questions  right  deemed  that  payment."  was  t o a d i v i d e n d r e c e i v e d by  actually  f o r the  must be  u n s u c c e s s f u l attempt  i f any,  as  effect by  year  to a  bene-  considered payable,  in that  arisen the  i n the  year to the of  which  to  enforce  nature  of  non-exercise the  right  can  of be  barred.  d e t e r m i n e d a f t e r t h e t r u s t had t a k e n c a p i t a l c o s t a l l o w a n c e , t h a t amount w o u l d be $ 8 0 , 0 0 0 w h e r e a s t h e b e n e f i c i a r y was a c t u a l l y e n t i t l e d t o a n d r e c e i v e d t h e f u l l $ 1 0 0 , 0 0 0 . S i n c e i n such a case the t r u s t would not need the a l l o w ance t o s e t o f f a g a i n s t o t h e r income, i n p a r t i c u l a r , amounts r e t a i n e d as a r e s e r v e f o r d e p r e c i a t i o n , s u b s e c t i o n 104(16) p r o v i d e s f o r the f l o w t h r o u g h of such amounts t o the b e n e f i c i a r y . In the r e s u l t , c a p i t a l c o s t allowance may be d e d u c t e d b y t h e b e n e f i c i a r y f r o m t h e a m o u n t w h i c h w o u l d o t h e r w i s e be h i s i n c o m e f r o m t h e t r u s t , b u t c a p i t a l cost allowance cannot, i f deducted at the t r u s t l e v e l , unduly enhance the p o s i t i o n of the b e n e f i c i a r y . 21  Paragraph  22  See  23  Paragraph  24  Subsection 104(24). The v i e w s o f t h e D e p a r t m e n t o f N a t i o n a l R e v e n u e may b e f o u n d i n I n t e r p r e t a t i o n B u l l e t i n s IT-286R " T r u s t s — A m o u n t P a y a b l e " and IT-342 " T r u s t s — I n come P a y a b l e t o B e n e f i c i a r i e s . " Raphael, supra, note 3 at  supra,  104(13)(b). note  2.  104(23)(c).  15 With  respect to the nature of the right  argument  h a s b e e n made t h a t  a vested  interest  the  trust  trust ment  i n remainder  i s sufficient  within  The  right  of a beneficiary  income a c c u m u l a t i n g  o f an amount p a y a b l e .  of a beneficiary  of the trust  entitlement  t o e n f o r c e payment u n l e s s perhaps  but is  c a n t h u s n o t be e q u a t e d  by a b e n e f i c i a r y  i s also  not preceded  having  whose  by t h a t  interest  argu-  proper  with  such  of  in a  The  to ensure  performance  exercised  the  t o e n f o r c e due p e r f o r m a n c e  to bring  the d e f i n i t i o n  f a i l e d . ^  the right  required,  an  a right i s  i s not only vested  of another  beneficiary,  nor  subject to defeasance.  The under  issue  which  capital  has a l s o  trustees  a t any time  arisen  i n the context of a  were g i v e n a d i s c r e t i o n f o r the "maintenance,  trust  t o pay income o r  support, education,  p. 161 d e s c r i b e s an amount a s " p a y a b l e a t a d a t e t o a p e r s o n i f t h e p e r s o n h a s on t h e d a t e t h e r i g h t t o demand p a y ment t h e r e o f , s u e t h e r e f o r a n d t h e a u t h o r i t y a n d c a p a c i t y to g i v e a v a l i d b i n d i n g r e c e i p t f o r payment r e c e i v e d . " 25  [ 1 9 6 4 ] E x . C.R. 9 4 6 , [ 1 9 6 4 ] C.T.C. 1 7 7 . S e e a l s o t h e c o m m e n t o n t h i s c a s e b y M c G r e g o r , ( 1 9 6 4 ) , 12 C a n . T a x J . 2 3 8 . T h i s p r i n c i p l e has been e x p r e s s l y adopted w i t h r e s p e c t t o t h e deemed r e c e i p t o f p r o c e e d s o f d i s p o s i t i o n s o f p r o p e r t y deemed t o o c c u r under s u b s e c t i o n s 1 0 4 ( 4 ) , 1 0 4 ( 5 ) , 1 0 4 ( 5 . 1 ) , and 1 0 7 ( 4 ) : s e e s u p r a , n o t e 17. W i t h r e s p e c t t o t h e deemed i n c o m e a r i s i n g when t h e t r u s t i n c u r s r e c a p ture of c a p i t a l cost allowance, see W i l l i a m s o n , supra, n o t e 20 a t p . 3 2 1 a n d s e e C u l l i t y a n d F o r b e s , s u p r a , n o t e 3, a t p . 1 1 1 .  26 A n s e l l E s t a t e v . M i n i s t e r o f N a t i o n a l R e v e n u e , [ 1 9 6 7 ] 1 E x . C.R. 5 1 8 , [ 1 9 6 6 ] C.T.C. 7 8 5 . S e e a l s o t h e c o m m e n t s o n t h i s c a s e b y M c G r e g o r , ( 1 9 6 3 ) , 11 C a n . T a x J . 42 o n t h e T a x A p p e a l B o a r d d e c i s i o n a n d ( 1 9 6 7 ) , 15 C a n . T a x J . 2 5 7 on t h e d e c i s i o n o f t h e E x c h e q u e r C o u r t .  16 advancement purported payable  tees  The  2 7  Such  a request  the trust  under  consideration.  instrument  The c o u r t  the authority  i n t h e c a s e o f S a c h s v . The  given  were  found  that  to the trus-  but that Queen  year  by h i s  w a s n e v e r made a n d n o a m o u n t s  w a s t o p a y , n o t t o "make p a y a b l e "  suggested  trustees  i n each  t o t h e b e n e f i c i a r y a s a n d when r e q u e s t e d  i n the years  under  of the b e n e f i c i a r y .  t o make t h e a m o u n t s o f i n c o m e a r i s i n g  parents. paid  or benefit"  even  i f , as  2 8  [ t ] h e a u t h o r i t y t o p a y income t o t h e b e n e f i c i a r ies... includes the authority to declare or design a t e income a s h e l d f o r them t o t h e e x c l u s i o n o f the continuance of the trustee's authority to d e p r i v e them o f i t and t o t h e e x c l u s i o n o f t h e p o s sibility of t h e i r being deprived o f i t upon t h e happening of events referred to i n the trust deed, 2 9  this  had not i n f a c t occurred  seem, t h e n , exercise unless  that  a d i s c r e t i o n t o pay, cannot  they  are actually paid  least, unless  held  f o r him subject  such  case.  amounts o f income o v e r w h i c h  very  ficiary  i n the present  they  not otherwise  I t would  the trustee  be c o n s i d e r e d  payable  to the beneficiary or at the  are irrevocably designated  only  to h i scalling  being  may  entitled  as  f o r them;  to enforce  being  t h e bene-  payment o f  amounts.  27  Cole T r u s t s v. M i n i s t e r 3027 ( T . R . B . ) .  of National  Revenue,  [1980]  28  [ 1 9 8 0 ] C.T.C. 3 5 8 , 8 E.T.R. 39 ( F . C . A . ) ; C.T.C. 39 ( F . C . T . D . 1 9 7 9 ) .  29  P e r T h u r l o w C . J . a t C . T . C . p . 3 6 2 , E.T.R. p . 4 7 .  aff'g  C.T.C.  [1980]  17  The right his  failure  of the beneficiary to exercise  t o enforce  liability  payment w i l l  taxpayer, interest  In was  a  not having  entitled  exercised  case before  t o an a n n u i t y  t o which  before  beneficiary  i tclear that  and which,  receive,  a mere o m i s s i o n  must be l e g a l l y  30  i n order  barred this  taxed  upon i t .  received  3 1  a  taxpayer  i tas she  beneficiaries to receive  on t h e amount o f t h e a n n u -  to preclude  t o him which  f o rwhatever  that the  d i s c l a i m e r ofh i s  i n the t a x a t i o n year  reason,  occurring  These  deci-  taxation of the  he h a s n o t  he d o e s n o t c a r e  or refusal to exercise  i s insufficient.  may s e r v e  (1964),  other  on amounts p a y a b l e  payment  i t was h e l d  a r r a n g e m e n t s w e r e made.  received  claimer  but never  She was t a x e d  binding  In the case o f  t h e Tax Review B o a r d  s h e was e n t i t l e d  other,  s i o n s make  enforce  a valid  i n t o an agreement w i t h  l u m p sum i n s t e a d .  ity  Revenue^  i n t h e i n c o m e , was p r o p e r l y  another  entered  not r e l i e v e the b e n e f i c i a r y of  f o r t a x on t h e income p a y a b l e .  Wood v . M i n i s t e r o f N a t i o n a l  h i s legal  To p r e v e n t  from e x e r c i s i n g that  h i s right to  t a x a t i o n , he right.  A  dis-  purpose.  37 T a x A . B . C . 37.  31 J o h n s o n v . M i n i s t e r o f N a t i o n a l A . B . C . 266.  Revenue  to  (1958),  20 T a x  18 A b e n e f i c i a r y may d i s c l a i m h i s i n t e r e s t b y w o r d s o r b y conduct ^  but h i s disclaimer  0  receipt party  of monies coupled  as occurred  National paid  Revenue  ficiary  entitled  disclaimer ment.  assignment  credit,  however,  the party  the person  being  to a  v. M i n i s t e r o f  that  amounts  a disclaiming  t o whom t h e d i s c l a i m e d properly  who b e c o m e s e n t i t l e d  the terms of the o r i g i n a l merely  the event  third  does not c o n s t i t u t e a  not i n v a l i d a t e a disclaimer  under  Thus t h e  where t h e b e n e f i c i a r y d e p o s i t e d  0 0  can foresee  go d o e s  their  i n the case of Plaxton  The mere f a c t ,  such a case, so  with  t o him t o h i s c h i l d r e n ' s  disclaimer.  will  must be a b s o l u t e .  monies  made.^  4  In  t o t h e money i s instrument,  triggering that  Where a b e n e f i c i a r y has d i s c l a i m e d  bene-  the  entitle-  he i s n o t  liable  32  Wood, s u p r a ,  note 30.  33  ( 1 9 5 9 ) , 23 T a x A . B . C . 2 5 7 , 60 D.T.C. 3 8 , p e r F o r d h a m a t T a x A . B . C . p . 2 6 0 , D.T.C. 4 0 . S e e a l s o t h e c o m m e n t o n t h i s case by McGregor, (1960), 8 Can. Tax J . 96. For further d i s c u s s i o n of the nature of a d i s c l a i m e r see C u l l i t y , "Will—Income Interests--Renunciation After Acceptance— Partial Renunciation—Taxation" ( 1 9 7 8 ) , 56 C a n . B. R e v . 317 a t p p . 3 1 8 - 3 1 9 : "The f u n d a m e n t a l d i s t i n c t i o n b e t w e e n the d i s c l a i m e r w h i c h , f o r most p u r p o s e s , a v o i d s a g i f t o f an i n t e r e s t a b i n i t i o a n d t h e v a r i o u s m e t h o d s b y w h i c h a person can divest himself of a p r o p r i e t a r y i n t e r e s t which he h a s p r e v i o u s l y a c c e p t e d h a s b e e n r e c o g n i z e d f o r centuries. After having accepted h i s i n t e r e s t , a l i f e tenant under a t r u s t might subsequently dispose o f i t by a s s i g n ing i t t o another b e n e f i c i a r y o r t o a t h i r d p a r t y , by d i r e c t i n g t h e t r u s t e e t o h o l d i t on t r u s t f o r such a p e r s o n , b y d e c l a r i n g h i m s e l f t o be a t r u s t e e , by s u r r e n d e r i n g i t t o some o t h e r b e n e f i c i a r y o r b y r e l e a s i n g i t t o t h e t r u s t e e s w i t h t h e i n t e n t i o n o f e x t i n g u i s h i n g i t . I n some circumstances, s i g n i f i c a n t consequences might f o l l o w from the c h o i c e o f one o r o t h e r o f t h e s e methods. They s h a r e ,  19 for 1.  tax. A m o u n t s Deemed t o The  concept  when a p p l i e d vested. him  sidered  to  therefore  is  an  Where t h e  i n the  infant  to  of  year be  be  an  amount p a y a b l e  only  i s that  reason  that  he  an  for  respect  beneficiary:  was tax  to  secondly,  payment of  the  income a r i s e s o n l y  terms of  the  an  i n f a n t , such  held  whether  and  not  i s not  his  3  income  r i g h t to the  v i r t u e of  interest i s vested  settlement. *^  payable  in trust for  i f i t i s , whether by  is  In d i s c u s s i n g  is  questions  3 5  property  firstly,  income  broader  interest  p u r p o s e s . ^ Two  vested,  Whether or  i s somewhat  i n f a n t b e n e f i c i a r y whose  payable  with  Payable  conarise  an  the  income  limitation his  on  infancy.  depends upon the  to  question  the of  however, the c h a r a c t e r i s t i c t h a t they are e s s e n t i a l l y d i s p o s i t i o n s o f s u b s i s t i n g i n t e r e s t s , and t h a t c h a r a c t e r i s t i c d i s t i n g u i s h e s each of them from a d i s c l a i m e r . Where an i n t e r e s t i s d i s c l a i m e d , i t i s t r e a t e d as i f i t had never b e e n a c q u i r e d by t h e d i s c l a i m i n g p a r t y " ; and a t p. 330; B e r n s t e i n , "Income Tax C o n s e q u e n c e s o f T r u s t D i s t r i b u t i o n s o f I n c o m e a n d C a p i t a l " ( 1 9 8 1 ) , 33 C a n . T a x F d n . Rept. P r o c . T a x C o n f . 587 a t p p . 5 9 2 , 6 2 5 - 6 2 6 ; A m i g h e t t i , supra, n o t e 4 a t p. 654. See a l s o I n t e r p r e t a t i o n B u l l e t i n s IT-305R " E s t a b l i s h m e n t of Testamentary Spouse T r u s t s , " p a r a g r a p h 5, a n d I T - 3 8 5 R " D i s p o s i t i o n o f a n I n c o m e I n t e r est in a Trust." 34  Herman v. M i n i s t e r o f A.B.C. 145.  National  35  Subsection  36  Hashman T r u s t e e s v. M i n i s t e r C.T.C. 2 2 2 7 , (T.R.BTTT  Revenue  (1961),  28  Tax  104(18). of  National  Revenue,  [1972]  20 vesting,  albeit  attribution case  with  rules,  respect to the application  Mr. J u s t i c e  Heald  stated  of the  i n the Sachs  that  J  . [a]n estate i s contingent i f the accrual of the o w n e r ' s t i t l e d e p e n d s u p o n t h e o c c u r r e n c e o f some e v e n t ... B e f o r e i t c a n be s a i d t h a t a b e n e f i c i a r y i s e n t i t l e d t o a v e s t e d i n t e r e s t , two t h i n g s must concur: ( a ) h i s i d e n t i t y must be e s t a b l i s h e d ; ( b ) his right to the interest (as d i s t i n g u i s h e d from h i s r i g h t t o p o s s e s s i o n ) must n o t d e p e n d upon t h e o c c u r r e n c e o f some e v e n t . 8  Thus where [each] pay  trustees  child  attains  the trust  held  were  t o keep t r u s t  monies t o the c h i l d r e n ,  their  "until  then t o  interests  were  t o be c o n t i n g e n t a n d b e i n g c o n t i n g e n t , n o t p a y a b l e . case  o f a power  f o r the maintenance of the children A distinction  between g i f t s  must  therefore  to infants  age o f m a j o r i t y  to infants  postponement  f o r any o t h e r  which,  from b e i n g t r e a t e d  reason w i l l  as p a y a b l e  37 S u p r a , Ibid,  note  36.  40 S u p r a ,  note 27.  A  p r e c l u d e t h e income  of National  a t C.T.C. p . 3 6 5 , E . T . R . p p . 5 0 - 5 1 . note  although vested,  during infancy.  28.  39 S u p r a ,  attaining the  to the beneficiary.  case o f Cole T r u s t s v. M i n i s t e r  of encroach-  f o r t a x purposes  c o n t i n g e n t on t h e i r  and g i f t s  In  v e s t t h e gift.°^  be drawn  are s u b j e c t t o a postponement o f payment  38  invested  t h e a g e o f 21 y e a r s " a n d w e r e  no w a y d i d t h e e x i s t e n c e i n t h a t ment  money  In the  Revenue ^ 4  after  21 stating its to  t h a t t o be v e s t e d  being  payable,  the limitation  arise  an amount must meet  t h e Board  goes on t o s t a t e ,  on payment,  that  out o f the terms o f t h e t r u s t  inherent  right  a t r u s t e e might  have  Limitations  Although sion,  brief  trust  deed"  case,  should  from  beyond  a non-resident  trust  free  4 1  t h e scope of t h i s  to a beneficiary  or both.  discusp l a c e d on which  status of either the  ^ Firstly,  no d e d u c t i o n i s  to a non-resident  i s resident i n Canada.  a distribution  any  payment  b e made o f l i m i t a t i o n s  f o r amounts p a y a b l e  the trust  [must]  and not from  to withhold  the non-resident  or the beneficiary,  respect  Payable  o f amounts p a y a b l e  primarily  permitted unless  essentially  mention  the deduction result  on Amounts  with  "the constraint  because o f t h e m i n o r i t y o f t h e b e n e f i c i a r y .  2.  the tests f o r  4 3  beneficiary  If this  was n o t t h e  o f w i t h h o l d i n g t a x c o u l d b e made b y  carrying  on b u s i n e s s  i n Canada.  41  The l a s t p o i n t was n o t s t r i c t l y n e c e s s a r y t o t h e d e c i s i o n s i n c e " t h e e v i d e n c e was n o t t h a t s u c h payment was w i t h h e l d b e c a u s e t h e b e n e f i c i a r y was an i n f a n t " : supra, note 27, at p. 3033.  42  For d i s c u s s i o n of the treatment of non-resident b e n e f i c i a r i e s s e e : R a p h a e l , s u p r a , n o t e 3, a t p p . 2 2 4 - 2 3 8 ; B e r n s t e i n , s u p r a , note 33, a t pp. 634-638; K e l l o u g h , s u p r a , n o t e 3, a t p p . 4 9 3 - 4 9 5 ; C u l l i t y a n d F o r b e s , s u p r a , n o t e 3, a t p p . 1 3 1 - 1 3 2 ; C o h e n , s u p r a , n o t e 3, c h a p t e r 5.  43  Subsection  104(7) .  Secondly, "designated and  the  deductibility  beneficiaries"  resident trusts  others  is limited.  for  designated  The  result  the  trust  hands of ing  tax  the is  the  Simply  4 4  beneficiary  income  from  Canadian  resource  ried  on  timber  44  i n Canada. capital  that would  capital  no  deduction  to designated income  the  can  among  be  flat  taken  beneficiaries.  i s taxed  i n the  r a t e r a t h e r than  i s d e f i n e d as  i n Canada,  had  put,  beneficiaries  persons  r a t e at which  hands in  of  the  withhold-  levied.  property  trust  at  to  include non-resident  appropriate trust  real  erty  amounts p a y a b l e  with non-resident  income p a y a b l e  Designated  taxable  which  i s that designated at  of  not  and  from  car-  including  only  l o s s e s from  taxable Canadian property  from  real  and  as  including  property  from  from  businesses  d e f i n e d as  allowable capital  r e s i d e n t , and  property,  income  resource p r o p e r t i e s ,  p r o p e r t i e s , and  have been  losses arising resource  timber  It is further  gains  been  from  including  only  i f the those  i n Canada,  businesses  prop-  carried  non-  from on  in  Paragraph 104(8)(b). The d e d u c t i o n o f a m o u n t s p a y a b l e i s l i m i t e d t o t h e amount by w h i c h t h e a g g r e g a t e o f a l l amounts p a y a b l e t o b e n e f i c i a r i e s o r i n c l u d e d i n t h e i r incomes under s u b s e c t i o n 105(2) exceeds the p r o p o r t i o n of t h e amount by w h i c h d e s i g n a t e d income o f t h e t r u s t e x c e e d s t r u s t income net of amounts p a y a b l e , amounts i n c l u d e d i n c o m p u t i n g t h e income o f a p r e f e r r e d b e n e f i c i a r y and amounts i n c l u d e d i n t h e income of a b e n e f i c i a r y under subs e c t i o n 105(2), t h a t the aggregate of amounts p a y a b l e t o d e s i g n a t e d b e n e f i c i a r i e s i s of a l l amounts p a y a b l e t o a l l b e n e f i c i a r i e s or i n c l u d e d i n t h e i r incomes pursuant to s u b s e c t i o n s 104(14) and 105(2).  23  Canada. ^ Double  t a x a t i o n of  4  trust  yet  deeming in  the  trust.  payable  such  the  f o r the  received  by  the  deducted  being  deductible  of  from  extent payable  i s deemed  have been p a i d  trust.  and  t h e r e f o r e not  by  included  designated  by  the  property  any  of  a trust  deduction  i s provided.  dividends  or  to  f o r the  these  purposes  to a non-resident  investment  amounts were not  a beneficiary. of  as  This  interest  a non-resident-owned that  i s held  4 7  The  Part  XIII  income  from  already  amount of  the  so Act  the  4 8  The but  the  the  additional  trust  to  as  an  deduction  corporation  to  the  beneficiary i s precluded  b e n e f i c i a r y where so  where a l l of  non-residents  allows  payable  d e d u c t i b l e by  4 6  Thirdly, for  to a designated  amounts not  income of  amounts not  fourth limitation  w i t h deemed p r o c e e d s of  income of  the  trust  spouse and  trust  deals  not  with  disposition where t h e r e  non-resident  included in has  a preferred beneficiary. ^  b e e n an  the election  by  the  45  Paragraph  46  Subsection 104(25.1). The same e f f e c t i s a c h i e v e d w i t h respect to the a p p l i c a t i o n of w i t h h o l d i n g tax under p a r a g r a p h 2 1 2 ( l ) ( c ) by s u b s e c t i o n s 2 1 2 ( 1 1 . 1 ) and 212(11.2).  47  Subsection  48  Subsection 104(11). A "non-resident-owned investment corp o r a t i o n " i s d e f i n e d i n s u b s e c t i o n s 248(1) and 133(8).  4  The  status  effect  of  108(1)(d.1).  104(10).  24 this the to  limitation hands of  i s that  the t r u s t .  a beneficiary  * p r e v e n t e d by  B.  f o r which such  received  from  no  of  taxable only in amounts  payable  deduction i s permitted, i s  amounts not  included  the  are  taxation  "amounts p a y a b l e "  f o r the upkeep of  trust  t o be  payable.^  to a beneficiary,  i n h i s income: and  the  namely,  amounts spent  on  his  trust property.  Benefits The  must be is  to  Double  amounts a r e a l s o  "benefits" behalf  but  deeming  In a d d i t i o n following  deemed p r o c e e d s  value of included  a l l "benefits" i n h i s income.^  to a taxpayer 1  Significantly,  made f o r a c o r r e s p o n d i n g d e d u c t i o n f o r t h e  provision  i s , of  course, designed  from  to counter  no  a  provision  trust.^2 tax  trust  The  avoidance.  49  Subsection 104(8). The d e d u c t i o n a p p l i c a b l e t o t h e s p o u s e t r u s t i n t h i s c a s e i s l i m i t e d t o t h e amount by w h i c h t h e t o t a l of a l l amounts p a y a b l e t o b e n e f i c i a r i e s o r i n c l u d e d i n t h e i r incomes under s u b s e c t i o n 105(2) exceeds the p r o p o r t i o n o f t h e amount by w h i c h t h e deemed p r o c e e d s e x c e e d t r u s t income net of amounts p a y a b l e , amounts i n c l u d e d i n c o m p u t i n g t h e income o f a p r e f e r r e d b e n e f i c i a r y and amounts i n c l u d e d i n t h e income of a b e n e f i c i a r y under subs e c t i o n 105(2) t h a t t h e amount p a y a b l e t o b e n e f i c i a r i e s i s of the a g g r e g a t e of a l l amounts p a y a b l e t o b e n e f i c i a r i e s o r i n c l u d e d i n t h e i r i n c o m e s by v i r t u e o f s u b s e c t i o n s 104(14) and 1 0 5 ( 2 ) .  50  Subsection  104(25).  51  Subsection  105(1).  52  E x c e p t t o t h e e x t e n t t h a t s u c h a m o u n t s c a n be c o n s i d e r e d " p a y a b l e " t o a b e n e f i c i a r y o r i n c l u d e d i n h i s income under s u b s e c t i o n 1 0 5 ( 2 ) , assuming t h a t s u b s e c t i o n 105(1) has t h i s w i d e a s c o p e , s e e i n f r a , n o t e 53.  25 Although  broadly  worded,  Payments o f c a p i t a l by  t h e s c o p e may b e s o m e w h a t  are expressly  include  taxpayer  the subsection  (note  application value, trust  that  or alternatively, for greater  than  o r low i n t e r e s t  loan  fair  by t h e t r u s t  "the  assumption  53  expenses,  4  by t h e t r u s t  Other  fair  to the  in i t s market  to the  The g r a n t i n g  to the taxpayer  suggested  benefits  of property  of a  could include  of a beneficiary's personal  or the rental  an a r t i f i c i a l l y  and  to the beneficiary  low r e n t . " ^  Even i f t h e l a t t e r a r e not i m p l i c i t l y excluded by v i r t u e of t h e i r being s p e c i f i c a l l y d e a l t w i t h under s u b s e c t i o n 1 0 4 ( 1 3 ) , s u b s e c t i o n 1 0 5 ( 1 ) c a n p r e s u m a b l y be r e a d down t o give such a l i m i t e d e f f e c t , i n accordance with subsection 4(4). I n t h e A n s e l l E s t a t e case, supra, note 26, Thurlow J . s t a t e d t h a t " [ t j o some e x t e n t t h e p r o v i s i o n o f t h i s s e c t i o n may o v e r l a p t h a t o f 6 3 ( 6 ) [ n o w 1 0 4 ( 1 3 ) ] b u t t h e i r f i e l d s of operation are not co-extensive": C.T.C. a t p . 799. See a l s o C u l l i t y and F o r b e s , s u p r a , n o t e 3 a t p. 115.  54 B e r n s t e i n , 55  property  i s not r e s t r i c t e d  market value.  least  Benefits  the sale of h i s property  constitute a benefit.^  living  the sale of trust  3  t o the b e n e f i c i a r i e s ) f o r l e s s than  also  for  as a r e , a t  i m p l i c a t i o n , payments o f an income n a t u r e . ^  w h i c h may b e c a u g h t  no  excluded  illusory.  supra,  note 33.  Canada Tax S e r v i c e ,  p.  105-101.  26  C.  Upkeep or  Maintenance  Where t h e income life  to  be  tenant  included  terms of  spent or  other  i n the  responding  on  in  the  not  be  11.  the  be so  required  to  rather  than  included the  by  ongoing  and,  Where  i s accumulating,  the  subject  of  the  trustee  and  lating it  for  will  ficiary. the  rate  be  the  benefit  taxed If not,  at  applicable  of  the  the to  what a  is  be  the  rate  elect  which  may  "reasonable  life  than  apply.  to  tenant  would  currently  I f the  have  beneficiary applicable  income w i l l  Cor-  The  6  be  i t depending  to  taxed on  for  income  accumu-  in his  the  electing  whether  the  is  allows  taxed  i n the  dis-  income  b e n e f i c i a r y e l e c t i o n which to  a  maintenance.  rather  different considerations  beneficiary  by  income amounts expended  tributable,  a preferred  trust.^  therefore,  r e p a i r s and  Income  used  beneficiary.  the  t e s t of  in his  trust  amounts must  Thus, presumably,  include  require  property  appropriate  Accumulating income  instrument  deducted  l i m i t e d by  circumstances."  capital  trust  Property  maintenance of  income of  are  Trust  b e n e f i c i a r y , such  a m o u n t s w h i c h m u s t be deducted,  the  the  amounts can  be  of  hands,  trust trust  beneat is  a  56  Subsection  104(6).  57  The o n l y . r e p o r t e d d e c i s i o n on t h i s s u b s e c t i o n d e a l t w i t h i t o n l y i n c i d e n t a l l y t o a n o t h e r m a t t e r , see M o l s o n v. M i n i s t e r o f N a t i o n a l R e v e n u e ( 1 9 5 0 ) , 20 T a x A . B . C . 6 7 , 58 D.T.C. 4 7 6 .  27 testamentary ficiary  or  inter  vivos  trust.  Where no p r e f e r r e d  e l e c t i o n i s made a n d t a x i s l e v i e d o n  rather  than  on  trusts  and t h e i r  the trust  the b e n e f i c i a r i e s , the question of consolidation  becomes  important.  treatment  of accumulating  income depends  then  preferred  beneficiary election, considered  bene-  multiple The  tax  on w h e t h e r  a  f u r t h e r below, i s  made.  A.  The  Preferred  Beneficiary  As m e n t i o n e d , where is  Election  a preferred  made, t h e amount o f a c c u m u l a t i n g  election ary^  and c a n be  trust. the  i s included  u  As  income  rate later  i s taxed  applicable year  of  income s u b j e c t  8  to the  i n c o m p u t i n g t h e income o f t h e b e n e f i c i -  excluded  a result,  beneficiary election^  i n c o m p u t i n g t h e income o f t h e  rather  than  being  taxed  i n the  trust,  i n t h e hands of the b e n e f i c i a r y , a t t h e  t o him, and  receipt.  i n the year  of e l e c t i o n , not the  6 1  58 F o r a m o r e d e t a i l e d d i s c u s s i o n o f t h e p r e f e r r e d b e n e f i c i ary e l e c t i o n than f o l l o w s here, see B e r n s t e i n , supra, note 33 a t p p . 5 9 5 - 6 1 5 ; B e r n s t e i n e t a l . , "The T a x a t i o n o f A c c u m u l a t i n g I n c o m e o f P e r s o n a l T r u s t s " ( 1 9 8 0 ) , 28 C a n . Tax J . 715; S t r i n g e r , " P r e f e r r e d B e n e f i c i a r y E l e c t i o n i n T e s t a m e n t a r y T r u s t s " ( 1 9 7 9 ) , 5 E.T.Q. 1 6 0 . See a l s o I n t e r p r e t a t i o n B u l l e t i n IT-394 " P r e f e r r e d B e n e f i c i a r y Election." 59 S u b s e c t i o n  104(14).  60 S u b s e c t i o n  104(12).  61 S u b s e c t i o n  104(14).  28  Accumulating are  under  an  income  obligation  which,  they  late.  Accumulating  trust  to  income  without  beneficiary  and  proceeds  of  disposition.  received  by  the  ficiaries a  i s thus  beneficiary  The  ship  to  a  and  the  trust the  or  not  do  inclusion  existence otherwise  of  income of  of  income  to  the by  certain  the  a  deemed  actually  distributed  prerequisite  to  accumu-  amounts e l e c t e d  to  preferred  is a beneficiary i n C a n a d a and  a person  settlor.  J  interested  has  "capital  a  The  respect  and  the  trustees  to  bene-  election  by  trust.  beneficially either  without  as  of  the  with  accumulate  deduction  is limited  resident  to  is defined  necessary  beneficiary  individual the  and  election  preferred  of  trust  income w h i c h  accumulate or  have a d i s c r e t i o n  calculated  preferred  is that  A  standing  of  who  trust the  in a particular includes  trust;**  interest"*^  the  is either  "beneficiary" in" a  beneficiaries.  or  4  an  that  who  is  an  settlor relation-  "a  person  i s , a person  "income  A  who  interest"^  62  Paragraph  108(1)(a).  63  Paragraph  108(1)(g).  64  Paragraph  108(1)(b).  65  D e f i n e d a s "a r i g h t ( w h e t h e r i m m e d i a t e o r f u t u r e and w h e t h e r a b s o l u t e o r c o n t i n g e n t ) o f t h e t a x p a y e r as a b e n e f i c i a r y u n d e r t h e t r u s t t o , o r t o r e c e i v e , a l l o r any part of the c a p i t a l , of the t r u s t " : paragraph 108(1)(c).  66  Defined whether  a s "a r i g h t a b s o l u t e or  (whether immediate or f u t u r e and c o n t i n g e n t ) of the t a x p a y e r as a  bene-  29  in  the  trust.  The  i d e n t i t y of  pursuant that  to  the  i s , one  by  nor  and  individual. that  was  created  and  the  his  than  i s "a  i d e n t i t y of  by  not  s e t t l o r of  I f the  trust  by  the  by  someone o t h e r  of  r e s u l t of  property  the  which  individual,^ i f the  8  a  the  has the  trust  than  determined  testamentary  created  the  of  7 1  of  property  than been  first  case,  property  so  indi-  contributed  settlor is i s an  7  long  2  by as  that  inter  by  an  that  testamentary  jointly  trust,  death of  s e t t l o r depends upon whether contribution  In  is a  is  a  contribution  spouse.  trust  as  trust other  the  a  and  Alternatively,  3  the  or  Act.  in receipt  anyone o t h e r  trust,  the  a r i s i n g on  individual, vidual  '  vivos  trust, " ^ 7(  the  trust  one  person  an the  individual fair  f i c i a r y u n d e r t h e t r u s t t o , o r t o r e c e i v e , a l l o r any of the income of the t r u s t " : paragraph 108(1)(e). supra,  note  58,  paragraph  mar-  part  67  IT-394,  7.  68  Paragraph  69  Subparagraph 1 0 8 ( 1 ) ( h ) ( i ) . See a l s o t i n IT-374 "Meaning of S e t t l o r . "  70  Paragraph  71  A c c o r d i n g t o I T - 3 7 4 , s u p r a , n o t e 6 9 , p a r a g r a p h 5, a c o n t r i b u t i o n i s e s s e n t i a l l y a transfer which vests t i t l e in the t r u s t e e w i t h o u t the person t r a n s f e r r i n g the p r o p e r t y r e c e i v i n g any v a l u e i n r e t u r n . Loaned p r o p e r t y presumably does not t h e r e f o r e c o n s t i t u t e a c o n t r i b u t i o n , nor does a s a l e f o r f a i r market value.  72  What i s m e a n t by a " j o i n t unclear. A p p a r e n t l y , the j o i n t l y h e l d p r o p e r t y nor p e r s o n be o f e q u a l v a l u e ,  108(1)(i). Interpretation  Bulle-  108(1)(f).  c o n t r i b u t i o n " i s somewhat c o n t r i b u t i o n n e e d n o t be o f need the c o n t r i b u t i o n of each a l t h o u g h the c o n t r i b u t i o n may  30  ket  value  exceeds tions  o f t h e c o n t r i b u t i o n s made b y t h e i n d i v i d u a l  J  the fair  market  made b y o t h e r  In-the with  7  second  respect  case,  the settlors  result  of this  always  may o n l y  tion  o f income  an i n t e r  7  6  of a l lcontribu-  individual  a s t h e same c o n d i t i o n i s m e t value  of the joint  from  may n e v e r  time  Where t h e t r u s t  to time ^ 7  As a  7 4  have  a  o r may  h a s no s e t t l o r i t a n d no  c a n b e made b y  may b e a p r e f e r r e d b e n e f i c i a r y o r i f he i s t h e s p o u s e  o r i f he i s t h e c h i l d ,  contribu-  and h i s s p o u s e .  vivos trust  f o r t a x purposes  the settlor,  i s the settlor.  no p r e f e r r e d b e n e f i c i a r y ,  of the trust,  grandchild,  market  have a s e t t l o r  by d e f i n i t i o n ,  of  that  are the individual  have a s e t t l o r .  A person  of the total  and so long  rule,  has,  settlor  persons,  to the fair  tions,  settlor,  value  reduc-  election.  i f he i s t h e o r former  spouse  grandchild, or great  o r a spouse o f any o f them, o f t h e s e t t l o r .  7  7  The  n e e d t o b e made s i m u l t a n e o u s l y , s e e I T - 3 7 4 , s u p r a , n o t e 6 9 , p a r a g r a p h 4. S e e a l s o R a p h a e l , s u p r a , n o t e 3, a t p . 192 . of the contribution, 69, paragraph 6.  At t h e time supra, note  74  Clauses  75  An i n d i v i d u a l ' s s t a t u s a s t h e s e t t l o r o f an i n t e r v i v o s t r u s t c a n be r e g a i n e d by subsequent c o n t r i b u t i o n s t h e value of which, coupled w i t h the value of h i s previous c o n t r i b u t i o n s , exceeds t h e value o f c o n t r i b u t i o n s by other part ies.  76  IT-394,  77  Paragraph  1 0 8 ( 1 ) ( h ) ( i i ) ( A ) and  supra,  note  108(1)(g).  according  t o IT-374,  73  108(1)(h)(ii)(B).  58, paragraph  10.  31 extended an  d e f i n i t i o n of  child  illegitimate child,  payer  has  in  law  or  or  daughter-in-law,  be  preferred  an  in a  jointly  income  for  applies  the  for  t h i s purpose,  dependant custody  stepchild,  or  an  of  and  whom t h e  control,  adopted  thus  tax-  a  son-  c h i l d may  a l l  beneficiaries.  elect  income, not  8  infant  fact  Where a p r e f e r r e d may  7  that  exceeding tax  beneficiary  exists,  a designated his  purposes  share,  and  part  may  be  excluded  he  of  and  the  the  accumulating  included  from  that  trust  in  of  his the  7 9  trust. the a  The  3  nature  share of  the  discretionary Where the  living ciary  at  the  other  of  a preferred  trust  or  than  a  spouse  trust  non-discretionary  trust end  as  beneficiary  is a  of  the  the  or  depends  upon  otherwise  and  trust.  spouse  trust ^  taxation  year,  no  share  i n the  s p o u s e has  8  a  as  and  the  spouse  preferred  is  benefi-  accumulating  Q "1  income.  The  share  of  the  spouse  i s the  entire  amount  of  78  Subsection  79  B e r n s t e i n , s u p r a , n o t e 33, r a i s e s t h e i s s u e o f w h e t h e r o r not the p r e f e r r e d b e n e f i c i a r y , t o be e n t i t l e d t o e l e c t , must have a c a p i t a l i n t e r e s t , s i n c e a c c u m u l a t i n g income i s added to t r u s t corpus. He s u g g e s t s t h a t w h i l e a c a p i t a l i n t e r e s t i s not n e c e s s a r y where the t r u s t i s a spouse t r u s t , a t l e a s t a c o n t i n g e n t c a p i t a l i n t e r e s t may be n e c e s s a r y where the t r u s t i s d i s c r e t i o n a r y , a l t h o u g h the matt e r i s not c l e a r w i t h r e s p e c t to a n o n - d i s c r e t i o n a r y t r u s t (pp. 6 0 2 - 6 0 3 ) . S e e a l s o R a p h a e l , s u p r a , n o t e 3, a t pp. 193-202.  80  As  defined  252(1) .  in paragraph  104(4)(a).  32 that on  trust  not a  income.  The  p r o p e r t y , income  including  s p o u s e , who  capital  capital  rather  than  by  the  terms  is  entitled will  leaving of  h a v e no  any  person,  or  trust  earned An  for his  Paragraph  82  Subsection  83  Subparagraph  trust  rate.  the  spouse  g a i n s as w e l l  ben-  If  beneficiary  as  income,  the  income.  trust  the  share  of  the  according to whether  or  e x e r c i s e of d i s c r e t i o n  by  to e x e r c i s e such  share  a  discretion.  the general r u l e i s the p o r t i o n  " r e a s o n a b l y be  general rule  i s a member o f  equally  81  capital  regarded  as  is  of  accu-  being  benefit."  exception to t h i s  to share  the  that  r e c e i v e the  taxed at the  a spouse  beneficiary's  anomaly  gains,  discretionary,  i n c o m e t h a t may  the b e n e f i c i a r y tled  i s not  trust  those  i s determined  failure  a spouse  never  of  gains  t a x on  instrument  i s not  capital  leads to the  pay  depends upon the  the  a preferred  mulating  can  accumulating  beneficiary  his interest  that  trust  trust  not  Where t h e  she  t h e m t o be  the  This  to the b e n e f i t  to receive c a p i t a l  Where t h e preferred  or  8 2  of  only. t o . income can  accrue  y e t o n l y he  income c o m p r i s e s  f o r the purposes  gains.  is entitled  gains which  eficiary,  trust  accumulating  i n any  a class  income of  104(15)(a). 108(3). 104(15)(b)(ii).  provides that  where  of b e n e f i c i a r i e s the  trust,  his  enti-  share  33 is  calculated  by d i v i d i n g  t h e amount o f income t o w h i c h  class  i s e n t i t l e d by t h e number o f members o f t h e  other  than  registered  allow,amounts  charities.  accumulating  hands o f b e n e f i c i a r i e s applicable entitled  tionary  into  an  by any p e r s o n , power,  regulation. preferred interest  depends must  be p r e f e r r e d or  share  be p r e f e r r e d  taxed  rates  i n the  than not  are being  depend upon  to exercise, share  trust,  a  the  discre-  i s governed  i n order  a l lbeneficiaries  by  f o r any whose  or non-exercise of the  beneficiaries, i f they were  persons  resident  who  would  i n Canada,  charities. ^ 8  the general rule  i s determined  i s that  by d i v i d i n g  t h e number o f p r e f e r r e d  84 S e e C u l l i t y  i s to  8 4  beneficiary's  the exercise  beneficiaries  registered  Here  upon  t o be  themselves  or the f a i l u r e  to elect,  class,  of t h i s  of the b e n e f i c i a r i e s  a discretionary  beneficiary  discretion  election.  a preferred  Under  for charities  the c h a r i t i e s  Where t h e i n t e r e s t s exercise  effect  w i t h lower marginal  to the t r u s t , to enter  The  the  a preferred  the accumulating  beneficiaries  and F o r b e s ,  supra, note  beneficiary's income  by  e n t i t l e d to share  in  3, a t p .  114.  85 P a r a g r a p h 1 0 4 ( 1 5 ) ( c ) . W i t h r e s p e c t t o t h e n e c e s s i t y f o r p e r s o n s e n t i t l e d on a g i f t o v e r o r i n d e f a u l t o f a p p o i n t ment t o q u a l i f y as p r e f e r r e d b e n e f i c i a r i e s , s e e Bernstein, s u p r a , n o t e 3 3 , a t p. 609 a n d C u l l i t y , " P o w e r s o f A p p o i n t m e n t " ( 1 9 7 6 ) , 28 C a n . T a x F d n . R e p t . P r o c . T a x C o n f . 744 at p. 748, respectively.  34 the  income. ^ A  s e r i e s of  8  situations  where  are  and  living  Where t h i s uted  by  ferred ing  any  of  case  to  i s an  not  effect  i n the  income, whether tax  on  the  election  a subsequent or  i t .  deal  either  property  with of  above,  them  income.  contrib-  factor relevant to  share.  in effect  a t r a n s f e r of  i t allows  rule  accumulating  trust  additional  the  8 7  the  share  precluding  i s two-fold.  tax  a preferred beneficiary in a given place,  this  of him  the  pre-  from  mak-  8 8  of  i t allows  share  dealt with  to  h i s spouse or  a beneficiary's  election.  The  and  p r o p o r t i o n of  beneficiary is nil,  the  place  the  settlor  determination  settlor  entitled  i s so,  the  In  the  exceptions  not  to  the  liability year.  In  the  first  from  the  trust  In the  second  tax-free distribution b e n e f i c i a r y who  to  of  earlier  the elected  to  pay  86  Income Tax  Regulations,  Part  XXVIII,  paragraph  87  Income Tax R e g u l a t i o n s , and 2 8 0 0 ( 4 ) .  Part  XXVIII,  subsections  88  Paragraph  89  Subsection 104(14). Such a r e s u l t , f o r accumulating income g e n e r a l l y , w h e t h e r e l e c t e d upon by a t r u s t and p r e f e r r e d b e n e f i c i a r y o r n o t w o u l d a l s o s e e m t o be r e a c h e d by t h e d e c i s i o n i n t h e A n s e l l E s t a t e c a s e , s u p r a , n o t e 26, see Ex. C R . a t pp. 533-534, and by a r e a d i n g o f s u b s e c t i o n 107(2), assuming that accumulating income i s added t o c o r p u s and i s t h u s d i s t r i b u t e d t a x - f r e e t o a b e n e f i c i a r y in s a t i s f a c t i o n of h i s c a p i t a l interest.  104  8  9  2800(3)(f). 2800(3)  (15)(d).  35  B.  Income A c c u m u l a t i n g and Beneficiary Election  W h e r e no beneficiary  election  as  pays  as  t a x on  a testamentary  mentary  trust  was  t a x on  ated  by  a person  this  category of  trust  are  by  this  date  mentary has  an  be  erty  exceeds  the  fair  90  Subparagraph  91  Clause  an  has  of  an  vivos trusts  as  year  or  trust  i f the  otherwise than  liable  by  on  A  not  cre-  scope  of  recent 12,  i f ,d u r i n g the trust  28,  1981  otherwise  created before than  1982 by  testa-  "property an  of  an  108(1)(i)(ii)(A).  indiprop-  individual  market value of p r o p e r t y c o n t r i b u t e d  108(1)(i)(ii).  trusts  taxation  market v a l u e of  the death  and  amend-  testamentary  to the  testa-  and  otherwise than fair  the  on  November  June  of  arising  inter vivos rather  i f ,after  to the  that  at which  The  his d e a t h . T r u s t s  classed  preferred  itsclassification  individual.  been c o n t r i b u t e d  9 1  rate  individual  c o n s i d e r e d t o be  on  a  remains  a trust  Trusts created after  inter  and  Preferred  inter vivos trust.  been narrowed  his death"  contributed  The  trusts  in a taxation  on  income.  a  income as  trust  that  been c o n t r i b u t e d  vidual  the  other than  individual will  as  the death  " p r o p e r t y has  than  that  or  o t h e r w i s e be  c l a s s i f i e d as  year,  accumulating  d e s c r i b e d e a r l i e r as  ments t o the A c t . would  trust  i t s income depends upon  a consequence of  which  the  f o r tax purposes,  the payment o f  trust  the Subject of  i s made b y  to designate the  the b e n e f i c i a r y for  Not  on  36 death.  * Where, even w i t h  applicable, it  An eral  vivos  o f 34%  determined cation  t o t a x on  as a testamentary  i t s taxable  income a t t h e  t r u s t pays  of taxable  t o be  tax at the greater  income a n d t h e amount  i t s tax payable.^  rates  an i n t e r  vivos  of a  of approximately  Transitional not  apply  trust subject  1971:  w h i c h was  after  until  on  since  June  any  debt  any  b e n e f i c i a r y was  to federal tax  to British  this  Columbia  Section  minimum  trust established  on t h a t  date  minimum  i n the year  before  year;  does  June  nor receive  a t arms  carry  property  by  date,  incur  by a p e r s o n w i t h length.^6  108(1)(i)(ii)(B). 117.  94 S u b s e c t i o n  18,  there-  which d i d not  18, 1971; n o r a f t e r t h a t  not dealing  rate  and c o n t i n u o u s l y  or o b l i g a t i o n to or guaranteed  92 C l a u s e  95 T h a t 190,  that  the end o f t h e t a x a t i o n  way o f g i f t  93  vivos  resident  any a c t i v e b u s i n e s s  appli-  50%.^  rules provide  t o an i n t e r  fed-  otherwise  income t a x , f o r example, w o u l d pay t a x a t a combined rate  now  trust,  As a r e s u l t o f t h e  4  o f t h e p r o v i n c i a l income t a x r a t e s  payable,  conditions  to i n d i v i d u a l s . ^  inter  rate  restrictive  a t r u s t c a n be c l a s s e d  i s subject  applicable  t h e more  122(1) .  i s , 4 4 % o f 3 4 % : Income T a x A c t , R.S.B.C. 1 9 7 9 , c . s. 3 ( 1 ) , ( 5 ) .  whom  37  C.  Multiple  Trusts  Although respect  a trust  to trust  substantially one  person,  accrue the of  property,  where s e v e r a l  a l l the trust  and t h e income  may  the trust  election  property  be t r e a t e d  practical  h i g h minimum mentary  trusts  beneficiaries,  minimum  rate  from s e p a r a t e separate  status  individual,  may  and by  ultimately  beneficiaries,  or i s subject  this provision  of individual to inter  and those rule  exist  contributed  of  I t ssignificance  applicable  —  or class  distributable  effect.  rate  has been  with  a s o n e . ^ Where a l l o f t h e income  i s currently  by p r e f e r r e d  trusts  from a l l the t r u s t s  reduced by t h e r e p l a c e m e n t  the  t o be an i n d i v i d u a l  t o t h e same b e n e f i c i a r i e s  trusts  little  i s deemed  inter  -- w h i c h since  each  i s subject  vivos  vivos  trust,  been with  trusts.  trusts  are subject  i s of  has a l s o  tax rates  a  Testa-  not caught  t o t a x do  being  to  treated  t o i t s own m a r g i n a l  by  benefit as a rate  of  taxation.  In enue^  8  the case of M i t c h e l l i t was h e l d  that  each o f t h e t a x p a y e r ' s  96  Subsection  122(2) .  97 S u b s e c t i o n  104(2) .  98  (1956),  four four  16 T a x A . B . C .  99.  v. M i n i s t e r separate children,  of National  trusts,  Rev-  one c r e a t e d f o r  d i d not constitute  a  38  single  individual.  whether  the  mainders  over;  have been  III.  trust  i f so,  contrary,  of  that  is a  the  trust  become s i m p l y  t e r s when r e c e i v e d dividends  The  through  that  on  and by  the  for  the  to  of  income,  treatment the  are  provides  the of  cross-re-  decision  would  of  between  for be  passing from  The  the by  the  beneficiary with to  apply  the  be  the  types  those  the  trust  these  for  to  types  example  result that gross  of  charac-  designated  dividend  of  these  different  Thus  t r u s t can  trustee  e f f e c t of  trust,  beneficiary.  as  the but  a number o f  through  the  to  the  treated  trust.  and  individual  credits retain their  up  tax-  as the and  them.  the  rules  are  fairly  allowances  and  c r e d i t s subject  set  out  a m o u n t s w h i c h may  a l l types  e n t i t y or  "conduit"  received  is entitled  mechanics of  types  tions  by  provisions  The  that  report  express provision  c r e d i t s to  than  received  received  beneficiary  and  an  a  Act  instead  income  income a l l o w a n c e s  credit  the  rather  i s that  the  i s not  r e l a t i o n s h i p or  allowances  provisions  being  i t seems l i k e l y  i n s p i t e of  a  beneficiary  able  the  t h e Income A l l o c a t e d Between T r u s t The F l o w - T h r o u g h R u l e s  beneficiary,  income,  the  from  otherwise.  The N a t u r e o f Beneficiary —  rather  appear  i n s t r u m e n t s made p r o v i s i o n  Recognizing,  and  I t does not  income  i n the be  received  Act  straightforward.  as  designated. by  the  are  the The  t r u s t as  to  flow  limitaargument  well  as  39 allowances  and c r e d i t  character  by a recent  that  except  eficiary's  addition to the Act.  as o t h e r w i s e income  shall  provided,  ited.  1  0  their  deductible  That  amounts  amendment included from  states  i n a benan  inter-  by a b e n e f i c i a r y o f amounts  by t h e t r u s t  are correspondingly l i m -  1  The this  to retain  be deemed t o be income  i n a t r u s t . l ^ O Deductions  otherwise  types  treatment  lowing: taxable  o f income,  capital  benefits;  loss;  allowances,  i s provided  dividends,  terminal  99  be p e r m i t t e d  i n t h e hands o f t h e b e n e f i c i a r y ^ has been p u t t o  rest  est  should  both  gains;  and d e a t h  i n the Act, are p r i m a r i l y the fol-  taxable  capital  depletion  and c r e d i t s f o r which  and nontaxable;  cost  allowance;  allowance,  interest; recapture  foreign taxes;  and  pension  benefits.102  See a l s o , B e r n s t e i n , s u p r a , note 33, a t p. 616; K e l l o u g h , s u p r a , n o t e 3, a t p . 4 9 1 . S e e a l s o M i n i s t e r o f N a t i o n a l Revenue v. Trans-Canada Investment C o r p o r a t i o n , [1956] S.C.R. 4 9 , L 1 9 5 5 J C.T.C. 2 7 5 ; a f f ' g L 1 9 5 3 J E x . C.R. 2 9 2 , [ 1 9 5 3 ] C.T.C. 3 5 3 .  100  Subsection  108(5).  101  Paragraph  102  Although not d i s c u s s e d here, s i m i l a r treatment i s extended t o the investment tax c r e d i t (subsection 127(7)) and t o amounts r e c e i v e d a s a r e f u n d o f premiums u n d e r an RRSP ( s u b s e c t i o n 146(8.1)).  (108)(5)(b).  40 A.  Dividends 1.  Taxable  Dividends  Taxable dividends capital  stock  designated  of a taxable  by t h e t r u s t  taxable dividends the  trust.  respect  r e c e i v e d by a t r u s t  to non-resident  dividends  of the  c o r p o r a t i o n ^ may 1  a s , a n d t h e r e f o r e be deemed  to this  withholding  beneficiaries  as income  from  treatment  than  i s provided  t a x under P a r t  be  t o be,  r e c e i v e d by t h e b e n e f i c i a r y r a t h e r  An e x c e p t i o n  non-resident  Canadian  on s h a r e s  by  with  XIII:  a r e t r e a t e d as r e c e i v i n g t a x a b l e  the trust,  rather  than  dividends  per  se.  The amount w h i c h ticular  beneficiary i s subject  firstly, amount it  c a n be d e s i g n a t e d  i t "must  included  cannot  payable,  exceed  reasonably  to three  r e c e i v e d by any limitations:  be c o n s i d e r e d "  t o be p a r t  i n t h e income o f t h e b e n e f i c i a r y ; t h e amount  par-  so i n c l u d e d , whether  as  of the  secondly, income  amounts e l e c t e d by a p r e f e r r e d b e n e f i c i a r y , o r ben-  efits  o r upkeep;  and t h i r d l y ,  nated  as t a x a b l e  dividends  i t must n o t be an amount  with  respect  to another  desig-  benefici-  ary.  103  Subsection 104(19). See a l s o I n t e r p r e t a t i o n B u l l e t i n IT-372 " T r u s t s — F l o w - t h r o u g h of Taxable Dividends to a Beneficiary."  41 The is  effect  entitled  sions ^ 1  trust that and  to  4  to  of  apply  such  i f no  gross-up  not  the  to  dividend I f no  apply  credit  has  i s that  gross-up  a l l of  is lost  beneficiary  credit  i s made,  provisions to  the  i t s income.  b e e n made, t h e  rules  the  and  designation  these  distributed  designation and  a designation  income.  is entitled i t has  such  the  the  extent  If  operation  to both  provi-  trust  i t  has,  of  the  and  the  beneficiary.-^5  2.  Non-taxable  Dividends  Non-taxable dividends nated  by  of  the  may  be  differ A  the  trust,  1  designated somewhat  with  from  can  beneficiary.  In  be  share  of  the  dividends. i t has  the  not  when an  amount  instead  which  beneficiary dividends.  i s payable  a p p l i e s not  to  the to  respect  to  nature  the  to  to of  extent  another  bene-  105  See  106  Subsection 104(20). Non-taxable d i v i d e n d s are p r i m a r i l y d i v i d e n d s p a i d out of a c o r p o r a t i o n ' s c a p i t a l d i v i d e n d account: subsection 83(2).  note  33,  121. a t p.  a  limi-  Subsection  supra,  section  income  considered"  limited  with  the  104  Bernstein,  and  i f desig-  amounts  taxable  present,  i s again  been d e s i g n a t e d  82(1)  the  "reasonably  although  amount  trust,  to a p a r t i c u l a r  b e n e f i c i a r y , but The  on  applicable to  made o n l y  above,  the  i n computing  limitations  respect  those  by  included  a d d i t i o n , the  r e f e r r e d to  the  that  not  b e n e f i c i a r y . ^ The  designation  tation  are  received  617.  42 ficiary. B.  Interest The  is  Income  portion  deemed t o be  t r u s t . - p nated  are  n  of-interest interest  his  the  to deduct taxable  same a s  up  those  ficiaries  receiving  tion  of  w o u l d be  A  deduction  s  a  r  e  the deduction  such  to  interest s  u  no  by  and  the not  can  i t  of  by  income.  a trust  in  the  the  desig-  precluded  of bene-  where  f o r the  for interest  enti-  computing  number o f  Furthermore,  being  is  flow-through  i f i t were not  deduction  of  taxable dividends.  income  the  trust  be  amounts d e s i g n a t e d  is multiplied  interest  this provision,  amount w h i c h  applicable  inter vivos trust,  permitted,  beneficiary,  the  $1000 o f  i n c o m e .  the  i s an  the  receiving  to  interest,  trust  of  l i m i t a t i o n s on  e  Each b e n e f i c i a r y tled  income d e s i g n a t e d  the  opera-  income from  taking  itself.  107  Subsection  104(26).  108  Section  109  Subsection 110.1(1). For f u r t h e r d i s c u s s i o n of the t r e a t m e n t of i n t e r e s t income see R a p h a e l , s u p r a , note at pp. 212-215 and pp. 216-217.  110.1. 3,  43 C.  Taxable C a p i t a l A  flow-through  capital  l o s s e s and  mitted,  although  capital  gains  property.  designated  are  of  as  deductible which thus  taxable  capital  net  capital  losses carried  by  the The  the  trust  limitations  and  to of  the  are  on  deemed the  the  same a s  interest  net  nor  no  flow-through  these  amounts  disposition  those  No  p r o v i s i o n i s made f o r t h e  of  can  capbe  a p p l i c a b l e to  Amounts  has  per-  taxable  amount w h i c h  is  is  i n Canada.  deemed  neither  amounts w i t h  a preferred beneficiary election  allowable  t o be  1 1 1  income.  as  of  forward  deemed d i s p o s i t i o n s a r e  amounts p a y a b l e  of  gains  a beneficiary resident  b e n e f i c i a r y from  proceeds as  to  essentially  taxable dividends received  of  only  Amounts d e s i g n a t e d  ital  Gains  respect  b e e n made, permitted.  flow-through  of  to  and  1 1 2  losses.  1  1  3  110  Subsection 104(21). See a l s o I n t e r p r e t a t i o n B u l l e t i n IT-381 " T r u s t s - - T a x a b l e C a p i t a l G a i n s and A l l o w a b l e C a p i tal Losses."  111  For  112  Subsection  113  T h i s may c a u s e a p r o b l e m w h e r e t h e t r u s t h a s l o s s c a r r y f o r w a r d s — d e d u c t i b l e i n computing t a x a b l e income r a t h e r than income--yet i s r e q u i r e d to d i s t r i b u t e a l l i t s income, thus l e a v i n g i t w i t h a t a x a b l e income of z e r o . As a r e s u l t , t h e b e n e f i t o f t h e d e d u c t i o n i s l o s t .  the  purposes 108(6)  of  s e c t i o n s 3 and  and  paragraph  111.  108(1)(a), respectively.  44 D.  Capital  Cost Allowance,  Recapture  A b e n e f i c i a r y may d e d u c t his  income from  as a r e s u l t and  the t r u s t  of e l e c t i o n ,  from  either  and T e r m i n a l  Loss  t h e amount t h a t  as b e i n g p a y a b l e  t h e amount o f c a p i t a l  w o u l d be t o him o r  cost  t e r m i n a l l o s s o t h e r w i s e d e d u c t i b l e by t h e t r u s t  trust  determines.Amounts  correspondingly  reduced.  recapture of c a p i t a l allowance allowed  deducted  cost,  beneficiary  i s limited  that the  t h e n d e d u c t i b l e by t h e t r u s t a r e  F o r the purpose  of c a l c u l a t i n g  however, amounts o f c a p i t a l  by b e n e f i c i a r i e s  to the t r u s t .  allowance  cost  a r e deemed t o have b e e n  The amount d e d u c t i b l e by a p a r t i c u l a r t o h i s p r o p o r t i o n a t e share of t r u s t  115  income. E.  Depletion The  Allowance  flow-through of a depletion  amounts p a y a b l e  to a beneficiary  i s limited to  to the extent that  amounts a r e d e s i g n a t e d by t h e t r u s t an amount d e d u c t i b l e i n c o m p u t i n g  allowance  as b e i n g p a y a b l e  those "out o f  t h e income o f t h e t r u s t f o r  t h e y e a r u n d e r r e g u l a t i o n s made u n d e r s u b s e c t i o n 65(1) . " As  i s the case with the d e s i g n a t i o n of c a p i t a l  cost  allowance  114  S u b s e c t i o n 104(16). Some q u e s t i o n e x i s t s as t o w h e t h e r the b e n e f i c i a r y e n t i t l e d t o take c a p i t a l cost allowance must be a c a p i t a l b e n e f i c i a r y , s e e R a p h a e l , s u p r a , n o t e 3, a t pp. 219-220.  115  Subsection  104(17.1).  116  Subsection  104(17).  45 and t e r m i n a l limited  l o s s , t h e amount d e d u c t i b l e  to h i s proportionate  share  The e f f e c t o f t h e d e s i g n a t i o n receives F.  t h e income  Foreign  i s deemed  t o have  such  income  trust.  that  may  The amount  8  amount  that  income  included  as  being  that  may  in  foreign  i s designated  be d e s i g n a t e d  be c o n s i d e r e d "  by t h e t r u s t w i t h  A beneficiary  of the foreign  i s also  tax paid  the proportion  computing h i s income The  received  source  by t h e  i s l i m i t e d to the t o be p a r t  of the  t o him o r as t h e r e s u l t o f e l e c t i o n —  income, t h a t  trust.  the. b e n e f i c i a r y  i n c o m p u t i n g t h e income o f t h e b e n e f i c i a r y  i s not designated  beneficiary.  eign  "reasonably  payable  proportion  i s that  income.  tax-free.  income t o t h e e x t e n t 1  of t r u s t  Taxes  A beneficiary  1  by a b e n e f i c i a r y i s  deemed  of foreign  i s of the t o t a l  t o be  i t sactual  deemed  t o be  foreign  117 S e e B e r n s t e i n ,  income  source  supra,  t o have p a i d  income  foreign foreign  therefrom  that  i t s forincluded  income o f t h e sources i s  l e s s any  amounts  income o f t h e b e n e f l c i a r y .  note  and  to another  by t h e t r u s t on  income o f t h e t r u s t from  deemed  respect  ^  u  33, a t p. 622.  118 S u b s e c t i o n 104(22). See a l s o I n t e r p r e t a t i o n B u l l e t i n IT-201 " F o r e i g n Tax C r e d i t - - T r u s t and B e n e f i c i a r i e s . " 119 P a r a g r a p h  104(22)(b).  120 P a r a g r a p h  104(22)(c).  —  46 Foreign by  the  taxes paid  e f f e c t of  receiving credit  G.  1  2  such  these  income  provisions  Pension  benefits  against  his  to  income  the  paid  beneficiary.  i s that apply tax  those  the  the  1 2 1  beneficiary  foreign  otherwise  tax  paya-  Benefits  provisions  dealing  apply  to  designated  puting  the  w h i c h may sonably  only  by  the  be be  any  other  a  the  included  the  designated  b e n e f i c i a r y and  As  be  considered  with  testamentary  trust,  income of  the  are  to  be  which  trusts.  i n the  deemed  beneficiary are  flow-through  part  are  not  of  Pension  income of  to  be  the  pension benefits  the  included  instead.  l i m i t e d to  of  1 2 j  "  trust, in  Amounts  t h o s e w h i c h may  rea-  amounts p a y a b l e  designated  com-  to  in respect  of  beneficiary.  r e s u l t of  eligible  and,  designations  is entitled  which would otherwise  be  by  be  2  The  if  deemed, e s s e n t i a l l y , t o  t r u s t l e s s t h o s e deemed p a i d  The  ble.  are  where  for the  121  Paragraph  122  Section  123  Subsection  124  Paragraph  designation,  transfer  to  beneficiary  104(22)(d). 126. 104(27). 60(j).  the  amounts  a deferred i s the  tax  spouse of  in question  arrangement the  may 1 2 4  deceased  tes-  47 tator,  f o r the  taxable H.  pension  income.  Death  income exemption  tary  trust  a death  ered  "to  ular  b e n e f i c i a r y " i s deemed t o  as  be  beneficiary  where the of son  paid  as  part  or  where the  i n the  the  is  the  but  the  not  nature  computing  a  testamen-  be  consid-  be  received  and  not  exemption spouse of  both. of  the  income.  are  125  Subsection  110.2(1).  126  Subsection  104(28).  127  Subsection 248(1) 56(1)(a)(iii).  or  to  time by  the  the  partic-  that  have been such  person  a child  the  received  income  as  of  is  income a result  that  t a x a t i o n of  hands of  the  A l l o c a t i o n of income,  at  a  i n computing  that  accumulating,  taxed  to  per-  1 2 7  rules governing i n the  by  reasonably  a particular  deceased.  d i s t r i b u t a b l e or Trusts  received  may  b e n e f i t was' p a i d ,  for taxation  trust,  depends upon currently  benefit  least partial  spouse  income p r o v i d e  that  at  b e n e f i c i a r y i s the  whose d e a t h  amount  retaining i t s character,  In c o n c l u s i o n ,  or  any  payable  ° By  f o r at  of  benefit  a death  trust.  eligible  in  Benefits  that  the  $1000  1 2 5  Finally,  by  of  a minimum  " d e a t h b e n e f i t " and  beneficiary  tax  liability  i s , whether  and  on  rate  trust  the of  i t is  source approxi-  subparagraph  of  48 mately  50% -- u n l e s s t h e y a r e t e s t a m e n t a r y  higher  i n most  receiving to  cases  t h a n w o u l d be p a i d  t h e income d i r e c t l y .  This  by a  inequity  some e x t e n t by t h e use o f t h e p r e f e r r e d  elect ion.  trusts —  a  rate  beneficiary c a n be  removed  beneficiary  49  Chapter Problems Having rules will to  b e made  t h e way  here w i l l  in this  be  not  be  rules  whom a n d  on  rate.  rules  chapter to present a  logical  argument  taxed.  The  income  One  what  or  technical  as p a r t  as on  of  t a x s h o u l d be  avoid  points  such  matters which  the d e s c r i p t i o n  imposed,  argument and  them, o r  certain  t h e way  of  fail  problems  t o do  the  so, w i l l  as  focus  were  when, and  i n which  attempt  as when  an  dis-  the  more g e n e r a l q u e s t i o n s s u c h  These problems  solve  s h o u l d be  considered payable —  --  Canadian an  such  of  the e x i s t i n g income,  In the c o u r s e of  apparent.  One  trust  s o much on  i n Chapter  existing  i n Chapter  to the t a x a t i o n  i n which  amount c a n cussed  I n h e r e n t i n T a x i n g T r u s t Income  set forth  pertaining  Two  as  at  on  what  will  become  existing also  be  discussed. Starting a more o r  less  from  the p o s i t i o n  permanent  and  i n the  lives  of  ing  from p r o p e r t y h e l d  feature  in trust  i s that  Such  i s appropriate  - 128  an  income t a x system  i n the p o l i c y  taxpayers, i t i s clear  income t a x as a result  that  arising  must  that  equally  be  of  governments  income  in principle  aris-  subject  from p r o p e r t y o t h e r w i s e both  is  ° and  to  held. at  a  The p r i n c i p l e o f n e u t r a l i t y i n a t a x i n g s y s t e m s u g g e s t s t h a t t a x p a y e r s s h o u l d p a y t h e same a m o u n t o f t a x o n a g i v e n amount o f income w h e t h e r i t i s r e c e i v e d d i r e c t l y o r t h r o u g h an i n t e r m e d i a r y s u c h a s a t r u s t o r a c o r p o r a t i o n .  50 pragmatic of  tax  that  level  would  so  be  f a r as  should  conform  should  not  anced sity the  additional L  simple  was  matter  p o s s i b l e the to general  this  to prevent  XJ  a  i f this  not  the  indeed.  method  chosen  principles  Given  latter  undue  of  that  payment of  to  created  trust  taxation  taxes  clear  trust 1 2  ^  income  and  i s the  through  use  i s placed  taxed,  of in  liability  the  129  For example, p r i n c i p l e s need f o r s i m p l i c i t y .  130  For example, the r e c o g n i t i o n that t i o n n o t an e n t i t y .  131  I t was d o u b t l e s s t h i s c o n c e r n w h i c h p r o m p t e d t h e i n c l u s i o n of t h e f o l l o w i n g p r o v i s i o n i n t h e November, 1981 N o t i c e o f Ways and Means M o t i o n t o Amend t h e A c t : "(73) T h a t . . . (e) e f f e c t i v e a f t e r November 12, 1981, a p r o v i s i o n be i n t r o d u c e d t o c o u n t e r t a x a v o i d a n c e w h e r e i n a t a x a t i o n y e a r a t r u s t d i s t r i b u t e s an amount t o o r d e s i g n a t e s an amount i n r e s p e c t o f a b e n e f i c i a r y and one o f t h e r e s u l t s t h e r e o f i s an u n d u e r e d u c t i o n o r p o s t p o n e m e n t of the tax otherwise payable under the Act." The provis i o n d i d not u l t i m a t e l y appear i n the l e g i s l a t i o n a l t h o u g h m o r e p r e c i s e a m e n d m e n t s w e r e made t o l i m i t t h e a d v a n t a g e s w h i c h c o u l d be d e r i v e d f r o m t h e o p e r a t i o n o f t h e r u l e s as t h e y t h e n s t o o d ; i n c l u d i n g a more r e s t r i c t i v e d e f i n i t i o n of "testamentary t r u s t " ; the r e s t r i c t i o n o n t h e c o n d u i t n a t u r e o f t h e t r u s t (now s . 1 0 8 ( 5 ) ) ; and l i m i t a t i o n s w i t h regard to the shares of d i v i d e n d s and  equity  i n some  the  neces-  for  of  imposed  avoidance  c o n c e p t s . B a l -  when p r o p e r t y  i n c o m e m u s t be  t a x m u s t be  the  tax  o b j e c t i v e , however,  r e d u c t i o n of  taxpayer  case  It is also  unnecessarily disregard trust  against  trust. -  since  and  quarter.  neutrality  a trust  i s an  and  the  obliga-  51 I.  Determining As  tax  on  result  a  general  since An  stances  to  he  rule,  the  which  ferred,  thus  tionship  that  property  the  the  the  use  transferor  transfer  transferor  may  the  and to  well  benefit  an  i s subject appropriate  benefit  of  that  rule  i s made  in  circum-  apply. has  of  the the  The been  basis  transferee, t r u s t was  the  for  trans-  ownership,  retain control of  to  and  although property  transferor  which  receive  property,  this general  r e l i e v i n g the  under  and  that  property  attribution rules  i s that  between  conditions  the  to  Taxpayer  owner of  i s e n t i t l e d to  exception  exception  such  Appropriate  income a r i s i n g from  income.  this  the  the or  made, over  income a r i s i n g  relathe is the there-  from.  Assuming, such that rules, tax  the  unit:  however,  i t will  attract  question the  that  arises  t r u s t , the  c r e d i t s w h i c h c o u l d be ( e . g . s. 1 0 4 ( 1 7 . 1 ) ) . 132  the  transfer  application as  to  the  trustee,  or  allocated  of  of the  correct the  among  property  is  not  attribution choice  of  the  beneficiary.  beneficiaries  Income Tax A c t , S t a t s . Can. 1952, c. 148, as amended, s s . 74-75. F u r t h e r s t a t u t o r y r e f e r e n c e s i n t h i s chapter are to t h i s Act u n l e s s otherwise i n d i c a t e d .  52 A.  Trust  or  A trust, legal  entity.  made l i a b l e that  a trust  A trust  u n l i k e a c o r p o r a t i o n , does not c o n s t i t u t e a As a r e s u l t ,  i t cannot  own p r o p e r t y ,  n o r be  f o rt h e payment o f t a x on income a r i s i n g  property,  since  Trustee?  n o r make p a y m e n t o f t h a t not being  an e n t i t y  t a x through  can hardly  be a  from an agent  principal.  has been d e f i n e d as  an e q u i t a b l e o b l i g a t i o n b i n d i n g a p e r s o n (who i s c a l l e d a t r u s t e e ) t o d e a l w i t h property over which he h a s c o n t r o l ( w h i c h i s called the trust prope r t y ) , f o r t h e b e n e f i t o f p e r s o n s (who a r e c a l l e d t h e b e n e f i c i a r i e s o r c e s t u i s q u e t r u s t ) , o f whom h e may h i m s e l f b e ,QJie a n d a n y o n e o f whom may e n f o r c e the o b l i g a t i o n . 3  Notwithstanding between rules  position Act, ^ 1  sion  the nature  two p a r t i e s v i s - a - v i s  deem t h e t r u s t  ficiary  4  3  of a trust  certain  t o be an e n t i t y  as a  property, separate  relationship the existing  from both  and t r u s t e e , f o rt h e purposes o f t h e A c t . i sstated clearly the directive  on t h e m a t t e r . ^ 1  unease w i t h  adopting  and expressly  included  i n another  The c o n f u s i o n  5  so b a s i c  While  benethis  i n one p a r t  ofthe  c a s t s some  confu-  perhaps  reflects  a d i v e r s i o n from  trust  an lawand  133  U n d e r h i l l ' s Law R e l a t i n g t o T r u s t s a n d T r u s t e e s (London: B u t t e r w o r t h s , 1 3 t h e d . , D a v i d J . H a y t o n e d . , 1 9 7 9 ) p . 1.  134  Subsection  135  S u b s e c t i o n 104(1) which p r o v i d e s t h a t a r e f e r e n c e t o a t r u s t i s t o be read as a r e f e r e n c e t o a t r u s t e e . See a l s o , C h a p t e r 1, s u p r a , a t p . 5, n . 4.  104(2).  53 is  n o t , as might  the  trust  trust that  the trust  vis-a-vis  individual  from  that  that  of the Act.  i t s agent,  being  that  t h e two p r o v i s i o n s  a trust  i s a separate  to a trust  —  the  agency q u e s t i o n the trustee  In  such a context,  ing a  are apparent:  one,  i t s tax  and another,  that  property  and a c t i n g  distinct  from  that  f o r t a x on income  of  arising  liability sense.  however  reference  who  —  entity  or individual,  to a  t o be d i r e c t e d  i s , appropriately,  i s considered  t o be t h e s e p a r a t e  the reference  to the trustee's 1 3  be t o t a l l y  a literal  to a trust  satisfied  application  i s a reference  nonsensical  results  its  meaning  i s questionable  136  Subsection  137  For example, paragraph  trus-  toward that i t  entity.  with  i f redunthis  read-  of the provision to a trustee,  among some o f t h e o t h e r there,  a  personal  u n c h a n g e d * ' makes p e r f e c t ,  One c a n n o t  that i s ,  and t h a t  as a reference  of i t appears  the result  remaining  since  of the Act together,  i s t o be t a k e n  which on t h e face  is  dant,  i s liable  of the  property.  tee  tax  the trustee;  i n a capacity  capacity,  as t o the nature  discharging  owner o f t h e t r u s t  property  as t o the nature o f  Two v i e w s  entity  Reading  reference  confusion  law, but rather  i s a separate  through  trustee,  his  trust  f o r purposes  liability the  under  be s u s p e c t e d ,  i t must  produces  provisions. a l s o be  that  °  question-  104(2). 104(2)(b),  subsection  If  104(15).  54  able  when  a p p l i e d to the issue of the nature  an e n t i t y  or  argued be  the trust  that,  entity  the trustee.  an e n t i t y ,  surely the distinction  an a r t i f i c i a l  person.  be  achieved  by d i s t o r t i o n  unnecessary  distortion,  ought t o  between t h e  than  In a d d i t i o n , such  the notion  "simplicity"  of the nature  although  be  i n h i s personal  i s s c a r c e l y i f a t a l l more c o m p l e x  of  misleading  i t might  the trust  as t r u s t e e and t h e i n d i v i d u a l  only  is a  Although  f o r the sake of s i m p l i c i t y ,  considered  capacity  as t h e t a x a b l e  f o r so t r e a t i n g  individual  as  otherwise.  Treating shorthand  of the trust  admittedly  of the only  can  trust;  "for tax  purposes." B.  Trustee  or Beneficiary?  Assuming  that  i t i s neither necessary  treat  the trust  trust  and t h e t r u s t e e , i t i s more a p p r o p r i a t e  latter, legal son  a further question  owner o f t r u s t  entitled  trust  and t h a t , as between t h e  arises.  property,  be t h e p a r t y  arguments  s p r i n g t o mind  trust  entity  Should  property  subject  i n favour  immediately.  and as such,  t o so t r e a t  the  the t r u s t e e , as  o r the b e n e f i c i a r y as the per-  t o t h e b e n e f i t o f t h e income  property, Several  tee  as a t a x a b l e  nor d e s i r a b l e t o  to  arising  tax?  of imposing He  income  from the  t a x on t h e  i s the legal arising  trus-  owner o f t h e  from that  property  55 is  generally  receivable  by him.  agement o f t h e t r u s t p r o p e r t y suited  to reporting  addition,  The directly ship. he  The p r o b l e m  detriment  pays  achieves  this  which gives  taxpayer  some  his  personal  result, to  be a p p l i c a b l e  rates  which  receives  the trustee  receives.  The  there-  toh i s separa-  i s that,  ought  arises  rates  to the attributes of the and exemptions  f o r example, from  n o t t o be r e l e v a n t .  as t o the rate  income  as  given  marginal  but does not b e n e f i t  and f i n a n c i a l  as a r e other  property  arising  employs p r o g r e s s i v e  recognition  to trust  be s u b j e c t e d  that  The d i f f i c u l t y  income, As a  of t a x which  ought  i n t h e hands o f t h e t r u s t e e .  alternatives are possible,  evant personal simply  result.  circumstances  the question  Two  of the trust r e l a t i o n -  as an i n d i v i d u a l from h i s l i a b i l i t y  by v i r t u e o f d e d u c t i o n s  where t h e t a x p a y e r  i t .  t a x on t h e t r u s t e e i s  t o any b e n e f i t  t a x o n money he n e v e r  system of t a x a t i o n  and  entitled  i s not of course  of h i s l i a b i l i t y  trustee  t h e means o f d i s c h a r g i n g  i n imposing  In  i n h i s hands,  he i s t h e l e g a l o w n e r o f t h e t r u s t  i s n o t , as t r u s t e e ,  tion  with  best  tax payable.  out o f t r u s t monies  difficulty  a n d man-  he i s i n t h e p o s i t i o n  a t t r i b u t a b l e to the nature  Although  from.  a  liability  primary  the control  income and d e t e r m i n i n g  t a x c a n be p a i d  thus matching  Having  given  the absence of  circumstances.  The t r u s t e e  t o t h e same s e t o f m a r g i n a l individuals, with  taxation  no a l l o w a n c e  f o rt h e  relmay  56 exemptions may a  be  subjected  rate  by  payer. of  the  of  taxation,  the  the  under which well the  be  ciary single  taxpayer,  the  tax  on  trust  comments on  income c o n f o r m i n g that  neither  in either the  tax,  case  lesser  rate  1 3 8  aggregation  of  trustee,  the  desirability princi-  is particu-  correlation the  rate  income to  i f i t had  at  trust  income  might  been taxed  i n the  well  which  from a  w h e r e more t h a n one  could  such  coincidental.  the  income  he  tax-  general  entitled  than  of  choice  and  i s merely  beneficiary,  income,  the to  any  trustee  b e n e f i c i a r y was  the  Alternatively,  circumstances  alternative, while  a  the  of  earlier  i t appears  one  the  exists,  ignoring  w o u l d pay  at  taxpayers.  rate  i m p o s e d on  only  hands of  flat  trust  first  taxed  such  since  rate  beneficiary  Applying  to  i n mind  appropriate  between  a  definition  taxation  of  larly  to  Bearing  the  ples  applicable  benefi-  hands of  result  in  in  a  higher  rates. While  the  adoption  anomaly of  the  appropriateness  number o f  a  beneficiaries with  such  a  rate  which would  of  a  flat  on  the  138  of  rate  would  rate  scale  of  not be  gives  flat of  rise  progressive  to  the  by a  the  be  would rate  interests  necessarily  payable  rate  eliminate  varying  i n the  the  further  marginal  with  trust  question  rates,  such  of  The as a  the  income,  equivalent  beneficiary.  the  the  adoption  to  where  rate  Due t o t h e a p p l i c a t i o n o f two s e t s o f g r a d u a t e d m a r g i n a l r a t e s o n t a x a t i o n o f t h e same a g g r e g a t e a m o u n t o f i n c o m e .  57 should  fall.  stances  of  influence  Since  the the  ance v a l i d l y be  set  a  flat  taxpayer, choice  being  closer  to  of  rate  other  ignores factors  rate.  upper  economic  would  end  of  circum-  presumably  C o n s i d e r a t i o n s of  among t h e m , s u c h  the  the  tax  avoid-  a rate might w e l l  the  s c a l e than  to  need  the  to  lower  end.  As  has  been  its  difficulties.  the  issue:  marginal  rates;  distinction  tax  avoidance,  restrictions  cable are  to  trusts  in nature  1 4  on ^  a  n  when one  trusts c  j  the  subject  4  1  to  ill-thought  out  collection  b u i l d s on  an  1  are  the  the  not. "^ 1  The  the  prevention  t o be  considers  the  to q u a l i f y the  flat  increasingly  complex  rule  and 1  introduces  further distinctions  its  basis  of of  testa-  rate  appli-  however,  and  somerules,  each of  which  AO  own.  139  Sections  140  See  141  A minimum  142  I n t e r e s t i n g l y , i n none of the o t h e r t h r e e s y s t e m s f o r t h e t a x a t i o n o f t r u s t i n c o m e d i s c u s s e d i n C h a p t e r 3, i s a d i s t i n c t i o n drawn b e t w e e n t e s t a m e n t a r y and i n t e r v i v o s trusts.  the  117,  of  individual  as  anti-avoidance  preceding  on  further  Such d i s t i n c t i o n s ,  of  without  to  quantum of  vivos t r u s t s .  is  r e v e a l a compromise  in order  add  which  are  appears q u i t e simply  and  each of  rules  vivos trusts  especially  inter  neither alternative  existing  inter  placed  illogical  times  The  testamentary  the  mentary  illustrated,  122.  definition federal  of  testamentary  r a t e of  34%:  s.  trust:  s.  108(1)(i).  122(1).  58  S i n c e the reasons  initially  t i o n of the t r u s t e e , e s s e n t i a l l y i n n a t u r e , seem o u t w e i g h e d by  advanced  i n favour of  a d m i n i s t r a t i v e and  the d i f f i c u l t y  w e l l be  unit.  tax  income t o w h i c h t h e b e n e f i c i a r y i s e n t i t l e d  can  Trust  with his other  income t h e t o t a l o f w h i c h ,  j e c t to the a p p r o p r i a t e exemptions, d e d u c t i o n s , c r e d i t s , determines  b l e at the a p p r o p r i a t e The  taxed, i t  t h a t t h e b e n e f i c i a r y i s t h e more a p p r o p r i a t e  be a g g r e g a t e d  and  expedient  in determining  an a p p r o p r i a t e r a t e a t w h i c h t h e t r u s t e e c o u l d be may  taxa-  h i s t a x a b l e income and  allowances thus  tax  paya-  rates.  conceptual d i f f i c u l t y  t h a t w h i l e he  sub-  is entitled  i n t a x i n g the b e n e f i c i a r y i s  to the b e n e f i t of  from p r o p e r t y h e l d i n t r u s t ,  he  income  i s not, at l e a s t  arising  in classical  t r u s t t h e o r y v i e w e d as t h e owner o f t h a t p r o p e r t y .  In o t h e r  w o r d s , he d o e s n o t  rather,  has  a right  have r i g h t s  a g a i n s t the t r u s t e e t o compel the p r o p e r  t r a t i o n of the t r u s t . that  owns h i s i n t e r e s t adopted  practice,  143  He  i s , the a s s e t s g i v i n g  course  i n t h a t p r o p e r t y but  owns n o t rise  i n the t r u s t .  i n the case  the p r o p e r t y of the  to the The  income, but  Archer-Shee. ^  not m a t t e r .  trust,  instead  c o n t r a r y v i e w was  o f B a k e r v.  t h e d i s t i n c t i o n may  adminis-  1 4  Viewed from  of In the  [1927] A.C. 844 ( H . L . ) . See a l s o , W a t e r s , "The N a t u r e o f t h e T r u s t B e n e f i c i a r y ' s I n t e r e s t " (1961), 45 Can. B. Rev. 219.  59 perspective to  tax  be  subject  of  t a x a t i o n , the  f o r the to  same r e a s o n tax,  benefit  of  per  se,  possession  erty.  1  taxed  4  can  interest ciary  be  income.  which  at  should Given  the  natures, cases. which  one  criterion  the  view  of  that  the  specific  itself  point  the  i t may  i s the  be  imposed,  of  the  legal  trust and  equitable  cannot one  trust  property.  on  matter  1 4  the  i s not  both  his  from  that  potenof  that  and  simple.  separates thus  allows  varying  in a l l  positions from  own-  liability  i n t e r e s t s of  various  person  benefi-  the  whom t a x  estates  himself,  the  nature  solution applicable  must examine  the  ^  despite the  use  prop-  but  r e l a t i o n s h i p which  i n t e r e s t s and  find  by  assets  regarding  equitable  p o s i t one  a b e n e f i c i a r y might  received  person  the  in  the  to  ownership  o w n e r be  seem t h a t  difficulties  subject  b e n e f i c i a r y owns  income  constitutes  to  legal  enjoyment the  be  said earlier  i s not  that  the  beneficiary  Instead  right  from  this  successive  a  to  is entitled  issue  that  nature  ownership of  The  o w n e r was he  and  logically the  an  trust  for conceptual  ership,  of  the  by  a r i s e s not  While  for  met  i n the  interest,  tial  the  Arguably,  4  that  namely because  and  but  b e n e f i c i a r y ought  the  in point  144  T h i s v i e w i s r e f l e c t e d i n o t h e r p a r t s of the A c t , eg. s. 5 4 ( c ) ( v ) change of l e g a l ownership w i t h o u t a change i n b e n e f i c i a l o w n e r s h i p ; s. 56(2) i n d i r e c t p a y m e n t s ; s s . 74 a n d 75 a t t r i b u t i o n r u l e s .  145  The n a t u r e o f cance f o r tax 65-68.  t h e b e n e f i c i a r y ' s i n t e r e s t and i t s s i g n i f i p u r p o s e s i s d i s c u s s e d f u r t h e r b e l o w , a t pp.  60  of  view of  general  p r i n c i p l e s as  well  as  with  an  eye  to  prac-  and  Rate  ticality. 11.  Imposing  Tax  Liability:  Beneficiaries  in a given  whether  their  entitlement  tingent  —  unascertained,  of  or  income a r i s i n g  considered: receipt is  not  the  of  poned;  the  and  first  utable;  the  by  the  case,  the  be  may  or  trust.  income,  of  ascertained  may  obviously, latter  two  of  i s not  to  yet  con-  receipt  his  be  be  is  interest is  payment  income  is  is  postor  accumube  discretion.  currently  accumulating  In  distrib-  in  the  in Receipt  of  trustee.  i s Ascertained  stance  under which  vested  interest in that and  he  should  is in receipt  m u s t b o t h be  taxed.  of  income  ascertained  income) c l e a r l y be  and  By  he  taxing  (a  and  rather the  in  ascertained  ascertained,  trustee's  be  who  b e n e f i c i a r i e s to  income w i l l i t will  in  and  although  i t i s vested,  the  merely be  is ascertained  distribution  --  Three p o s i t i o n s w i l l  s i t u a t i o n e x i s t i n g where  exercise  or  not  e i t h e r because  although  Timing  i s vested  b e n e f i c i a r y who,  Where a b e n e f i c i a r y  can  and  the  T h e B e n e f i c i a r y who Income  trustee  income  b e n e f i c i a r y who  i n the  hands of  A.  of  for eventual  determined the  the  because  more p r o p e r l y  to  y e a r may  b e n e f i c i a r y who  in receipt or  lating  under  income;  contingent  Difficulties  circumhave  than  a the  beneficiary  61 the  o b j e c t i v e of taxing the person  income a r i s i n g ficiary year  from  property  c a n be t a x e d  i n which  tax liability  merge  i n t h e same  The  existing  rules  him and by d e d u c t i n g  achieve  from  a m o u n t . * ' T h e same r e s u l t 1 4  4  this  trust  should  when a l t h o u g h  to the beneficiary, 1  and i s r e c e i v e d by him.  As  to discharge i t  result  by t h e mechanism  i n t h e income o f t h e b e n e f i c i a r y  rules  t h e bene-  taxpayer.  to  ment .  In addition,  and t h e means w i t h w h i c h  including  paid  to the benefit of  a t the r a t e a p p r o p r i a t e f o r him i n the  of  existing  i s met.  t h e income a r i s e s  well,  entitled  income  amounts  the corresponding  and does occur  under t h e  income has n o t a c t u a l l y  he c o u l d ,  payable  i f he w i s h e d ,  been  enforce  pay-  7  146  Subsections 104(6),(13). T h e same e f f e c t w o u l d be a c h i e v e d , a l t h o u g h a t t h e expense o f added c o m p l e x i t y , by a g r o s s - u p a n d c r e d i t s y s t e m u n d e r w h i c h t a x was p a i d b y both t h e t r u s t e e and t h e b e n e f i c i a r y .  147  See t h e d e f i n i t i o n  o f "amounts p a y a b l e " :  s.  104(24).  62  B.  T h e B e n e f i c i a r y who Income  i s Ascertained  Somewhat more d i f f i c u l t ficiary,  although  This  may  occur  gent  or because, although  postponed.  The  receive  have been  the  c a l l e d upon a year  arising  that  t o him  scribed  t a x upon  the rate This  i n the year  or because there  the income,  rate  could  income  had been had been  received A  1 4 8  f o r him  further  a change  i n which  or  receivwould  i n the  differ  i s received  from  or  year that  receiv-  i n the rates in his  in  the  the year  well  a change  he  i t f o r the year  a t w h i c h he  appropriate  may  contingently  i n which i t i s received the rate  under  in fact  making p a y m e n t .  i s that  e i t h e r because there  payment i s  i s at least  from the d i s p a r i t y between  w h i c h income a r o s e .  able  t o pay  contin-  the b e n e f i c i a r y  i n which not having  by t h e b e n e f i c i a r y  applicable  income.  he h a s n o t y e t a n d  have d i f f i c u l t y  p a y t h e t a x w o u l d be in  i s that  income a r i s e s and  able  i n receipt of  i f he d o e s u l t i m a t e l y r e c e i v e  i t arose,  inequity  the bene-  taxing  t h e i n c o m e t o w h i c h he  Even  i n c o m e , he may  with  of  a r i s e where  h i s interest i s vested,  difficulty  never  which  i s not  i n Receipt  e i t h e r because h i s i n t e r e s t i s as y e t  circumstances  will  questions  ascertained,  these  entitled.  but not  pre-  financial  position.  148 P r a c t i c a l l y , o f c o u r s e , t h i s p r o b l e m may b e s o l v e d b y a d i r e c t i o n i n the t r u s t instrument that the trustees are t o pay a l l t a x e s o r by t h e e x e r c i s e by t r u s t e e s o f a b r o a d l y drawn power o f e n c r o a c h m e n t .  63  Assuming  f o r t h e moment t h a t  between t h e y e a r s ily  of taxation  at least  interest  i s vested,  alternative without ond  regard  timing  the  the  way o u g h t  taxation  possibility  could  s t i l l  be g i v e n  of the trustee i s discussed  he t o be c o m p e l l e d  e x i s t i n g rules provide  an i n f a n t  beneficiary  but with  trustee  The  remains.  sec-  I f ,  to the p o s i t i o n of might  further  be a  t o p a y t a x on  desirable  below.  contingent,  existing  rules,  Where  however, i n  i n c o m e he  may  years  149  Subsection  respect  applicable  taxation  s.  of tax l i a b i l i t y and i s l a t e r  104(18).  for taxation to him.  1 4 9  of the trustee  the problems of matching  income a r i s e s  t o income  vested of the  While the  t h u s more c l o s e l y a p p r o x i m a t e s t h e  than would  the imposition  the  then  tax i s paid  rate  with  payment p o s t p o n e d ,  at the rate  at which  appropriate  with  who's  i n t h e hands of t h e  i s only  a  p a r t i c u l a r l y i fthe  d i s p a r i t y of rates  recognition  such  receive.  The  rate  not necessar-  of the b e n e f i c i a r y ,  be a p p r o p r i a t e  interest of a beneficiary  never  in  may  problem,  This  ought  to the p o s i t i o n of the beneficiary.  beneficiary,  result.  disparity  i n the case of the b e n e f i c i a r y  i s t o t a x t h e income  alternatively,  no  and r e c e i p t  t o be a b a r t o t h e t a x a t i o n  solution,  the timing  receipt  of  and d i s p a r a t e received,  under t h e income rates  remain.  in  64 As  f o r the taxation  beneficiary rules  provide  ficiary, tax  whose that  the trust  is  not a preferred  not exceeding  fact  reflects payment this  that  the fact  may e l e c t  h i s share.  beneficiary,  such that  t o an i n f a n t  case  Although  i s a preferred  that  he w i l l  15(  -  )  bene-  pay the income  I f the beneficiary  o r i f he c h o o s e s n o t t o make  i s taxed  whose  the beneficiary  at the rate  applicable  o f income  above  —  right  to  receive  has i n s u f f i c i e n t funds  the rate  i n the year  he  receives  t h e income  In  addition  t o d i s p a r i t i e s a r i s i n g from from  year  taxation  circumstances  The e l e c t i o n o f c o u r s e  As f o r t h e p o t e n t i a l d i s p a r i t y  rates  t h e income.  o f d i s p a r i t y between  beneficiary  scribed  has v e s t e d , i n  e x i s t s , under these  t h e d i s p a r i t y between  no d o u b t  of t h e postponement of  t o t h e income  may n e v e r  s t i l l  i s less problematic.  must be e l e c t e d  the case  i n theory the problem  receipt  tax.  treatment unlike  made i f t h e b e n e f i c i a r y the  i s as y e t contingent, the e x i s t i n g  trustee.  The  it  fora  on an amount o f a c c u m u l a t i n g  e l e c t i o n , t h e income  the  accumulating  where t h e b e n e f i c i a r y  i n a year  of  and  interest  he a n d t h e t r u s t e e  applicable  the  o f income  need n o t be to discharge  i n rates  referred  applicable  to the  he p a y s t h e t a x a n d t h e y e a r -- a t h i r d  t o year  150 S u b s e c t i o n s . 104(14).  factor  must  now b e  a change  o r a change  to  i n which added.  i n the pre-  i n the position  65 of  the beneficiary  the on  fact  that  certain  free the  t o another  no  scope  of  such  1  5  i t may s u b s e q u e n t l y  rates.  1  5  There  1  this  i s considered  of a capital  i s , under  problem  indirectly.  t o be a d i s t r i b u t i o n  The S a c h s c a s e  by a p r e f e r r e d  in satis-  i s not taxa-  t o vest  the  attentions  of the Court  the  applicability that  bution If  such  1 5 3  h o w e v e r may h a v e provided  beneficiary with  sufficient  that the  a contingent  income  interest i n the beneficiary. were d i r e c t e d  While  to the question  of the a t t r i b u t i o n r u l e s ,  a r e s u l t would preclude  been  i twould  of  seem a s  the subsequent  distri-  to a different beneficiary. one does n o t a c c e p t  tax a beneficiary with  received,  151  the distribution  i n t e r e s t , an event w h i c h  was  to  the existing rules,  2  election  well  and p a i d t a x  a divergence i n  since  What h a s n o t b e e n d o n e d i r e c t l y done  from  be d i s t r i b u t e d t a x -  beneficiary notwithstanding  forcorrecting income  faction ble.  once t h e b e n e f i c i a r y has e l e c t e d  income,  applicable  i s the potential d i s p a r i t y arising  either  the view  respect  i n a mandatory  that  i t i s appropriate  t o i n c o m e he h a s n o t y e t  fashion  o r t h r o u g h an  Ibid.  152  Subsection  107(2).  153  S a c h s v . T h e Q u e e n , [ 1 9 8 0 ] C.T.C. [ 1 9 8 0 ] C . T . C . 39 ( F . C . T . D . ) .  358 ( F . C . A . ) ,  aff'g  66  election  m e c h a n i s m , one  trustee.  The  i m p o s e d on and be  met,  the way,  trustee  reference  where the  trustee tax  the  could  rate be  could  year.  The  problem of  in  year of the  necessary for  a partial  vis-a-vis  out  paid  at  the  by  the  one  such  to  the  the  could  problems.  ficiary's  income s h o u l d  the  trust  i n c l u s i o n at  the  top  income m i g h t w e l l  lead  tax;  such  a higher  trustee  with  regard  Further, tee,  the  to  in order  arbitrarily  beneficiary by  rate  a  an  case of  earlier by  by  an  therefore  that to  was  that  adjustment if  application trustees  him.  reveals  i n c o m e be  his being  rate  i t  different  the  certain  example, which p o r t i o n  end  of  to this  further deduction  i t further  to  In  for  being by  can  applying  rate  solved  the rate  have a c e r t a i n l o g i c a l  istrative  of  be  of  the  beneficiary.  i n the  appeal,  notional  that  income upon w h i c h  case of  equitable  a  the  appropriate  a p r o p o s i t i o n may  For  a course,  the  taxes paid  pursuing  taxation  determined  income u l t i m a t e l y r e c e i v e d  While  the  is ascertained,  beneficiary of  such  beneficiary's  i n the  refund  b a c k on  p o s i t i o n of  of  distribution  trustees  or  the  applicable  and  made b y  to  paid be  to  w o u l d be  beneficiary  levied  the  fall  major o b j e c t i o n  the  without  must  the  subject being  of  and  admin-  the  bene-  considered  since  beneficiary's to  a higher  applicable  rate  to  the  income.  calculate his  tax  payable  as  trus-  t r u s t e e must have knowledge of  the  taxable  income  of  67 the  beneficiary,  given in  that  the  its  were the  year,  or  he  allowances,  need  leads  to  for  reducing  on  the  either  difficulties.  the  his  trustee of  the  the  beneficiary  in order  to  file  the  beneficiary  or  if this  tion  of  tax the  Thirdly,  on  and  for  income a r i s i n g  relevant most  beneficiaries, returns  shares  beneficiary,  tax  payable  of  1 5 4  determine  his  tax  than that  under  payable;  the  and  trust  his  income.  the  beneficiary  under  necessary returns  i n the where  rate  then  return. pres-  information  from  i n the  same y e a r the  based  on  preceding there  in effect  is  substantial  i s impossible,  the  thus  c o n f i d e n t i a l tax  are  to  the  applicable the  as  trustee the  posi-  year. a  number  calculate  aggregate  a procedure  existing  which  cred-  Firstly,  income p r o p o r t i o n a t e  i n each case,  determine  the  in a year,  must  additional  trustee  beneficiary  trustee  of  beneficiary  the  significantly,  the  the  154  else,  the  return  of  i s put  make u s e  tax  amount by  part  otherwise  and  must pay  the  information  Secondly,  get  thus  disclose  by  have been e n t i t l e d to  receipt  further  entire  received  by  to  to  income  his  increased  compelled  sure  trust  might  i n c o m e w o u l d be This  indeed, perhaps of  separate  interest and  of  thus  latter  somewhat more  of  to  complex  rules.  Assuming t h a t not o n l y the b e n e f i c i a r i e s but a l s o t h e i r s h a r e s a r e a s c e r t a i n e d , s u b j e c t t o t h e i r m e e t i n g any cont i n g e n c i e s i m p o s e d on t h e i r entitlement.  68 These problems, income has  is ultimately received  been a p p l i e d  ficiary  whose  therefore arises paid  by  is  the  of  that  adjustments to  be  another  should trust  the  be  the  case of  the  eventually  the  made, g i v e n  beneficiary. i n t e r e s t of  assume t h a t  the  b e n e f i c i a r y whose  income,  to  clear that  a  and  further  amounts of that  the  Under  a contingent  bene-  who  problem  tax  previously  income w i l l  the  rate  contingent vest  now  be  existing rules, beneficiary  to  be  the  difficulties  income where b e n e f i c i a r i e s are  i n r e c e i p t of  choice  In  by  noted,  to  disregarded.  It taxing  i t .  receives  need  failure  vest  not  never  would  to  be  i n t e r e s t does not  in that  received the  i t should  income,  made  are  i s a choice  not  wholly  involved  ascertained  resolvable.  b e t w e e n a number o f  in but The  imperfect  solut ions. C.  The  Unascertained  Beneficiaries given  power ary X  i f any,  held  power  by  discretion or  the  i s not  in a given  to X  under  y e a r where the  tlement,  as  t o Y.  year  Beneficiary  of  a  trust  trust will  a b e n e f i c i a r y , d e p e n d s on What  a d i s c r e t i o n as whether  to whether Under  unascertained  instrument provides  trustee.  or  be  to  these  to  i s meant  a  the  any  enti-  discretionary  h e r e by d i s c r e t i o n -  to whether accumulate  u l t i m a t e l y pay circumstances  that  in  to  pay  i t , but  income rather,  to a  accumulated  income  i t seems c l e a r  that  69  tax  must be p a y a b l e  since be  there  by t h e t r u s t e e  a n d a t some s t a n d a r d  a r e no b e n e f i c i a r i e s w h o s e p o s i t i o n s w o u l d  such  a case  i twould  a payment on t h e p a r t  seem t h a t  of the trustee  a pre-payment by t h e b e n e f i c i a r y . could  be s u b j e c t  eficiary use  of a gross-up could  income r e c e i v e d receive ther  to adjustment  was a s c e r t a i n e d .  beneficiary  include  tax or refund  credit  applicable  The Instead,  could  i n income  credit f o r the latter  could  i s no r e a s o n  n o t be  at the point  This  and t a x p a i d  there  at which  be s i m p l y In other  amount  was a p p l i c a b l e be n e c e s s a r y  t h e ben-  words, t h e both  He w o u l d  i n determining  i n respect  paid  done by t h e  f o r tax purposes  by t h e t r u s t e e .  then  what  t h e amount o f  to a particular beneficiary. use such a  system.  where a l l p o t e n t i a l b e n e f i c i a r i e s a r e p r e f e r r e d and o n l y  t a x on t h e t r u s t  presently  then,  1 5 5  t h e b e n e f i c i a r i e s may  income a t t h e i r  own  c o n s t i t u t e d make no p r o v i s i o n  rates.  i n which  the trustees  ben-  elect to  The r u l e s  as  forsituations in  which not a l l b e n e f i c i a r i e s are q u a l i f i e d situations  fur-  o f t h e income.  to determine  e x i s t i n g r u l e s do n o t , however,  eficiaries,  why  considered  I f s o , t h e amount  and c r e d i t system.  Rules would of course  155  as y e t  relevant. In  pay  rate  to elect, or for  do n o t u l t i m a t e l y  exercise  Or w h e r e , i f n o t p r e f e r r e d b e n e f i c i a r i e s , t h e b e n e f i c i a r i e s w o u l d be p r e f e r r e d were t h e y r e s i d e n t i n C a n a d a , o r e l s e were r e g i s t e r e d c h a r i t i e s : s. 1 0 4 ( j ) .  70 their  discretion  previously  elected.  the development  of  the b a s i s  of  III.  Nature  The  The  i n favour of The such  Sachs  a somewhat s h a k y  nature  of  and  the  the  held  t a k e s as  t o the nature of  regarded  clearly  as  having  the t r u s t  result,  all  preserved. specific income erty,  that  latter  preserved be  the  when  r e c e i v e d by  Applied  essentially,  than  the  tax  form  treatment.  on  income a r i s i n g on  the view  from one  interest.  If  assets  he  then  retaining  i t s character.  As  income ought  i s regarded  from  through  the  as owning  i n the  that  i n the  trust.  i n the  hands of  the  be not  trust,  a source  income a r i s i n g  to  then  i s propIn  trust  this  i s not  trustee  to  beneficiary.  interest  ity,  so  a mere c o n d u i t , w i t h  his interest  against these  beneficiary's  preclude  i t does  trust  his interest  i s income  i t passes  as  type of  i f he  instead,  nature of  the  has  e n t i t l e m e n t to the o p e r a t i o n of  to that  property being  case,  seen  the t r u s t  Alternatively,  him  of  in specific  t o be  pertinent  r e c e i v e d by  who  foundation.  treatment  rights  ought  a s s e t s but  although  the b e n e f i c i a r y ' s  the b e n e f i c i a r y ' s  tax rules  however,  depends e s s e n t i a l l y  income p a s s i n g t h r o u g h a  beneficiary  Income  thus  in trust  c a s e may,  a situation  property  is  a potential  that  i n which  two  i s the the  views  as  taxation  substance  of  i t i s received,  to the  nature of  principle the ought  of  income,  the  neutralrather  to govern i t s  71  The  same i s s u e a r o s e  to  the question  be  the party  nature one  as t o whether  taxed.  could  argue  decided,  of rates.  passing  through  view.  on t h e q u e s t i o n  however,  since either  t a x on t h e beneof the  assumed w i t h o u t  In considering the effect  taxable  beneficiary Regardless  being o f neu-  on income o f  the matter  trust  as a conduit  chapter  c a n no  longer  theory  or otherwise  ought  here.  of whether there  so f a r as t h e nature was c o n c e r n e d ,  Taking  the classical  the trust  Thus one c o u l d With  argue  respect  that  than t h e  or principle.  o r t h e t r u s t e e was  a person  of  different  the position  t o be t h e t r u s t e e r a t h e r  was s t i l l  principles.  i s the better  a n a r g u m e n t was made  i n no way i m p i n g e d o n t a x t h e o r y  be imposed.  trust  in this  are present  entity  tax unit,  ever,  from  as an e n t i t y  considerations  the trust  earlier  departing  trust  could  treating  Although  against  ing  was u n n e c e s s a r y  ignored.  Arguably,  the  c o u l d be s i m p l y  the trust,  regard  a d e c i s i o n as t o the  t o him, the nature  a l l o w i n g f o r a focus  trality  the  context,  i n the d i s c u s s i o n imposing  interest  thus  with  o r not t h e b e n e f i c i a r y ought t o  at the rate appropriate  beneficial  chapter  f o r t a x a t i o n o f a b e n e f i c i a r y under  Likewise  ficiary  the  In that  in this  of the beneficiary's interest  theory.  be  earlier  considered  o n whom t a x l i a b i l i t y i n favour  to this  of preserv-  question,  how-  view of the b e n e f i c i a r y ' s i n t e r e s t con-  72  flicts  directly with  desirability  of achieving c o n s i s t e n t treatment  wide spectrum to  depart  the tax notion of neutrality.  o f incomes and t a x p a y e r s ,  from  trust  theory  Whether one a g r e e s sion  i t would  lowed. viewed  In other  words,  that  situations,  other  cases,  described  IV.  areas ical  which  156  justifiable  t h e above  conclu-  as income  this  be  a l l income from  prop-  i n the trust.  logical  approach.  to the Act, the conduit  in a limited  i s considered  fol-  t o be  number o f  by s t a t u t e . income  from  spe-  In a l l property  above. *' 1 5  i n Summary  are problematic of rules  of the areas  taxpayer:  only  foregoing discussion should  system  first  that  as e x p r e s s l y p r o v i d e d  income  The P r o b l e m s The  amendments  i s now p r e s e r v e d  cific  as  do n o t a d o p t  of recent  be  i n a l l tax matters  i s , the beneficiary's interest  the advent  principle  with  the trust  or alternatively,  rules  across the  a c o n s i s t e n t p a t t e r n be  b y t h e b e n e f i c i a r y be v i e w e d  The e x i s t i n g With  that  the  context.  or disagrees  l o g i c a l that  as a c o n d u i t  received erty,  seem  in this  i t may  Given  i n any attempt  to develop  f o r the taxation of trust  focusses  the trust,  Subsection  have h i g h l i g h t e d s e v e r a l  108(5).  on t h e n a t u r e  although  a  log-  income.  and i d e n t i t y  i t i s n o t an e n t i t y ;  The of the  the  trus-  73  tee  who  has l e g a l but not b e n e f i c i a l ownership o f t h e t r u s t  property;  or the beneficiary,  is  conceptually.  viewed  tion or  of tax, considers  not the b e n e f i c i a r y  income.  This  area  regardless  The s e c o n d three  not  originally  the  nature  of the interest held  appropriate tive  rate  problems,  taxing  a person  been s u b j e c t e d culty  deals  trust. the  treatment  whether  determining problems  discussion and by t h e  and  which  of the  administra-  arises  from  t h e income w h i c h The t h i r d  of  area  o f income p a s s i n g  has  of  diffi-  through the  depends on one's v i e w o f t h e n a t u r e o f  b e n e f i c i a l i n t e r e s t and thus o f t h e t r u s t .  sion  existing rules  reflect  e x i s t s as t o whether  subject  to tax.  trust  provisions,  times  the trust(ee)  case,  the rate  the  receive  the treatment  imposi-  the determination  as t h e d i f f i c u l t y never  on  imposed;  difficulties  t o t a x i n h i s hands.  with  That  The  is  who may  be  by t h e t r u s t e e  include  of tax, timing  as w e l l  should  in  i n a more g e n e r a l i z e d  Such problems  of the  and i s i n r e c e i p t o f  f u r t h e r problems  p e r s o n o n whom t a x l i a b i l i t y  beneficiary.  that  his interest  s i t u a t i o n s depending  the  apparent  area,  i s ascertained  reveals  o f how  these problems.  depending  i t i s sometimes i s subject  of taxation  t r u s t as testamentary  confu-  i t i s the trust or the trustee  Further,  who  Some  on t h e n a t u r e  of the  t h e b e n e f i c i a r y a n d someto tax.  In the  latter  depends on t h e c l a s s i f i c a t i o n or inter  who  vivos.  of  74  With liability, of  respect  to the question  e i t h e r no a t t e m p t  a b e n e f i c i a r y who  income, is,  to achieve  lead  ascertained  an a p p r o p r i a t e  to  difficulties.  As  f o r the matter  sistent  i s made, o t h e r  i s both  i t i s a t t h e expense 1  5  of the imposition  of other  rate  than  of tax  i n the case  and i n r e c e i p t o f  of taxation, or i f  factors which  i t  themselves  8  of the nature  treatment  under  examining  and c r i t i c i z i n g  of trust  the existing rules  income,  i s only  incon-  too appar-  ent . In  must be aware  that  the nature  such as t o preclude is  i n a l l cases  ularly law,  tencies occur  between  of the subject  both  over  logical  those  and c o n s i s t e n t .  be  of another  the differing  108(l)(f),  This  that  i s partic-  t o l a y t h e r u l e s o f one a r e a o f area,  trusts.  t h e r u l e s o f t h e two s y s t e m s  and r e f l e c t  m a t t e r may  the development of a system of r u l e s  s o when o n e a t t e m p t s  taxation,  any s e t o f l e g a l r u l e s one  objectives  ( i ) , sections  Inconsis-  a r e bound t o  of the respective  157  Paragraphs  117, 122.  158  F o r e x a m p l e , w h e r e no p r e f e r r e d b e n e f i c i a r y e l e c t i o n i s made, an i n t e r v i v o s t r u s t i s t a x e d a t a 5 0 % r a t e a n d a c c u m u l a t e d income i s u l t i m a t e l y d i s t r i b u t e d as c a p i t a l w i t h n o a d j u s t m e n t made a s t o t h e a m o u n t o f t a x p r e v i ously paid. A l t e r n a t i v e l y , i f a n e l e c t i o n i s made, although the i n i t i a l rate of tax paid i s appropriate to t h e e l e c t i n g b e n e f i c i a r y h e h a s p a i d t a x o n i n c o m e h e may n e v e r r e c e i v e a n d a t a r a t e w h i c h may n o t e v e n a p p r o x i mate t h a t a p p l i c a b l e i n t h e y e a r i n w h i c h t r u s t money i s eventually received.  75  areas  of law.  ought  t o be m i n i m a l .  tion  of trust  tent  than  Inconsistencies  a system,  however,  The e x i s t i n g r u l e s g o v e r n i n g  i n c o m e may  i s required  within  i n some  by t h e i r  respects  subject  be more  matter.  the taxainconsis-  76 Chapter Alternatives  Problems the  as those  t o the Canadian  i n the taxation of trusts  current Canadian  such  illustrated  i n Chapter  of the trust  enters  o f any scheme o f r u l e s .  taxation ing  trust  these  current  I.  of the Royal  commencing  by t h e Commission  income,  two m a t t e r s  tioned.  The f i r s t  159  f o r tax-  Aspects  and c o n t r a s t e d  of  with  ^  In p a r t i c u l a r , to devise  Commission  regarding  of these  on t h e p r i n c i p l e s  attempt  some o f t h e  regarding the  law.  of the proposals put  the taxation of  o f an i n t r o d u c t o r y n a t u r e  ophy o f t h e Commission.  5  chapter,  and B r i t i s h  an e x a m i n a t i o n  forward  1  w i t h by t h e implem-  as a r e t h e methods  a r e compared  i nthe  Canadian law.  Before  tion.  Problems  Two a r e i n h e r e n t  In t h i s  are described,  sets of rules  Proposals  focus  income.  Commission on T a x a t i o n  income under A m e r i c a n  three  are not l i m i t e d to  a n d must be g r a p p l e d  of the Royal of trusts  System  system of t a x i n g t r u s t  nature  proposals  Three  should  c a n p e r h a p s be t e r m e d  In general,  this  principles  focus  b e men-  the philos-  consisted of a  o f e q u i t y and n e u t r a l i t y this  trust  i n taxa-  l e d the Commission t o  f o r a system which would t a x  Report o f t h e R o y a l Commission on T a x a t i o n (Ottawa: Queen's P r i n t e r , 1966). S e e , f o r e x a m p l e , v o l u m e 4, p . 150.  77  trusts  fairly  diaries The  and  results  vis-a-vis of  Commission's to  that  in  their  vis-a-vis  this  allowed  that  respectively.  second  of  a gross-up  that a trust  report  and  n e c e s s a r y t o make h e r e .  in  this  Report  as  taining of  within  from  dations ples  a whole  the  trust  and  their  "prospective be  i s that  the exclusions Matters which  Commission  individual  and  c o n t a i n e d i n the Report  reflect  discussed  here  not  form p a r t  160  See  161  These  rules  intra-family  of  Report, terms  devised both  constitutes  since  similar  be  "additional  a gift  are defined,  159,  from  a r e common t o  the  trust  tax  recommenprinci-  f o r the treatment and  type of  underlies  each  tax law p r e s e n t l y  a t pp.  p.  149.  83-84.  per-  inclusion  these general  v o l u m e 4,  infra,  with  specifically  The  of  i t which i t  are not d e a l t  Neither  which  t h e g e n e r a l income  supra, note  the scope  or bequest,  transfers.  the premise  of  the expansion of the family.  of  ^  i n the  system  recommended t h e  to the  treatment  seen  beneficiary"  taxed at h i s  matter  the t a x base  income t h a t  be  1 6  s h a r e h o l d e r s , and  some r e c o m m e n d a t i o n s  The  i n the s p e c i a l  beneficiary.  credit  some c o n c e p t s w h i c h  and  to trusts.  gifts  unit  include  and  interme-  1 6 1  is  work  a  introductory  the Commission's  to a  g o v e r n i n g p h i l o s o p h y can  recommendation  The  transfers  to corporations  to elect  rate,"  direct  advocacy  applied  income p a s s i n g t h r o u g h o t h e r  of  f o r the rule  is  does appli-  78 cable  to Canada. Also  tions of  excluded from  which  t h i s work.  tions  from  trust  example,  transitional  Report of  o r because  1 6 6  treat  such  with  trust,  which  1  6  4  are merely  confusion i n the wording  that  the Commission  as an e n t i t y convenience  of the  adopted  than as e n t i t y .  Where  i t does so f o r purposes  only,  regarding  i n Chapter  tax levied  the view i t does of on t h e  162 T h e s e r u l e s supra, note  are elaborated 159.  163  See R e p o r t ,  supra, note  1 5 9 , v o l u m e 4, p p .  157-158.  164 S e e R e p o r t ,  supra, note  1 5 9 , v o l u m e 4, p p .  195-198.  165  supra, note  1 5 9 , v o l u m e 4, p p .  164-165.  See R e p o r t ,  spe-  as d i s t r i b u -  or the residence of a  as c o n d u i t r a t h e r  administrative  here,  scope  1 6 5  some a p p a r e n t  the trust  they deal  the  Taxation of the Trust  i t seems c l e a r  the trust  1 6 3  recommenda-  a r e beyond  they are provisions  in nature.  The G e n e r a l R u l e : Despite  because  are not discussed corpus  are certain  to trusts,  T h i s i s so e i t h e r  areas which  A.  consideration  although specific  cific  for  1 6 2  21 o f t h e R e p o r t ,  166 F o r e x a m p l e , t h e C o m m i s s i o n e r s s t a t e , a t v o l u m e 4, p . 1 5 0 of t h e R e p o r t , s u p r a , n o t e 159: " [ a ] t r u s t i s an i n t e r m e d i a r y , much l i k e a c o r p o r a t i o n o r a c o - o p e r a t i v e , a n d , as s u c h , i s a c o n d u i t t h r o u g h w h i c h income p a s s e s on t h e way t o t h e b e n e f i c i a r i e s " ; a n d a t p. 1 5 5 : "[a] trust i s a n e n t i t y w h i c h a c q u i r e s p r o p e r t y b y way o f g i f t , o r b e q u e s t , o r f o r a c o n s i d e r a t i o n , and e a r n s income from the h o l d i n g o r d i s p o s a l o f p r o p e r t y , from b u s i n e s s , o r otherwise."  79 trust than in  as as  a prepayment an  right.  toward  an  the  °  To  analogy  tor  and  all  i n t e r m e d i a r i e s be  trust  same m a n n e r . trust  as  trust  and  This  tax  The  t a x owed by  amount p r o p e r l y  i t s own  lean  of  unit,  i m p o s e d on  the  extent  between  subject  individual w o u l d be  rate;  subject  applicable  taxed,  analogy  to  t o an 50%  initial  These  as  an  entity  Commissioners  reflect  i t s direc-  their  view  possible, in  e x p l a i n s the  that the  focus  on  the  rule,  the  income at  the  the t r u s t e e .  t a x on  a general trust  scheme o f  t o a number o f  income.  the  extent  t h a t , as  in their  trust  c o r p o r a t i o n and  the  perhaps  r a t h e r than  to d i s t r i b u t a b l e  accumulated  the  beneficiary rather  the  that  i t t r u s t e e they  Commission proposed  be  the  things.  exceptions  income and exceptions  one  1  6  8  This  including  top  rule  one  applicable to  are  discussed further  the  existing  below.  Comparing Canadian of  this  rules,  substance.  respects,  the  one  general sees  Firstly, trust  Report,  rule  with  a similarity i n both  of  cases,  i s considered  t o be  system  of  form but d i f f e r e n c e s  at  least  i n some  a taxable  entity,  1  6  9  167  See  supra,  note  159,  v o l u m e 4,  p.  150.  168  See R e p o r t , s u p r a , 163-164, 203.  note  159,  v o l u m e 4,  pp.  169  I n c o m e T a x A c t , S t a t s . C a n . 1 9 5 2 , c . 148 a s a m e n d e d , s . 104(2). Further s t a t u t o r y references i n t h i s Chapter are to t h i s Act unless otherwise indicated.  157,  159,  80 presumably income.  the primary  The e x i s t i n g  inclusion  taxable rule  entity  with  respect  reflects this position  and then deduction  o f amounts  payable  to trust in i t s  t o t h e bene-  i 7n ficiary.  By c o n t r a s t ,  ±  h a s no p r o v i s i o n income  i s taxed  receiving the  a credit  described  sequently  this  trust,  Instead  with  beneficiary  the  o r i n t h e hands o f  he makes t h e f i r s t  election  that  trusts  to distributable rule  a deduction  applies  not  the subject  170  Income  171  Report,  172  Income  only  testamentary  159,  at least at rate  f o rtaxation  accumulating beneficiary  i n t h e t r u s t and  elect i o n .  4, p p . 159,  ( 6 ) , (12).  of the  and thus i n  (13).  volume  T a x A c t , s . 104(2),  t h e two.  a t a 50%  f o r income p a y a b l e  T a x A c t , s . 104(6),  and con-  and t o accumulated  which provides  t o income  note  be t a x e d  income  of a preferred  supra,  between  d i s t i n c t i o n i s eliminated,  The r u l e  allows  between  i n the Commission's proposals  differential exists  The c u r r e n t  practice  amount.  f o rtaxes paid  trusts  a further  both  income.  —  no d i s t i n c t i o n , i s drawn  no r a t e  level.  applies  of this  i n the trust  provided  inter vivos  Thirdly,  made b y t h e C o m m i s s i o n  below.  Secondly, and  f o rdeduction either  beneficiary  the proposal  161.  1  7  2  81 Finally, trust  under  ment by which the  and  most  the proposed  the b e n e f i c i a r y  he  must  account  amount o f  tax paid  the b e n e f i c i a r y  him  receives  i s payment of  tier  system  B.  ficiary  where  eficiary  and  the  prepayand  tax d i r e c t l y  on  the  by  existing  income p a y a b l e  income t a x - f r e e .  the t r u s t  for  1 7 4  first  In  to  neither  tier  in a  two-  taxation.  aside  elections  trust  which  income a r i s e s 1 7 5  Elections  could from  effect  of or  the e l e c t i o n  the  made b y  a gift  on  the  bene-  o r where a  described  depending  could  ben-  elect  above, whether  the income  accumulated.  respect to d i s t r i b u t a b l e  income,  "amounts p a y a b l e " t o t h e b e n e f i c i a r y  note  be  by  the b e n e f i c i a r y  tax treatment than that  distributable  With  a  credit  the t r u s t . U n d e r the  is a non-resident,  different  nature is  receives  by  g r o s s i n g - u p t h e amount r e c e i v e d  pays  t a x by  he  Exceptions to the General Rule: Benef i c i a r y  Leaving  for  by  the tax paid  i s c o n s i d e r e d t o be  f o r which  accumulated  case  of  rule  by  rules, or  significantly,  under  essentially the  existing  173  Supra,  171.  174  Income Tax A c t , s. 1 0 4 ( 1 3 ) , ( 1 4 ) , and s e e A n s e l l E s t a t e v . M i n i s t e r o f N a t i o n a l R e v e n u e , [ 1 9 6 7 ] 1 E x . C.R. 518,  175  See R e p o r t , s u p r a , n o t e 159, 162-164, 199-202, 203, 209.  volume  4,  a t pp.  157,  160,  rules,  ° a resident  could, taxed  under  the proposed  t o him  receive  beneficiary entitled  at h i s rate  from  rule, elect of  the t r u s t the  tax. full  As  to such  income  t o have t h a t a result,  amount o f  he  income would  income t o w h i c h  he  17 7  was  entitled,  credit, the  and  rather  a possible  existing rules  tributable  optional The  that  as p a r t  rather  ways. from  their  otherwise  be  election differs  respect  and  the  proposed  the  top  176  Report, A c t , s.  177  Report, supra, 168-169.  178  Report, supra,  179  Income Tax  the concept  of payable t a x by  to minor  of  income  the  therefore  beneficiary  benefit  subject  be  be  was  treated  to  to subject  such  the second  1 7 9  would  i s not,  o f h i s income and  in his hands.  i n d i v i d u a l rate, unless  supra, note 104(24).  b e n e f i c i a r y but  as p a r t  to taxation  r u l e would  The  due  is  r e s u l t of  income t o t a x  volume  4,  p.  153;  Income  note  159,  volume  4,  pp.  159,  163-164,  note  159,  volume  4,  p.  104(18).  at  election, dis-  159,  A c t , s.  dis-  i n the  beneficiaries  for their  to a minor  i s treated  subject  from  t h e e x i s t i n g r u l e s , a l l income w h i c h  payable  his infancy,  amount,  mandatory.  incomes  '° U n d e r  a reduced  Firstly, that  income a c t u a l l y used  of  therefore  than with  election.  to  i n two  This  S e c o n d l y , payment o f  proposal  only  receiving  refund.  income d i f f e r s  case of minors. is  than  169.  Tax  83 cussed  b e l o w , was  applicable.  disadvantageous,  given  minor b e n e f i c i a r y ,  income b e i n g  and  adults  income t o  Turning rule  who  ficiary"  now  for  at  usual  the  his  interest  to  the  have  rate.  trust  1 8  his ^  or  on  out  i n the  his  who  attaining  the  to  both  liability minors  received  or  do  so  least age  the  bene-  "prospective  bene-  on  income  1 8 1  --  system,  is likely  to  either  receive  either  on  the  years  not  greater  rate,"  that  a  whose to  of  eventuthem.  A  death of  older  than  than  e l e c t i o n was tax  than  t r u s t monies  ten  Where an  accumu-  rather  a beneficiary who  the  resident  proposed  t r u s t w o u l d pay  "additional  a  tax  c a p i t a l or  likely  i s at the  allow  income,  on  40  beneficiary's  i s , the  180  Report, supra, 169-172.  note  159,  v o l u m e 4,  pp.  159-160,  181  Report,  note  159,  v o l u m e 4,  pp.  159-160,  i f an  he —  set  made  i t s income  the  supra,  the  for  have not  "additional" rate  vested  instrument.  such a b e n e f i c i a r y ,  be  tax  accumulated  is either  considered  trust  of  Under  w o u l d become e n t i t l e d t o  is,  reasons  t r u s t pay  income and  income b e n e f i c i a r y  of  receivable,  d e f i n i t i o n of  the  at  indefeasibly  receive  or  well  applicable  problem  Commission would  beneficiary"  is  tax  the  question  benefit,  p e r s o n w o u l d be he  the  t h i s could  entitled.  within  trust  "prospective  are  the  elect  lating  of  for whatever  to  fits  to  received  they  p r o p o s e d by  ficiary  ally  who  which  rate  i t does avoid  without for  the  While  trust  by at  would  163-164, 170.  84 pay by  an amount o f t a x e q u a l t o t h a t the beneficiary  This rently ary  election  embodied  election.  1 8  h a d he r e c e i v e d  differs  The s c o p e  i s i n some w a y s w i d e r  beneficiary  category.  stand -|  income.  from  t h e one  0  than  that  i n a certain  of the latter familial  of this, class,  one a  relationship  notes  benefici-  to the  such  i s not the case  with  respect t o the former  C o n v e r s e l y , w h i l e a p e r s o n may h a v e o n l y a  tionary  interest this  definition  under  a trust  i s not generally  of a person meeting  of prospective beneficiary.  rule,  the beneficiary  whose which  the o c c u r r e n c e o f one o f two p r o p o s e d used  i n the Report  supra, note  discre-  and y e t be a p r e f e r r e d  true  must have a c o n t i n g e n t i n t e r e s t  phrasing  benefici-  of the preferred  class.  proposed  cur-  OA  s e t t l o r , *  ciary;  paid  1 8 2  as t h e p r e f e r r e d  As an i l l u s t r a t i o n  a l t h o u g h t o b e a member  a r y must  have been  of the category of prospective  beneficiary  that  the  would  substantially  i n the l e g i s l a t i o n  -^  which  suggests  To q u a l i f y  interest will  the  under t h e  i s not vested  be s a t i s f i e d  events. that  benefi-  1 8 5  on  Although the  the vesting  of  such  182  Report,  1 5 9 , v o l u m e 4, p p . 1 6 0 , 1 7 1 .  183  Income Tax A c t , s.  184  Income Tax A c t , s. 1 0 8 ( 1 ) ( g ) , a n d s e e s u p r a , C h a p t e r p. 30.  185  T h a t i s , o n t h e d e a t h o f a n i n c o m e b e n e f i c i a r y who w a s a t l e a s t 10 y e a r s o l d e r t h a n t h e b e n e f i c i a r y o r o n a t t a i n i n g an a g e n o t g r e a t e r t h a n 40 y e a r s s p e c i f i e d i n t h e t r u s t instrument.  104(14). 1,  85 interests  would  the  trustee,  the  existence  applicable the to  not  d e p e n d on  e x a m i n a t i o n of of  to  two  or  naming  the  beneficiary  occurrence  of  alluded are  to  placed  more p r o s p e c t i v e interest are  to  can  be  one  be  of  effect  the  interests.  discretionary each cannot  be  and to  paid  tax  at  with  respect  least,  this  on  1  8  7  to  rule  beneficiaries  or  each  rates  the  With  limi-  w h e r e two  Where  additional  interest.  preferred  of  tax  portions  respect  to  is similar having  of the  to  ascertaina-  OQ  Where p o t e n t i a l  0 0  interest  under  determined,  somewhat d i f f e r e n t . ciaries  paid  is  limited  certain  election  involved.  separate  each  shares to  1  ble  on  are  of  events.  paragraph,  determined,  applicable  prescribed  of  this  would a r i s e  preceding  the  case  i s presumably  i n the  calculated  determination  the  by  provisions  Since  1 8 6  whose e n t i t l e m e n t  beneficiaries  income a t t r i b u t a b l e  that  of  trustee  i n the  reveals  the  of  a discretion  proposed  beneficiaries.  discretion  tations  rules  of  discretionary  the  As  the  exercise  more b e n e f i c i a r i e s  case,  the  the  make t h e  The  the  a  trust  and  the  rules  governing  proposed  election  w o u l d be  beneficiaries  and  the  additional  rule  would  rate  at  rate  186  Report,  supra,  note  159,  volume  187  Report,  supra,  note  159,  v o l u m e 4,  188  Income Tax  Act,  s.  104(15)(b).  thus  4,  of  have o n l y the  of  election  have a l l  which the  share  the  are benefi-  trust  beneficiary  pp.  171-172.  p.  171.  a  hav-  86 ing  the  that  highest  a l l of  the  This proposal necessity  of  present,  i n the ^  1  the  such  can  be  remainder  The rent  rules  ciary, while  trust  and  in both  to  the  respect  upon and at  hands of  differ  the  not  only  differ  the  with  the  Report,.supra,  190  Income Tax  Act,  by  note s.  on  the  159,  As  the  the  cur-  preferred  position be  trust  beneficiar-  each  amount  proposals  benefici-  benefi-  elected, of  paid  would  ben-  be  the by the  benethe case  income b e a r i n g  tax  beneficiary  accumulated  receive the  the  at  in  rates,  of  an  trust,  amount on either  volume  104(15)(c).  of  4,  at  pp.  initially  which his  ^  done  cases  from  or  share  the  beneficiary.  trustee,  189  prospective  tax  is  amount o f  additional  the  case  prospective that  1 8  the  as  for  rate.  in that  in the  shares  50%  distributable  been p a i d  not  usual  calculated  income would u l t i m a t e l y initially  both  prospective  at  c a l c u l a t i o n of  t h a n by  the  are only  taxed  d e f i n i t i o n of  cases  to  postulate  shares of  i n mind, would under  rather  rule  beneficiaries  to  i n the also  current  assumption  beneficiary.  l i m i t a t i o n i s proposed  taxed  i n the  they  ficiary  the  being  that  the  a l l beneficiaries,  Commission proposals  eficiary  with  elected  on  by  circumstances,  income a t t r i b u t a b l e ies  the  failure  final  a l l of  Under  by  determined  received  d i f f e r s from  currently. ^  aries.  rate,  i n c o m e was  election  and  w h i c h not  marginal  tax  had  additional  171-172.  in  87 rate  o r a t 50%, and would  This  of course d i f f e r s  accumulated has  from  income under  been t h e s u b j e c t  receive  credit f o r that  the tax-free  the  t r u s t would  C.  C a l c u l a t i o n o f t h e Tax C r e d i t  problem the  Commission  subject  recognized  r a i s e d by t h e f a c t  credit —  be  any one o f s e v e r a l :  years  or at a lesser additional rate  tax or  e i t h e r because  or because  o f changes  the prospective  The results used  of which  receive  Supra,  the rate  note 174.  n o t made,  with the f o r which  have been  forthis  have p a i d  paid  could  tax at the  where an e l e c t i o n had have v a r i e d  i n the prescribed  have  over the  rates of  changed.  was t h e a d o p t i o n o f a f o r m u l a ,  were t o be c a l c u l a t e d y e a r l y , of t a x f o r which  t h e r a t e was t o be  which  the  could  be  the beneficiary  the "cumulative average  words o f t h e Commission,  191  might  t a x might  b e n e f i c i a r y might  credit;  1  i n the position of the beneficiary;  s o l u t i o n proposed  to determine  would  o f changes  tax —  The r e a s o n  the t r u s t might  b e e n made; t h e a d d i t i o n a l r a t e  to deal  the i n i t i a l  the t r u s t at d i f f e r e n t rates.  rate  or i s simply  and sought  by  50%  1  t o t a x a t t h e 50% r a t e .  that  b e n e f i c i a r y was t o r e c e i v e  or noti t  beneficiary election. ^  Where an e l e c t i o n i s u n a v a i l a b l e  The  distribution of  the present r u l e s , whether  of a preferred  remain  amount.  rate."  In the  88 d e t e r m i n e d by c a l c u l a t i n g t h e t o t a l income o f t h e t r u s t , other than c u r r e n t l y distributable income, which had been s u b j e c t t o i n i t i a l t a x , and d i v i d i n g t h i s amount by t h e t o t a l initial tax paid thereon. 1 9 2  .One s h o u l d lated  note  income,  receiving trust.  that  i s applicable  applicable  funds w i t h i n 1  9  necessary  once, whether  ary,  i n the year Multiple  such under  only  t h e 50% r a t e  paid  by t h e  the Commission proposed be t r e a t e d  as  as t h e one d e s c r i b e d the existing  by t h e t r u s t  i n which  dealing  as a r e found  that  separate  rules,  above since  i s not, of tax i s paid  o r by t h e e l e c t i n g  t h e income  with  benefici-  arises.  the consolidation  i n the current  ered u n n e c e s s a r y by t h e Commission some r e f l e c t i n g g e n e r a l  some s p e c i f i c included  beneficiary  Trusts  Provisions  sons,  t o accumu-  3  A calculation course,  one t r u s t  only  to the  income b e i n g  F o r ease of c a l c u l a t i o n ,  trusts.  trusts  rate  the credit  distributable  separate  D.  this  to t r u s t s .  the treatment  1  9  4  of  multiple  l e g i s l a t i o n were  consid-  f o r a combination  principles  adopted by  Reasons o f a g e n e r a l  of the family  of  them,  nature  as the t a x u n i t ,  192  Report,  supra,  note  1 5 9 , v o l u m e 4, p . 1 7 6 .  193  Report,  supra,  note  1 5 9 , v o l u m e 4, p p .  194  Multiple trusts are discussed the R e p o r t , s u p r a , note 159.  rea-  and t h e  158-159.  a t v o l u m e 4, p p . 1 9 0 - 1 9 1 o f  89 inclusion trusts  of  gifts  in particular,  be  taxed at  —  and  either  since  h i s income  by  --  him  result  no  each  E.  Nature  The  by  the  of  number o f  treatment  Both the of  rates  taxes  would  through  be  the  Income T a x e d :  income  f o r which  1 9 5  No  reduced  provision  rules  was  tax payable  under  differ  relief  from  income,  several  when r e c e i v e d  the use  of  rates.  Rules  flow-through treatment  f o r amounts not  the d i s c u s s i o n  extent to which a certain  a result  and  with.  the  i n the  Report,  supra, note  159,  v o l u m e 4,  pp.  177-178.  196  Report,  supra, note  159,  v o l u m e 4,  pp.  178-179.  197  Income Tax  ss. 104(16)-(22),  1 9 6  1  9  of  may such  7  treatment  195  Act,  income  which  could treat  inconclusive  of  i n the g r e a t e r  credits  dealt  the b e n e f i c i a r y  for-  beneficiary.  the mechanics of  n a t u r e were  reduced  i n the p r e c l u s i o n  specifically  of  of  f o r the  and  was  flow-through  these proposals  and  To  multiple  Flow-Through  allowances  to the b e n e f i c i a r y  rate  possible.  made f o r t h e as  would  personal  aggregated  must have s e p a r a t e m a r g i n a l  types of  flow-through  be  to  the proposals  the b e n e f i c i a r y  would  considered sufficient  existing  being  was  each  respect  the Commission were d i v i d e n d s , i n t e r e s t  income.  losses,  and  trust  types of  proposed  The  from  With  the b e n e f i c i a r y ' s  reduction i n tax  trusts,  being  person  tax base.  income under  or at  i n a r e d u c t i o n of  The  the  since  50%  i f one  trusts  eign  within  income Report,  (26)-(28), 108(5).  as  90  the  latter  existing  in fact,  rules  are  virtually fairly  non-existent.  detailed  and  can  several  By  growing  contrast, more so  the  each  year.  I n summary t h e n ,  one  between the p r o p o s a l s of ing  rules.  was  suggested  respect t a x by  Although i t has  not  the b e n e f i c i a r y  the n e c e s s i t y f o r the  treatment the  Finally, of  inter  Commission  gross-up  and  been adopted.  the  current rules  v i v o s and  and  the  credit  result  trust,  complex c a l c u l a t i o n s the  differences  Elections  income c u r r e n t l y r a t h e r than  major  system  with  i n payment  thus  of  avoiding  r e q u i r e d under  reflect  testamentary  exist-  the  a disparate  trusts  not  found  in  Report.  11.  American A.  Taxation of Trust  General  Inevitably, regarded  as  both  under American both  which  perhaps, an  See 361  given  entity  law.  The  and  i t s nature, a conduit  the  trust  1  of  8  income  S t a t l e r T r u s t v. C o m m i s s i o n e r F. 2 d 128 ( 2 d C i r . 1 9 6 6 ) .  of  is  purposes  is reflected  f o r amounts of  to b e n e f i c i a r i e s , ^  that various types  a trust  for tax  conduit principle  granted  distributed  provide  Income  Rules  the deduction  currently  198  the Royal  a two-tier  to accumulating  proposals.  note  and  income  i n the  retain  Internal  in  their  rules char-  Revenue,  91 acter  whether  beneficiary. in  that  its  nant  that  system  exemption Nor  nature  of the  American  are d i f f i c u l t .  On  an  does  an  2  1  point  of the t r u s t albeit  income  in either  with  As m e n t i o n e d ,  clearly  differing a trust  law  to the  t h e one under  domi-  hand,  not  i n favour of  i t  American taxed  i n Canada.  the  On  an case  governing the  the character  system.  by  individ-  i s allowed  exemption,  the  At best,  rules  of  conduit each  is a  characteristics.  calculates  in essentially  as  though,  are ultimately  examination of the r u l e s distributed,  the  t a x --  an  entity  the case  American  to the personal  income  law, ^  under  pay  as does law  i s less  or of  entity,  Canadian  not n e c e s s a r i l y  a trust  similar  here.  taxable  and  income  i t s accumulation distributions  o t h e r hand,  hybrid,  taxable  the t r u s t  the b e n e f i c i a r y ,  nature  an  i n m u c h t h e s a m e way  i n each  appear  law s i n c e  the  --  i s r e g a r d e d as  simple comparisons with  trait  might  trust  i t must c a l c u l a t e  ^  2  The  1 9 9  fiduciary  u a l .  to  t a x e d i n the hands of the t r u s t  gross  income  and  t h e same m a n n e r a s d o e s  then an  199  I n t e r n a l Revenue Code s. 6 5 2 ( b ) and s. 6 6 1 ( b ) , as amended b y T a x R e f o r m A c t o f 1 9 7 6 , P u b . L . No. 9 4 - 4 5 5 , s . 1 9 0 6 ( b ) ( 1 3 ) ( A ) , 90 S t a t . 1520. R e f e r e n c e s t o t h e I.R.C. are r e f e r e n c e s t o t h i s Code ( 1 9 5 4 ) .  200  I.R.C. s. 6 4 K b ) ; s e e a l s o Maximov v . U n i t e d S t a t e s , F. 2 d 5 6 5 ( 2 d C i r . 1 9 6 2 ) , a f f ' d . 3 7 3 U.S. 4 9 , 10 L . 2 d 1 8 4 , 83 S. C t . 1 0 5 4 .  201  Supra,  note  199.  209 Ed.  92 individual,  subject  trust  property  under  a separate  taxable ber to the  rule  2  credits  2  f o r e x a m p l e a r e i n some  income. ^4  of rules  t o some e x c e p t i o n s . * ^ ? - c a p i t a l  and t o t h a t  U J  The  Internal  specifically  foreign tax credit  to b e n e f i c i a r i e s ) tributions  c r e d i t . j  n  and  Code  trusts  deduction  from  i n c l u d e s a numwith  respect  are the allowance  that  i t i s not  classification  con-  exemption  exemptions of as s i m p l e  i s also allowed  of  allowed  of the p o l i t i c a l  are allowed  i s not subject  on  with  are excluded  of the personal  e  d e p e n d i n g on t h e i r  contributions,  Among t h e s e  ij u  or  t r u s t s . A  Revenue  and t h e d i s a l l o w a n c e  to individuals,  plex  extent  (to the extent  allowed $100  instances dealt  applicable to trusts  and d e d u c t i o n s .  gains  $300  o r com-  for charitable  to the l i m i t a t i o n  applica-  ? n7 ble  to individuals  202  I.R.C.  203  I.R.C. s. 644, a s amended by Tax R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s . 7 0 1 ( e ) , 90 S t a t . 1 5 2 0 ; Revenue A c t o f 1 9 7 8 , P u b . L. No. 9 5 - 6 0 0 , s . 7 0 1 ( p ) ( 3 ) , 42 S t a t . 2 7 6 3 ; I n s t a l m e n t S a l e s R e v i s i o n A c t o f 1 9 8 0 , P u b . L. No. 9 6 - 4 7 1 , s . 2 ( b ) ( 4 ) , 94 S t a t . 2 2 4 7 , a p p l i c a b l e t o g a i n s o n p r o p e r t y t r a n s f e r r e d t o t h e t r u s t a t l e s s t h a n f a i r market value.  204  I.R.C.  s.  205  I.R.C.  s. 6 4 2 ( a ) ( 1 ) , ( 2 ) .  206  I.R.C.  s.  207  I.R.C. s. 6 4 2 ( c ) , a s amended b y Tax R e f o r m A c t o f 1 9 6 9 , P u b . L. N o . 9 1 - 1 7 2 , s . 2 0 1 ( b ) , 83 S t a t . 4 8 7 ; T a x R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s s . 1 4 0 2 ( b ) ( 1 ) ( J ) , 1 4 0 2 ( b ) ( 2 ) , 1 9 0 6 ( b ) ( 1 3 ) ( A ) , 90 S t a t . 1 5 2 0 .  s.  generally.  u  Trusts  are also  allowed  64Kb).  641(c).  642(b).  93 deductions  f o r d e p r e c i a t i o n and d e p l e t i o n as w e l l  amortization the  to the extent  beneficiaries.  9 fl ft u  °  such  With  deductions  respect  as f o r  are not allowed  to net operating  to  losses,  9 0 q  these loss  a r e d e d u c t i b l e by t h e t r u s t carryovers  deductions  and c a p i t a l  are allowed  loss  U  3  and b o t h  carryovers  net  operating  as w e l l  to the b e n e f i c i a r i e s  on  as  excess  termination of  91 n  the  trust.  allowed  Of  to the trust  beneficiary To  this  importance  of d i s t r i b u t a b l e  point, at least,  calculates  however  f o r income c u r r e n t l y  to the extent  a r e more s i m i l a r also  greatest  than  deduction  distributed net  to a  income. 2 1  t h e C a n a d i a n and A m e r i c a n  different.  income and  i s the  A trust  taxable  L  rules  under Canadian law  income as t h o u g h i t were  9 1 9  an  individual  and  is entitled  the allowance  similar  cred-  its  and d e d u c t i o n s .  208  I.R.C. s. 6 4 2 ( e ) , a s amended by R e v e n u e A c t o f 1 9 6 2 , P u b . L. No. 8 7 - 8 3 4 , s . 1 3 ( c ) ( 2 ) , 76 S t a t . 9 6 0 ; I . R . C . s . 6 4 2 ( f ) , a s amended b y T a x R e f o r m A c t o f 1 9 6 9 , P u b . L. No. 9 1 - 1 7 2 , s . 7 0 4 ( b ) ( 2 ) , 83 S t a t . 4 8 7 ; R e v e n u e A c t o f 1 9 7 1 , P u b . L. No. 9 2 - 1 7 8 , s . 3 0 3 ( c ) ( 4 ) , 85 S t a t . 4 9 7 ; T a x R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s s . 1 9 0 6 ( b ) ( 1 3 ) ( A ) , 1 9 5 1 ( c ) ( 2 ) ( B ) , 2 1 2 4 ( a ) ( 3 ) ( B ) , 90 S t a t . 1520; Economic R e c o v e r y Tax A c t o f 1981, Pub. L. N o . 9 7 - 3 4 , s . 2 1 2 ( d ) ( 2 ) ( D ) , 95 S t a t . 1 7 2 ; T e c h n i c a l C o r r e c t i o n s A c t o f 1 9 8 2 , P u b . L. No. 9 7 - 4 4 8 , s . 1 0 2 ( f ) ( 1 ) .  209  I.R.C.  210  I.R.C. s. 6 4 2 ( h ) , a s amended b y Tax R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s . 1 9 0 6 ( b ) ( 1 3 ) ( A ) , 90 S t a t . 1 5 2 0 .  211  I.R.C.  s s . 651(a),  ( b ) , 661(a).  212  Income  Tax A c t , s.  104(2).  s.  Neither  to essentially  o f an amount i n  642(d).  94 lieu  of the personal  loss  c a r r y o v e r s by b e n e f i c i a r i e s  are  permissible  The of  American  trust  views  trust  on t e r m i n a t i o n  law however.  applicable  o r complex, descriptive  i s one w h i c h  2 1  distributions  on t h e c l a s s i f i c a t i o n  a d i s t i n c t i o n one rather  i s required  beneficiaries.  2 1 5  trust  of the trust  than  to distribute  A l l other  of  author  substantive.  a n d d o e s n o t make d i s t r i b u t i o n s  have c h a r i t a b l e  of  ^  to current  somewhat, d e p e n d i n g  as e s s e n t i a l l y  income c u r r e n t l y nor  rules  as simple  A simple  nor the deduction  under Canadian  income d i f f e r  the  exemption  2 1 4  its  of corpus, trusts are  ° "I fi complex. dian  X  D  Although  such  l a w , t h e two s y s t e m s  thought,  taxation  i n each  of  the d i s t r i b u t i o n  by  which  than  a distinction  i s not found  a r e not as d i f f e r e n t case depending  i n Cana-  as might  be  more on t h e n a t u r e  on t h e c l a s s i f i c a t i o n  of the trust  i t i s made.  213  Income T a x A c t ,  s.  104(3).  214  M i c h a e l s o n , " D i s t r i b u t a b l e N e t Income, The T i e r S y s t e m , and t h e T h r o w b a c k R u l e " ( 1 9 6 9 ) , 4 R e a l P r o p . P r o b . & T r . J . 634 a t 6 3 5 , s t a t e s t h a t t h e r u l e s , s o f a r a s a p p l i c a b l e t o e a c h t y p e o f t r u s t , a r e e s s e n t i a l l y t h e same.  215  The s p e c i f i c r u l e s a p p l i c a b l e t o simple t r u s t s are cont a i n e d i n I . R . C . S u b t i t l e A, C h a p t e r 1 J , P a r t I B .  216  The s p e c i f i c r u l e s a p p l i c a b l e t o complex t r u s t s a r e cont a i n e d i n I . R . C . S u b t i t l e A, C h a p t e r 1 J , P a r t I C .  95 While can  current distributions  law, taxed  accumulation tion  o n l y once,  deduction Canadian  law. first  Canadian  income the  beneficiary  A trust of  provides  and o n l y  elects  t o be t a x e d  under American  testamentary  graduated vivos  trusts  marginal  trusts  being  and  found  2 1 8  This  2 1  unless  ^  Canadian p r a c t i c e  t o a minimum  two  differs  law i s s u b j e c t t o m a r g i n a l from  in  when t h e  of the trust  in i t sstead.  on  by  subsequently  for taxation  are permitted  subject  Taxa-  are taxed  rates  where  t o pay t a x at the  rates applicable to individuals;  0  approximately  to those  hands.  for taxation  t a x a t i o n . T h i s differs  only  only  beneficiary,  i s accomplished  i n the trust,  i n the beneficiary's  law which  i s earned,  case  distributions  when e a r n e d ,  Ameri-  dealt with.  provisions similar  Accumulation  when d i s t r i b u t e d , from  are otherwise  i n the former  and i n c l u s i o n  occasions:  i n t h e hands o f t h e  distributions  of the beneficiary  o f income a r e , under  flat  inter  rate of tax of  91  50%.  217  I.R.C. s s 6 5 1 ( a ) , ( b ) , 6 5 2 ( a ) ; 104(6), ( 8 ) , (13).  218  I.R.C. s s . 6 4 K b ) ,  219  Income Tax A c t , s. 1 0 4 ( 1 2 ) , ( 1 4 ) .  220  I.R.C. s. 1 ( e ) . N o t e t h a t t r u s t s a r e a l s o s u b j e c t t o t h e a l t e r n a t i v e m i n i m u m t a x i m p o s e d u n d e r I . R . C . s . 55 a s amended, s u b j e c t t o an i n i t i a l e x e m p t i o n o f $ 2 0 , 0 0 0 .  221  Income Tax A c t , s s . 117, 1 2 2 ( 1 ) , ( 2 ) .  661(a),  Income Tax A c t , s s .  662(a),  667.  96 The  issue  of  difficulty  i n the  because of  the  each  United  greater  under American allowed  multiple  law:  trust  t r u s t s has  States  tax  than  caused  i n Canada,  no  doubt  w h i c h can  be  effected  reductions  These  resulted  in lieu  of  the  greater  from  the  personal  $1,000  exemption  exemption  —  since  9 9 9  reduced rates  to  of  grantor trusts ject  —  taxation  and  to  from  each  i s important  grantor  a p p l i c a t i o n of Although  in determining  consolidation  no  the  trust.  have been c r e a t e d ,  to  serve  $100  under  Treasury  s u b s t a n t i a l l y the  tax  reduction  are  also  as  subject  their  or  presently  Regulations  purpose,  purpose.  if  have  under  the  2 2 3  the  several  the  same  Multiple  provisions  of  sub-  they  same b e n e f i c i a r i e s , a n d  principal  to penalty  one  t r u s t s are  s u b s t a n t i a l l y independent and  i n t e n t i o n of  whether  multiple  separate  have trusts  the  Code  9 9 4.  dealing  with  approach under by law  the by  the  the  the  throwback  increased  throwback  beneficiary.  tax  rule The  rule. is paid  the  problem  consolidate  of  1938,  held  the  tax  is dealt by  the  289,  52  Stat.  by  the  with  under  Minister  of  National  having  477,  the  Revenue Act (U.S.).  223  T r e a s . Reg. s. 1 . 6 4 1 ( a ) - 0 T.D. 7204, 8-24-72.  224  I.R.C. s. 6 6 7 ( c ) , as amended by Tax R e f o r m A c t o f P u b . L. No. 9 4 - 4 5 5 , s . 7 0 1 ( a ) ( 1 ) , 90 S t a t . 1520.  paragraph  s.  paid  Canadian  222  (1956),  trust;  is ultimately  trusts essentially for  c.  consolidation  immediately  increased  a d i s c r e t i o n a r y power  Revenue t o  Under  same  163(a)  (c)  added  by  1976,  97 settlor B.  and b e n e f i c i a r i e s .  Distributable  Net  No  purpose test  is required.  2 2 5  Income 9 7 fi  Distributable context cept  n e t income  of current  distributions  of  mentioned e a r l i e r income.  unique to the t a x a t i o n of t r u s t s  cable  to distributions  Its  purpose i s twofold.  the  amount o f  and  correspondingly That  ciary.  Secondly, of  Distributable  are  necessary  225  Income  and  and complex  i t provides  appli-  trusts.  a ceiling  c a n be d e d u c t e d f r o m t r u s t  i s ,i t limits  among t h e v a r i o u s  I t i s a tax con-  and e s t a t e s  simple  i n the  i n t h e income o f a  on  income  benefici-  • •  t h e amount t a x a b l e  i t allows  income between  the trust  Firstly,  included  •  ary -  types  from both  income t h a t  •  771  of  ° was  to the b e n e f i -  f o r the a l l o c a t i o n  the trust  and  of  various  t h e b e n e f i c i a r y and  beneficiaries. n e t income  wi,th c e r t a i n as one  is essentially  taxable  modifications; modifications which  of the functions of d i s t r i b u t a b l e  Tax A c t , s.  income  net  104(2).  226 D e f i n e d i n I . R . C . s . 6 4 3 ( a ) , a s a m e n d e d b y R e v e n u e A c t o f 1 9 6 2 , P u b . L. No. 8 7 - 8 3 4 , s . 7, 76 S t a t . 9 6 0 ; T a x R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 94-455, s s . 1 0 1 3 ( c ) ( 1 ) , 1 0 1 3 ( c ) ( 2 ) , 90 S t a t . 1 5 2 0 ; C r u d e O i l W i n d f a l l P r o f i t T a x A c t o f 1 9 8 0 , P u b . L. No. 9 6 - 2 2 3 , s . 4 0 4 ( b ) ( 4 ) , 94 S t a t . 2 2 9 ; E c o n o m i c R e c o v e r y T a x A c t o f 1 9 8 1 , P u b . L. No. 9 7 - 3 4 , s s . 3 0 1 ( b ) ( 4 ) , 3 0 1 ( b ) ( 6 ) ( B ) , 3 0 2 ( b ) ( 1 ) , 95 S t a t . 1 7 2 ; T e c h n i c a l C o r r e c t i o n s A c t o f 1 9 8 2 , P u b . L. N o . 97-948, s. 1 0 3 ( a ) ( 3 ) . 227  S e e M o t t v . U n i t e d S t a t e s , 4 6 2 F. 2 d 5 1 2 ( C t . C l . ) ; c e r t , d e n i e d 4 0 9 U.S. 1 1 0 8 , 34 L. E d . 2 d 6 8 8 , S. C t . 9 0 2 .  98 income It  i s to determine  i s taxable  tributions  income  the character  as d e t e r m i n e d  to b e n e f i c i a r i e s  and  2 2 8  9 9  lieu  of the personal  ital  gains  and  exemption;  to the extent  likewise  determining  capital  income  before  distributed.  deductions  for dis-  f o r t h e amount a l l o w e d  with  3  the exclusion of  are allocated  to  l o s s e s except  to the extent  used i n  gains  in  q  they  net c a p i t a l  that  of  distributed  to the  cap-  corpus  benefici-  9 O Q  a r y r  J  and w i t h  U  from t a x a b l e a  the i n c l u s i o n  income, namely  foreign t r u s t , The  although trust to  notion  2  3  2  o f amounts  tax-exempt  and e x c l u d e d  of d i s t r i b u t a b l e  more complex  than  income d e t e r m i n e d  beneficiaries,  interest,  dividends net  or  income  deductions  included  2  excluded 3  1  income  interest.  i s similar  the Canadian concept  before  amounts  normally  2  3  of 3  to  of a n o t i o n a l  f o r amounts  payable  i n the incomes of p r e -  228  I.R.C.  s.  643(a)(1).  229  I.R.C.  s.  643(a)(2).  230  I.R.C.  s.  643(a)(3).  231  I.R.C.  s.  643(a)(5).  232  I.R.C. s. 6 4 3 ( a ) ( 6 ) , P u b . L. No. 8 7 - 8 3 4 , o f 1 9 7 6 , P u b . L . No. 90 S t a t . 1 5 2 0 .  233  I.R.C. s. 6 4 3 ( a ) ( 7 ) , a s amended b y C r u d e O i l W i n d f a l l P r o f i t T a x A c t o f 1 9 8 0 , P u b . L . No. 9 6 - 2 2 3 , s . 4 0 4 ( b ) ( 4 ) , 94 S t a t . 2 2 9 ; E c o n o m i c R e c o v e r y T a x A c t o f 1 9 8 1 , P u b . L . No. 9 7 - 3 4 , s s . 3 0 1 ( b ) ( 4 ) , 3 0 1 ( b ) ( 6 ) ( B ) , 95 S t a t . 1 7 2 ; T e c h n i c a l C o r r e c t i o n s A c t o f 1 9 8 2 , Pub. L. No. 9 7 - 4 4 8 , s. 1 0 3 ( a ) ( 3 ) .  as amended by Revenue A c t o f 1962, s . 7, 76 S t a t . 9 6 0 ; T a x R e f o r m A c t 94-455, s s . 1 0 1 3 ( c ) ( 1 ) , 1013(c)(2),  99  ferred  beneficiaries,  without  inclusion  of  and  with  capital  respect  gains  to  spouse  arising  trusts,  from  certain  OTA  deemed d i s p o s i t i o n s . gains  With  e x c l u s i o n , however,  income c o n c e p t  i n Canadian  amounts d e d u c t i b l e t o ary's of  income.  income  income, tative C.  the he  distributable  l i m i t a t i o n on  these  primary  law  and  of  amounts of  net  and  trust  or  which which  shares  this  trust  a ceiling  included  separate  capital  f u n c t i o n of  i s to provide  trust  the  i n the  on  benefici-  particular  types  provisions although  income, does p r o v i d e  amounts. -^ 2  trust  a quanti-  5  Trusts  simple  does so  to  under  except ion of  trust,  as  mentioned  above,  trustee i s required to d i s t r i b u t e  pus, a  like  the  allocation  i s covered  Simple A  The  the  the  not, has  w h i c h m a k e s no  J Q  no  charitable  is discretionary  i s a simple  trust.  i s one  current  under  income,  distributions  beneficiaries. -^ 2  not  as  Note  trusts  are  corthat  but  as  complex  234  Income Tax  Act,  ss.  104(6),  235  Income Tax  Act,  ss.  104(16)-(22 ) ,  236  Whether t r u s t income i s d i s t r i b u t a b l e depends upon the terms of the t r u s t instrument: F r i c k v . D r i s c o l l , 129 F. 2 d 148 ( 3 d C i r . 1 9 4 2 ) ; i n c o m e i s c u r r e n t l y d i s t r i b u t a b l e when t h e t e r m s o f t h e t r u s t i n s t r u m e n t d i r e c t t h e t r u s t e e s t o p e r i o d i c a l l y pay o r c r e d i t income t o the b e n e f i ciaries: U n i t e d S t a t e s v . H i g g i n s o n , 238 F. 2 d 4 3 9 ( 1 s t C i r . 1956).  237  I.R.C. s.  651(a).  (8),  7  whether  from  to d i s t r i b u t i o n  A l l other  which  (13). (26)-(28).  100 trusts.  An o t h e r w i s e  mination  year  of the  corpus. trust's  2  3  8  trust  being  i s allowed  The d e d u c t i o n  distributable  will  the trust  classification  amounts o f c u r r e n t  ary.  trust  n o t be s o i n i t s t e r -  s i n c e on t e r m i n a t i o n i t w i l l  For that year  A simple for  simple  make  i s t r e a t e d as complex,  made o n a y e a r l y  a deduction  from  income d i s t r i b u t a b l e i s limited  n e t income.  distributions  basis.  trust  to a  income  benefici-  t o t h e amount o f t h e t r u s t ' s  No d e d u c t i o n  amounts n o t i n c l u d e d i n t h e g r o s s  may b e t a k e n f o r  income o f t h e t r u s t , f o r  9 Tq  example, The his  t a x exempt beneficiary  income,  currently. or  not,  interest.  2 4  that ^  must  J  ^  include the corresponding  i s , t h e amount  He m u s t  the test  r e q u i r e d t o be  distributed  i n c l u d e t h e income whether  not being  actual  receipt  of a present  right  t o r e c e i v e t h e income.  included  i s the beneficiary's  income.  If distributions  proportionate  exceed  Ibid.  239  I.R.C. s.  651(b).  240  I.R.C. s.  652(a).  241  Ibid.  A  9  The amount  of distributable  distributable  amount o f e a c h b e n e f i c i a r y ' s  238  242  share  distributed  but the exisO  tence  amount i n  net  net income,  distribution i s  H i g g i n s o n v . U n i t e d S t a t e s , 1 3 7 F. S u p p . 2 4 0 ( D . M a s s . 1 9 5 6 ) , a f f ' d 2 3 8 F. 2 d 4 3 9 ( 1 s t C i r . 1 9 5 6 ) .  a  101 included The  i n h i s income. components  their  character  tions  applicable  of  *  income making  i n t h e hands t o them.  among t h e b e n e f i c i a r i e s cally  provides  No current dealt D.  distributions  trusts  trust  may  the t r u s t  retain  as do  deduc-  proportionately  instrument  specifi-  2 4 4  appears here since  that  subject  under the f o l l o w i n g  rules  that  from p r o p e r t y ,  s.  have  serve  although  income  charitable  of  is  heading.  are complex  gross  First,  income does  distributions  not  since  The  2 4 5  and a g i f t  income component  com-  t h e Code  include  of p r o p e r t y ,  from such a g i f t  the (taxable)  make  trusts.  beneficiaries.  two p u r p o s e s .  bequest or devise  arising 2 4 6  trusts  a c c u m u l a t e i n c o m e , may  o r may  of a g i f t ,  include  are allocated  which are not simple  from corpus,  value  amount  Trusts  Trusts  provides  unless  i n more d e t a i l  Complex  plex  this  of the b e n e f i c i a r y ,  They  otherwise.  up  c o m p a r i s o n o f t h e C a n a d i a n and A m e r i c a n t r e a t m e n t  with  Complex  J  the  i t does of  income  must be  sep-  243  I.R.C.  244  I.R.C. s. 6 5 2 ( b ) , a s amended by Tax R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s . 1 9 0 6 ( b ) ( 1 3 ) ( A ) , 90 S t a t . 1 5 2 0 .  245  I.R.C.  246  I.R.C. s. 1 0 2 ( b ) . Note t h a t amounts i n c l u d e d g r o s s income o f a b e n e f i c i a r y under t h e t r u s t  s.  652(a).  102(a). i n the provisions  102 arated  from  the (non-taxable) property  The  manner  The  second purpose of t h e complex  the  t a x avoidance  of  tax.  trusts in  i n which  nature,  tion  from  i s done  resulting  The r u l e s vary  this  from  governing  depending  component o f a  i s considered trust  on whether  the latter  o r postponement  from  complex  the d i s t r i b u t i o n  being  below.  i s to counter  the shifting  i s an a c c u m u l a t i o n d i s t r i b u t i o n , corpus;  further  rules  distributions  gift.  i s current  or i s a distribu-  received  tax-free  as would  9 4. 7 have been  a direct  Current tier ple  First  are those  which a r e required distributions required  of the corpus.  distributions  i n nature. trusts,  gift  tier  t o be d i s t r i b u t e d  of current  ered the  current  income  of 247  remaining  —  from corpus.  Second  only after  paid, of  income, d i s t r i b u t i o n s  tier  t o the extent deductions  t h e Code a r e t r e a t e d  The e x p r e s s i o n " t a x - f r e e " income t a x consequences.  i s used  in a  sim-  year  Second credited  tier or  discretionary of accumulated  will  as such  component be  consid-  i n t h e hands o f  of distributable  have been  as g i f t s  made b y  t h e income  distributions taxable  o r second  The d i s t i n c t i o n i s  of taxing  -- a n d t h e r e f o r e  beneficiary  also  a n d may c o n s i s t  the viewpoint  distributions.  tier  currently.  amounts p r o p e r l y  income, o r d i s t r i b u t i o n s  of  distributions,  t o be d i s t r i b u t e d ,  from  first  amounts o f income a r i s i n g  are other  distributions  important  may b e e i t h e r  taken  o f income here  for first  from  t o mean  net  property. free  of  103 tier  distributions.  vents  a taxpayer from  corpus that  and  essence, the  therefore  a l lcurrent  The  by  accumulated The it  tier  accumulated  ital.  s e p a r a t e and treated  t o t a x on  as  trust  be  i s from fact  to  trace  first  no  248  I.R.C. s.  249  I.R.C. s. 6 6 3 ( c ) , as Pub. L. No. 9 4 - 4 5 5 ,  2  4  ^  This rule  shares" of  As  is  allows the  bene-  f o r the purpose a result,  income  of  there-  a corpus d i s t r i b u t i o n  will  i s being  i n Canadian  p l a c e t h e r e i s no  corpus  place,  i n a y e a r where not  rule.  income. of  system  o r more b e n e f i c i a r i e s  equivalent  law accumulated  pus  the t i e r  beneficiary.  In the  In the second  by  i t s i m p l y because  has  from  caused  separate trusts net  system  income  pre-  It i s , in  p r e c l u d e s the need  independent  in receipt  f o r another  required.  as under  and  i s f o r two  distributable  subject  a distribution  been e x h a u s t e d .  the separate share  t o be  system  distribution.  a beneficiary  n o t be  rule,  trust  "substantially  calculating  that  not  h a r d s h i p which might  alleviated  fore,  income has  each  where a complex  ficiaries  claiming  the t i e r  non-taxable notwithstanding the  an o r d e r i n g  source of  In o t h e r words,  2 4 8  an  since  need  law nor  to separate  f o r tax purposes  income alleged  a l l i n c o m e was  i s an  as  well  to  cap-  from  cor-  accretion  distribution distributed  would  not  662(a)(1). amended by Tax R e f o r m s. 1 9 0 6 ( b ) ( 1 3 ) ( A ) .  is  Act of  1976,  104 give  rise  to  tax  avoidance  f o r two  reasons.  undistributed  income would,  at  be  t a x a t i o n at  r a t e of  subject  alent and  at present  this  point  treatment tion  to  of  would  to  the  relates  highest to  accumulated  not  accumulation  a  least  the  distribution,  approximately  conceptual the  a tax  trust,  50%,  rate.  equiv-  Secondly,  difference in  a l l e g e d corpus  subsequently  s i n c e such  the  inter vivos  individual  income,  have a v o i d e d  i n an  Firstly,  a tax  distribu-  levied  i s not  the  on  an  imposed  in  Canada.  Returning sions ties  governing to  trusts to  be  the are  to  mechanics  treatment allowed  complex  of  the  trusts  allowed  credited,  ond  tier  distributions.  net  i n c o m e . N o  or  are  the  distributions  m u s t be  trust.  distributable from  I.R.C. s s . 6 6 1 ( a ) ( 1 ) , 6 6 1 ( a ) ( 2 ) , and F i s c a l R e s p o n s i b i l i t y A c t of 97-248, s. 3 0 2 ( b ) ( 2 ) .  251  I.R.C. s.  661(c).  similaricomplex  income  required  distributions. for  by  5  1  amounts  not  Thus where  net  sec-  distributable  f o r amounts 2  In  distributed,  accumulated  250  provi-  L i k e them,  limited  income of  tier  can  a deduction  i s allowed  equal  see  tier  deduction  distributions  one  r e q u i r e d t o be  Both  tier  trust  f o r amounts of  first  are  complex  trusts.  currently,  paid,  in gross  simple  a deduction  properly  included  of  current distributions,  distributed  addition,  the  income,  first  any  income o r  as amended by 1 9 8 2 , P u b . L.  Tax No.  second corpus  Equity  105 and  are  dealt  with  distributions income, taxed  the  on  are  them as  income,  i n excess of  tributions.  As  in  currently income. prising  2  5  their or  As  bequests are  ments are  of  in  of of  tier  limit  the  distributable distributions Where s e c o n d  remaining  2  are  5  Second  2  taxed  as  are tier  distributable  such d i s t r i b u t i o n s  limit.  the  paid  properly  case w i t h  distributions  the a  previous  incomes amounts  i s the  in  limit  the  that  otherwise  current  character  the  to  second  tier  tier  are  taxed  distribu-  accumulation  dis-  0  indicated  include  which  up  exhaust  distributions.  beneficiaries  proportionately, tions  of  current  exceed  the  Where f i r s t  i n s u f f i c i e n t to  beneficiaries  distributions net  accordingly.  hands of  specific a l l at  neither  the  sum  of  once or  required  to  paragraph, required  paid,  simple from  up  beneficiaries  to to  distributed  distributable  trusts, complex  be  the  income  trusts 2 5 4  money o r  specific  i n no be  of  more t h a n  deducted  by  Gifts  its  or property  three the  com-  retains  beneficiary.  net  instal-  trust  nor  252  I . R . C . s.  662(a)(2).  253  I . R . C . s. 6 6 5 ( b ) , a s a m e n d e d b y R e v e n u e A c t o f 1 9 6 2 , Pub. L. No. 8 7 - 8 3 4 , s . 7, 76 S t a t . 9 6 0 ; Tax R e f o r m A c t of 1969, Pub. L . No. 9 1 - 1 7 2 , s. 3 3 1 ( a ) , ( d ) ( 2 ) ( A ) , 83 Stat. 487; Tax R e f o r m A c t o f 1976, Pub. L. No. 9 4 - 4 5 5 , s. 7 0 1 ( b ) , ( c ) , 90 S t a t . 1520.  254  I.R.C. s. 6 6 1 ( b ) , as Pub. L. No. 94-455,  amended by Tax R e f o r m A c t o f s . 1 9 0 6 ( b ) ( 1 3 ) ( A ) , 90 S t a t .  1976, 1520.  106 included  i n the beneficiary's  With  the exception  adian  treatment  lar.  A deduction  made  of current i s made  he i s i n r e c e i p t  rules  they  are broader  apply  tion,  between  those  as i s t h e case  provisions  tively  Accumulation  is  less  under American  i n that  i n the legis-  difference  i n their  law, provisions  treatment of  year.  2 5 6  accounting  which  as second  n e t income  collecrule.  tier  less  An e x c e p t i o n  i n excess of d i s t r i b u t a b l e  the trust  s.  i n a given  to a separate s e t  t h e "throwback"  c a n be d e f i n e d  i n excess of d i s t r i b u t a b l e  amounts  than  with  are subject  i s commonly c a l l e d  distributions  distributions  that  charac-  i n the d i s t r i b u -  The m a j o r  i s , of course,  t o t h e income  however,  included  simi-  inclusion  The A m e r i c a n  s p e c i f i c a l l y dealt i n Canada.  and an  entitled  the Canadian,  distributions  make u p w h a t  tributions  i sessentially  income,  of i tor not.  and Can-  income.  Accumulation  tier  system, American  trust  o f income  t h e two s y s t e m s  accumulated  2 5 5  distributions from  than  t o a l l types  not merely  lation  of  of the t i e r  i n t h e income o f t h e b e n e f i c i a r y  whether ter  income.  dis-  first  to this  n e t income b u t  income a r e n o t c o n s i d e r e d t o  255  I.R.C.  663(a)(1).  256  I.R.C. s. 6 6 5 ( b ) , a s amended b y Revenue A c t o f 1 9 6 2 , P u b . L. N o . 8 7 - 8 3 4 , s . 7, 76 S t a t . 9 6 0 ; T a x R e f o r m A c t o f 1969, P u b . L. No. 9 1 - 1 7 2 , s . 3 3 1 ( a ) , ( d ) ( 2 ) ( A ) , 83 S t a t . 487; T a x R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s . 7 0 1 ( b ) , ( c ) , 90 S t a t . 1 5 2 0 .  107  be a c c u m u l a t i o n E.  distributions.  Excess D i s t r i b u t i o n s : The  purpose  resulting  r a t e s and  i t s subsequent  income y e a r .  Throwback Rule  of the throwback r u l e  avoidance  low  The  from the a c c u m u l a t i o n of  The  2 5 8  distribution rule  i s to treat  i s not s t r i c t l y  the f a c t  i n which  26(  -  )  i t was  not a c c u m u l a t i o n ,  I t a l s o appears  J J  and  i s determined as  trust in a  in general distribution  accumulated.  f o r payment o f t a x a r i s e s  t a x p a y a b l e on d i s t r i b u t i o n method.  i t s effect,  tax  t r u s t mak-  the c a s e , however, i s apparent  that l i a b i l i t y  of d i s t r i b u t i o n ,  to a b e n e f i c i a r y  t h e b e n e f i c i a r y as t h o u g h t h e  had b e e n made i n t h e y e a r this  and  the  income a t  i s a p p l i c a b l e t o any  i n g an a c c u m u l a t i o n d i s t r i b u t i o n terms,  i s to prevent  both  from  i n the  year  from the f a c t by an  That  that  averaging  i f , w i t h the e x c e p t i o n of t a x -  257  I.R.C. s.  665(b).  258  S t e v e n s , " A c c u m u l a t i o n T r u s t s and t h e Throwback R u l e " ( 1 9 7 1 ) , 49 T a x e s 8 7 6 , s t a t e s a t p . 878 t h a t "What s t a r t e d out as a p r o p o s a l t o d e a l w i t h t h e m u l t i p l e t r u s t p r o b lem, a problem w h i c h needed a l e g i s l a t i v e s o l u t i o n , developed into a comprehensive new s y s t e m f o r t a x i n g t r u s t s a n d t h e i r b e n e f i c i a r i e s w h i c h i n v o l v e s g r e a t complexity. "  259  I.R.C. s. 6 6 7 ( a ) , as P u b . L. No. 9 1 - 1 7 2 , A c t o f 1 9 7 6 , P u b . L. 90 S t a t . 1520.  260  I.R.C. s. 6 6 7 ( b ) ( 1 ) , as amended by Tax R e f o r m A c t 1 9 7 6 , P u b . L. No. 9 4 - 4 5 5 , s . 7 0 1 ( a ) ( 1 ) , 90 S t a t . R e v e n u e A c t o f 1 9 7 8 , P u b . L. No. 9 5 - 6 0 0 , s . 7 0 1 ( q ) ( 1 ) ( C ) , 92 S t a t . 2 7 6 3 .  amended by Tax R e f o r m A c t o f 1969, s . 3 3 1 ( a ) , 83 S t a t . 4 8 7 ; T a x R e f o r m No. 9 4 - 4 5 5 , s s . 7 0 1 ( a ) ( 1 ) , 1 0 1 4 ( a ) , of 1520;  108 exempt  interest,  mulation  distribution.  The of  two  application  things:  secondly, tributed over the  trust D  ^  with  deemed to  income  for preceding  factors  years.  net income an  I f the  the remainder i s set against  distribution,  income o f a l l p r e c e d i n g  in a  in that  taxa-  year  accumulation earliest  undistributed  i n t h e same  to the extent  by  income, and i s  income o f t h a t  years  income  preceding  distribution  income.  Undis-  accumulation  had u n d i s t r i b u t e d  a second t i e r  net  and  and t a x e s p a i d  are present,  exeeds u n d i s t r i b u t e d  accumulation  accu-  the existence  i s "thrown back" t o the e a r l i e s t  year,  t o an  distribution,  distributions  the extent of u n d i s t r i b u t e d  undistributed  upon  of d i s t r i b u t a b l e  income o f s u b s e q u e n t p r e c e d i n g An  depends  respect to distributable  t o have been  preceding  not apply  an a c c u m u l a t i o n  i n which the t r u s t  distribution  do  1  i s the excess  Where t h e s e  year  6  and s e c o n d t i e r  distribution ble  firstly,  income  2  of the rule  undistributed  first  year.  the character rules  that  manner.  2 6 3  i t exceeds  taxable years,  is a  261  I.R.C. s. 6 6 7 ( a ) , a s amended by Tax R e f o r m A c t o f 1 9 6 9 , P u b . L. No. 9 1 - 1 7 2 , s . 3 3 1 ( a ) , 83 S t a t . 4 8 7 ; T a x R e f o r m A c t o f 1 9 7 6 , P u b . L. No. 94-455, s s . 7 0 1 ( a ) ( 1 ) , 1014(a), 90 S t a t . 1 5 2 0 .  262  I.R.C. s. 6 6 5 ( a ) , a s amended by Tax R e f o r m A c t o f P u b . L . No. 9 1 - 1 7 2 , s . 3 3 1 ( a ) , 83 S t a t . 4 8 7 .  263  I.R.C. s. 6 6 6 ( a ) , a s amended b y R e v e n u e A c t o f 1 9 6 2 , P u b . L. No. 8 7 - 8 3 4 , s . 7, 76 S t a t . 9 6 0 ; T a x R e f o r m A c t o f 1 9 6 9 , P u b . L. No. 9 1 - 1 7 2 , s . 3 3 1 ( a ) , ( d ) ( 2 ) ( B ) , 83 S t a t . 487.  1969,  109 non-taxable income  corpus  i n the year  deemed d i s t r i b u t e d purpose ary  on  distribution. i n which  i t was a c c u m u l a t e d  by t h e t r u s t  of offsetting distribution.  Taxes p a i d by t h e t r u s t  2  6  are also  to the beneficiary  the t a x assessed  f o r the  against the benefici-  4  The c a l c u l a t i o n o f t h e t a x p a y a b l e by t h e b e n e f i c i a r y distribution  i s somewhat c o m p l e x .  steps describes  i t s operation.  The f o l l o w i n g  Firstly,  d e t e r m i n e s t h e number o f p r e c e d i n g  amount o f t h e d i s t r i b u t i o n ( p l u s number o f y e a r s .  income f o r t h o s e y e a r s . applicable prior inates  tax rate,  to the year  sequence o f  2 6 5  years  against  and d i v i d e s t h e  t a x e s deemed d i s t r i b u t e d )  This gives Secondly,  h i m an a v e r a g e i n order  he t a k e s t h e f i v e  increase  and l o w e s t  by of  to determine the  years  immediately  i n w h i c h t h e d i s t r i b u t i o n i s made a n d  the years of highest  on  the b e n e f i c i a r y  taxable  w h i c h t h e d i s t r i b u t i o n i s t o be a p p l i e d  that  on  taxable  elim-  income.  264  I.R.C. 6 6 6 ( b ) , ( c ) a s amended b y T a x R e f o r m A c t o f 1 9 6 9 , P u b . L. No. 9 1 - 1 7 2 , s . 3 3 1 ( a ) , 83 S t a t . 4 8 7 ; R e v e n u e A c t o f 1 9 7 8 , P u b . L. No. 9 5 - 6 0 0 , s . 4 2 1 ( d ) , 92 S t a t . 2 7 6 3 ; T e c h n i c a l C o r r e c t i o n s A c t o f 1 9 7 9 , P u b . L. No. 9 6 - 2 2 2 , s . 1 0 4 ( a ) ( 4 ) ( H ) ( v i ) , 94 S t a t . 1 9 4 .  265  I.R.C. s. 6 6 7 ( b ) ( 3 ) p r o v i d e s t h a t : " i f t h e amount o f t h e u n d i s t r i b u t e d n e t income deemed d i s t r i b u t e d i n a n y p r e c e d i n g t a x a b l e y e a r o f t h e t r u s t i s l e s s t h a n 25 p e r c e n t o f t h e amount o f t h e a c c u m u l a t i o n d i s t r i b u t i o n d i v i d e d b y t h e number o f p r e c e d i n g t a x a b l e y e a r s t o w h i c h t h e a c c u m u l a t i o n d i s t r i b u t i o n i s a l l o c a t e d under s e c t i o n 666(a), t h e number o f p r e c e d i n g t a x a b l e y e a r s o f t h e t r u s t w i t h r e s p e c t t o w h i c h an amount i s deemed d i s t r i b u t e d t o a b e n e f i c i a r y u n d e r s e c t i o n 6 6 6 ( a ) s h a l l be d e t e r m i n e d without regard t o such year."  110 Thirdly,  he a d d s t o t a x a b l e  three  years  mined  i n S t e p One.  increased of  increase  the average y e a r l y  years.  the average  years  determined reduced  respect tax paid  f o r each of the  increase i s done,  Fifthly,  This  income  determines  and f i n a l l y ,  total  by t h e amount o f t a x p a i d  t o t h e i n c o m e now d i s t r i b u t e d . and t a x owing  i s limited  i n other  words,  exceeds  t h e amount o w i n g  deter-  he c a l c u l a t e s t h e  amount o f t a x by t h e number o f i n S t e p One.  remaining  i n income as  to the additional  F o u r t h l y , he t h e n  income;  ary  this  i n tax per year.  plies  then  Once  tax attributable  the three  income  the average he  multi-  preceding  amount o f t a x i s  by t h e t r u s t 2 6 6  i n each  This  with  offsetting  to the tax payable  on  of trust  i f t h e amount p a i d by t h e t r u s t from  does not r e c e i v e a c r e d i t  the beneficiary, the beneficiwhich  c o u l d be a p p l i e d  against  to accumulation  distri-  income g e n e r a l l y . ° A number o f s p e c i a l butions,  rules apply  t h e f o l l o w i n g among t h e m .  income a c c u m u l a t e d he  i s under  an  accumulation  The d i s t r i b u t i o n  f o r a b e n e f i c i a r y before  twenty-one  years  distribution.  birth  and  o f age i s n o t c o n s i d e r e d Instead,  of while t o be  i t i s t r e a t e d as a  266  I.R.C. s. 6 6 7 ( b ) ( 1 ) , a s amended by Tax R e f o r m A c t o f 1976, P u b . L. N o . 9 4 - 4 5 5 , s . 7 0 1 ( a ) ( 1 ) , 90 S t a t . 1 5 2 0 ; R e v e n u e A c t o f 1 9 7 8 , P u b . L. No. 9 5 - 6 0 0 , s . 7 0 1 ( q ) ( 1 ) ( C ) , 92 S t a t . 2 7 6 3 .  267  I.R.C. s. 6 6 6 ( e ) , a s amended by Tax R e f o r m A c t o f 1976, Pub. L. N o . 9 4 - 4 5 5 , s . 7 0 1 ( a ) ( 2 ) , 90 S t a t . 1 5 2 0 .  Ill  n o n - t a x a b l e d i s t r i b u t i o n of with  the  ordering  penalizes  receives  more s u c h  trusts  third  any  and  income vides  the  tax  exceed  The  American  is  to  the  extent  occurs  only  income  the  i s taxed  hands.  The  receipt  of  third  rule  where  a  d i s t r i b u t i o n s from  three  amount of  by  i s not  tax  paid  permitted In  A de  aggregate of  of  accumulated  Canadian  that  i s doubly  either  ^ A  deals  to  be  effect,  minimus  or  the offset such  rule  pro-  a l l distributions  2 7 0  at  income.  both  taxed.  the  time trust  i s taxed In  the  income d i f f e r s  i n a number of  there  i n the  beneficiary the  the  2 6  rule  in that  beneficiary.  i m p o s e d on  once,  Another  trusts  taxation.  treatment  tax  income  the  where  from  the  trusts  double  $1000.  the  multiple  year,  by  law  and  trust,  to  American  substantially  tion  owing  2 6 8  distributions.  accumulation  additional  exception  does not  of  i n one  is subject an  ciary  multiple  beneficiaries  beneficiary  against  of  corpus.  on  the  trust  ways. and  the  i s overpayment  income  or  i n the  his  case of  the  law  taxa-  i s earned,  and  beneficiary's  election the  benefi-  by  Under Canadian the  Under  and  without  preferred  benefi-  268  I.R.C. s. 6 6 5 ( b ) as amended by R e v e n u e A c t o f 1962, Pub. L. No. 8 7 - 8 3 4 , s . 7, 76 S t a t . 9 6 0 ; T a x R e f o r m A c t of 1969, Pub. L. No. 9 1 - 1 7 2 , s. 3 3 1 ( a ) , ( d ) ( 2 ) ( A ) , 83 Stat. 487; Tax R e f o r m A c t 1976, Pub. L. No. 9 4 - 4 5 5 , s. 7 0 1 ( b ) , ( c ) , 90 S t a t . 1520.  269  I.R.C. s.  270  I.R.C. s. 6 6 7 ( c ) , as amended by Tax R e f o r m A c t o f Pub. L. No. 9 4 - 4 5 5 , s . 7 0 1 ( a ) ( 1 ) , 90 S t a t . 1520.  667(b)(5). 1976,  112 ciary ity  e l e c t i o n under Canadian  i s determined  current  taxable  some e x t e n t which  the  i s not  of  most the  respect  until  there  two  apparent.  to  and  are  the  graduated marginal testamentary to m u l t i p l e  differences  ones.  of  United  States  dation  test,  such  the  t r u s t s may  two  least  at  the  differ-  treatment  law,  of  being  wider  scope  with  a p p l i c a t i o n of  a l l trusts, taken  not  with  jurisdictions.  a more n a r r o w l y incur  to during  substantial  the  the  is  distribution.  include  approach  i n the  in addition to  of  the  that  conceptually  taxation to  Finally,  trusts differs  and  in  years  discharging  and  liabil-  liability  t a x a t i o n , the  distributions, rates  law,  year  r u l e s under American  current  i s discharged  a number o f  systems of  Other  beneficiary's  to preceding  but  income b o t h p r a c t i c a l l y  character  respect  with  required  the  to  accumulated,  conclusion,  accumulated  respect  the  Under American  determined  ences between  the  year.  i n c o m e was  liability  In  with  law,  defined  penalty  of  just  respect In  the  consoli-  double  tax-  ation.  III.  B r i t i s h Taxation Unlike  law  governing  not  t o be  the  case  the  found  of Trust  Income  i n Canada and  t a x a t i o n of  i n the  United  t r u s t s i n the  c o l l e c t e d i n one  part  of  the  States,  United  the  Kingdom  income t a x  is  leg-  113 lslation. judicial  '  x  I t spiecemeal  d e c i s i o n s have  nature  and i t s heavy  r e l i a n c e on  l e d one w r i t e r t o d e s c r i b e  i t as a  979  "common l a w " a r e a system;  of taxation.  a system which  In t h i s  d i a n method o f t a x i n g e i t h e r Taxation  The  person  Schedules is  taxed  ment .  2  7  i s liable  as a g e n e r a l  entitled  receives  a two-tier  i tdiffers  the trust  from  t h e Cana-  or the beneficiary.  of the Trustee  trustee  beneficiary  I t i s by nature  i m p o s e s some t a x o n t h e t r u s t e e a n d  some o n t h e b e n e f i c i a r y .  A.  7 / 1  income  f o r t a x n o t a s an a g e n t  rule  but simply  because  t o and i n r e c e i p t o f i n c o m e . from  the various  sources  2 7 3  either  by d e d u c t i o n  at source  he i s t h e Thus  enumerated  a n d C a s e s o f t h e Income and C o r p o r a t e  f o rt h e  he i n the  Taxes A c t and  o r by d i r e c t  assess-  4  271  A l t h o u g h P a r t XVI o f t h e Income and C o r p o r a t i o n T a x e s A c t 1 9 7 0 , 1 9 7 0 , c . 10 ( U . K . ) , i s e n t i t l e d " S e t t l e m e n t s " i t deals not w i t h the t a x a t i o n of t r u s t s per se but with the o p e r a t i o n o f a t t r i b u t i o n r u l e s a p p l i c a b l e t o t r u s t s and to settlements of a l l kinds.  272  P a t r i c k C. S o a r e s , T r u s t s a n d T a x P l a n n i n g , Oyez P u b l i s h i n g L t d . 1979), p. 16.  273  Williams  274  Re S c h e d u l e A i n c o m e t a x s e e I n c o m e a n d C o r p o r a t e T a x e s A c t 1970, 1970, c. 10, s. 6 8 ( 1 ) ; r e S c h e d u l e B see s. 9 2 ( 1 ) ; r e S c h e d u l e C see 9 4 ( 1 ) ; r e S c h e d u l e D s e e s. 114; and r e S c h e d u l e F s e e F i n a n c e A c t 1972, 1972, c. 4 1 , s. 86.  v. Singer,  [1921]  1 A . C . 65  (London:  (H.L.).  114 Under subject One  to  such  ary  these  income  i s not  second  held  tax but  through  trustee The  circumstances  exception  -trustee, passes  certain  the  taxed,  i s not  where the  circumstances  persons  receiving  levying  tax  The  on  an  entity  between trust  tax  even  the  i s to  two  2  7  trust  as  his  followed  law,  well  have  a separate  some e x t e n t  the the  as  an  275  T a x e s Management A c t 1970, Wi11iams v. S i n g e r , s u p r a ,  1970, note  276  I n l a n d Revenue C o m m i s s i o n e r s v. S.C. 439.  tax,  for  his  recognize further  as  particu-  are  ignored.  conceptually the  trust  individual,  Reid's  as  distinction  under Canadian  c . 9, 273.  the  same e f f e c t  individual,  i s that although taxed  applies  where  circumstances  A  be  t r u s t e e s as  i n Canada, d i f f e r s  f o r tax purposes.  2 7 5  benefici-  from  merely  the  assessment.  t a x on  w h i c h does not  systems  not  not  exception  exempt  never  income.  where the  This  6  the  a case,  t r u s t e e may  nature  trustees' personal  course,  from B r i t i s h  l e v y i n g of  i n c o m e may  the  s i n c e the  latter  the  preclude  In such  exists  for t a x .  rule.  b e n e f i c i a r y and  the  tax  be  general  r e c e i v e d the  under which  liable  the  not  a u t h o r i z a t i o n of  trustee.  having  payment of  to  the  i s a non-resident,  In p r a c t i c e ,  larly  never  the  the  to  b e n e f i c i a r y i s by  e x a m p l e , w h e r e he financial  when, on  hands of  trustee will  exceptions  is paid directly  f o r the  himself  only  exists  circumstance  liable  are  the  ss.  a  13,  law  a  deduction  76  Trustees,  (U.K.); [1929]  115 is  permitted  f o r amounts o f  No  deduction  i s afforded  eficiary  receives  income p a y a b l e  under B r i t i s h  some c r e d i t  to a beneficiary.  law; i n s t e a d ,  f o r the tax paid  by  the ben-  the  trus-  tee .  Under applied:  British basic  investment rates cussed  1.  rate,  income  to trust  income  t a x law, three  higher  surcharge.  income  rate, The  rates  o f t a x may  and a d d i t i o n a l r a t e applicability  i n t h e hands  of  of the trustee  be  or  these is dis-  below.  The  General  A trustee  Rule:  Liability  i s not considered  for Basic t o be  an  Rate  Tax  individual  for tax  977 purposes tain  although  he  i s considered  consequences f o l l o w  liable  for basic  sources,  he  t a x on  i s not subject  nor,  as a g e n e r a l  The  applicability  cussed  rate  rule,  1983-84 t a x a t i o n 2 7 8  this.  to higher  i s he  year  Higher  Basic  and a p p l i e s  rate  Cer-  the trustee  arising  rate  subject  rate  a person.  Although  t h e income  of a d d i t i o n a l rate  f u r t h e r below.  L14,600.  from  t o be  t a x on  from  is  various  that  income  to additional rate tax. tax to trustees  t a x i s s e t a t 30% t o income  not  tax c o n s t i t u t e s a set of  is disf o r the  i n excess  of  increasing  277 A l t h o u g h t h e r e i s n o e x p r e s s a u t h o r i t y f o r t h i s p o i n t , i t a p p e a r s t o be g e n e r a l l y a c c e p t e d , s e e : Farrand, "Convey a n c e r ' s N o t e b o o k " ( 1 9 7 7 ) , 4 1 C o n v e y . 4. 278  Finance  ( N o . 2) A c t 1 9 8 3 ,  1983,  c. 49, s.  1  (U.K.).  116 rates  of tax corresponding  effect,  a graduated marginal  individual with  disentitles  respect  The  to trust  separate  reflected  tax  payable  the  personal  (additional  of course,  higher  tax  l a w i s made  taxed rate  279  that  tax l i a b i l i t y  and  rates  neither  on  h a s no  of tax.  8  Not b e i n g  an  reliefs  f o r tax purposes i s  are relevant  trust  income.  investment  is  i t distinguish  and  inter  vivos  the  Additionally, unaffected. surcharge  between  not found  trusts.  personal  i n assessing  income  i n Canadian t a x law, however,  basic  in British  the d i s t i n c t i o n The  to B r i t i s h trusts,  latter are on  a  flat  0  F o r t h e 1983-84 part  ^  the b e n e f i c i a r y ' s  A distinction  i n a manner more s i m i l a r 2  2 7  t o any p e r s o n a l  of the trustee  t a x ) nor does  testamentary  basis.  system.  of the trustee  the trustee  rate  bands of income; i n  income.  nor the t r u s t e e ' s  by  Canada,  rate  the trustee  status  i n the fact  circumstances  between  to increasing  year,  higher  of excess over -  the the the the the  rate  L14,600  f i r s t L2600 next L4600 next L7100 next L7100 remainder  t a x i s s e t as  follows:  higher  rate  40% 45% 50% 55% 60%  280 A l t h o u g h i t s h o u l d b e n o t e d t h a t t h e C a n a d i a n f l a t r a t e of a p p r o x i m a t e l y 50% i s a minimum and i s n o t a p p l i c a b l e i f t h e income o f t h e t r u s t i s s u c h t h a t t h e t r u s t ' s marg i n a l r a t e exceeds 50%: Income Tax A c t , s. 122.  117  2.  A c c u m u l a t i o n and D i s c r e t i o n a r y A d d i t i o n a l Rate Tax Not  liable a  being  for additional rate  result,  with  only  rate  accumulated  ther  tax could  1973  remedied rate  trusts. -*2 8  assessed  power. from  not  originally  t a x , nor f o r higher rate  i n that  tax.  or a discretionary  such  useful  i n c o m e was hands.  be c o m p l e t e l y a v o i d e d . this  s i t u a t i o n somewhat applied  against  income  to both  subject  Where  income  Not b e i n g  by p r o v i d i n g these  an i n d i v i d u a l ,  that  addi-  types of t a x i s thus  t r u s t s whether that  or i s d i s t r i b u t e d pursuant  fur-  The F i n a n c e A c t o f  and a d d i t i o n a l r a t e  of such  As  trust  and u l t i m a t e l y d i s t r i b u t e d as c a p i t a l ,  The c o m b i n e d b a s i c  claiming  was  tax i n the trustee's  t a x o f 15%  accumulated  Liability for  a power o f a c c u m u l a t i o n p r o v i d e d a  f o r tax avoidance  to basic  tional  a trustee  a trust f o r accumulation  or without  vehicle  was  an i n d i v i d u a l ,  Trusts:  income i s  to a discretionary  the trustee  i s precluded  t h e s u r c h a r g e - f r e e band o f income  available to  TOT  individuals. paid  during  would income  For this the period  have been p a i d  reason,  t h e o v e r a l l amount o f t a x  o f a c c u m u l a t i o n may  exceed  that  b y a b e n e f i c i a r y h a d he r e c e i v e d  which the  directly.  281  Finance  A c t 1973,  1973,  c . 51,  s . 16  (U.K.).  282  F o r t h e 1983-84 y e a r , t h e r e i s n o a d d i t i o n a l r a t e t a x ( t h a t i s , i n v e s t m e n t income s u r c h a r g e ) on i n v e s t m e n t i n c o m e n o t e x c e e d i n g L7100: F i n a n c e ( N o . 2) A c t 1983, 1983, c . 49, s . 1 ( U . K . ) .  118  The  addition  o f t h e 15% investment  complicated  by t h e f a c t  to  income  t h e same  treated XVI  that  surcharge i s  i t i s not necessarily  as i s the b a s i c  as the s e t t l o r ' s under  of the Act i s not subject  income  rate  tax.  applicable  Income  which i s  the a t t r i b u t i o n rules to additional  rate  of  Part  tax i n the  TOO  hands is,  of the trustee.  before  eficiary  this  being  he r e c e i v e s  income  on i n v e s t m e n t 9  with  basic  rate  beneficiary's cussed  tax.  credit  °  The  O  income  as that Other  i tarises  t o which right  an  income  that  infant  falls  within  of the beneficiary exceptions deal  t r u s t s and p e n s i o n t r u s t s . i s that  —  as t h e income o f a ben-  and i n d e f e a s i b l e  i tor not.  limitation  w h i c h when  i s treated  treated  of charitable  A further charged  excluded.  has a v e s t e d  exclusion,  whether the  d i s t r i b u t i o n --  i s also  beneficiary  Income  additional  rate  net of expenses,  2  with 8  5  taxi s  not the case  pc D  The r e s u l t a n t  f o r tax paid  complications  by t h e t r u s t e e  f o rthe  are dis-  below.  283  F i n a n c e A c t 1973, 1973, c. 51, s.  16(2)(b).  284  Ibid.  285  F i n a n c e A c t 1973, 1973, c. 51, s. 1 6 ( 2 ) ( c )  (U.K.).  286  F i n a n c e A c t 1973, 1973, c. 51, s. 1 6 ( 2 ) ( d )  (U.K.).  119 As trusts adian of  mentioned are not  law.  singled  of  Combined Rate  levied  this point on  out  taxation  i s a c c u m u l a t i n g and election  Adjustments discussion  i s taxed  F u r t h e r t a x may  payment  to a beneficiary; which  On  not  under  the  i n the  Discretionary  has  been  Can-  subject trust  at  be  Distributions  l i m i t e d to the  f o r the year during  arose.  but  accumulation  50%.  the trustee  beneficiary  and  for additional  beneficiary  a minimum r a t e  To  discretionary  Income w h i c h  a preferred  3.  above,  which  a s s e s s e d where the a payment w h i c h  would  not  be  so  the  tax  income  trustee  makes  i s income of  i f the payment  a  the  had  not  9 P. 7  b e e n made. ° tax  2  8  8  tax arises  i f the combined  i n the year of d i s t r i b u t i o n exceeds  applicable The the  This further  net  to the year  i n which  the  income  the combined  appropriately a combined  remaining after grossed-up  rate  of  a d i s t r i b u t i o n of  45%,  2 8 9  The  sum  t a x from  In o t h e r words,  a d i s t r i b u t i o n o f L550  L1000.  deducted  rate  i s treated  the deduction of  amount.  of  arose.  amount d i s t r i b u t e d t o t h e b e n e f i c i a r y amount  rate  as an  assuming  i s treated  i s both  treated  as as  287  F i n a n c e A c t 1 9 7 3 , 1 9 7 3 , c . 5 1 , s . 17 ( U . K . ) . In other words, t h i s f u r t h e r t a x i s not a p p l i c a b l e t o a payment w h i c h i s r e c e i v e d by a b e n e f i c i a r y as c a p i t a l , n o r t o an i n c o m e p a y m e n t w h i c h was n o t d i s c r e t i o n a r y .  288  That  289  Finance Act  i s , basic  and  1973,  additional 1973,  c.  51,  rate  tax.  s.  17(1),  (2)  (U.K.).  120 paid The  by t h e b e n e f i c i a r y ^ 2  trustee  paid a  assessed  i n the year  out  rather  B.  i n the year  2  than  as  Taxation Subject  No p r o v i s i o n paid  ^  x  already i s made f o r  exceeds  that  however.  i s made  i n which  f o r reassessA discre-  t h e income  and t h e r e f o r e  i n the trust.  2 <  arises,  taxable  in his  A d i s c r e t i o n a r y payment  i s presumably  received  made  by t h e bene-  c a p i t a l . ^ 2  of the Beneficiary to the exceptions  where t h e t r u s t e e beneficiary  i n the year  income  taxes  of distribution.  to the beneficiary  of accumulated  ficiary  2  of distribution,  p a y m e n t made  "payable"  hands  i tarose. ^  amount,  l a w , no p r o v i s i o n  ment o f t h e t r u s t e e  is  this  by t h e t r u s t e e .  o f t a x where t h e t a x o r i g i n a l l y  Under Canadian  tionary  and as owing  may s e t o f f a g a i n s t  o n t h e i n c o m e when  refund  0  never  i s exempt  referred  receives  from  tax,  t o above,  namely  t h e income and where t h e income  but also  i s taxed  not only i n  the  hands o f t h e t r u s t e e  i n t h e hands o f t h e b e n e f i -  290  Finance  A c t 1973, 1973, c. 5 1 , s. 1 7 ( 2 ) ( a )  (U.K.).  291  Finance  A c t 1973, 1973, c. 5 1 , s. 1 7 ( 2 ) ( b )  (U.K.).  292  F i n a n c e A c t 1973, 1973, c. 51, s. 1 7 ( 2 ) ( b ) ,  293  W h i l e o n f i r s t c o n s i d e r a t i o n i t w o u l d seem t h a t t h i s s h o u l d a l s o be t h e c a s e under B r i t i s h l a w , t h e c o n t r o l l i n g f a c t o r t h e r e i s n o t t h e s o u r c e o f t h e payment b u t the i n t e r e s t o f t h e b e n e f i c i a r y , t h a t i s , i n income o r capital. See f u r t h e r , i n f r a , pp. 124-125.  (3) (U.K.).  121 ciary.  The  tax l i a b i l i t y  entitlement  t o income.  income,  he  i s taxable  by  ^  He  him.  applicable tled and  to that  subject  hands.  through  included  at  This  cases,  entitled  to i t .  i t is  income  t o him.  and  Such  i n the hands  at the a d d i t i o n a l rate  received  the Schedule  2  9  5  income As  a  interest i s merely contingent  i s modified  to  i s currently  income under  enti-  to  him  result, or i s  i s not taxed Canadian  in  law  beneficiary election.  to which the b e n e f i c i a r y  in his total  rate  under  a d u t y t o pay  of the p r e f e r r e d  applicable  or not  A beneficiary  i s under  result  income  the basic  income  to divestment, trust  the use  Trust  the  upon h i s  is currently entitled  i t whether  on  i s then absolutely  vested  rates  upon  income.  when a b e n e f i c i a r y ' s  his  Where he  i s taxable  when t h e t r u s t e e he  of a b e n e f i c i a r y depends  is entitled  i s subject  income  has  already  The  9  6  is  to tax at the  of the t r u s t e e s as w e l l .  2  and  amount  borne  tax  i n some included  294  B a k e r v . A r c h e r - S h e e , [ 1 9 2 7 ] A.C. 844 ( H . L . ) ; H a m i l t o n R u s s e l l 's E x e c u t o r s v . C o m m i s s i o n e r s o f I n l a n d R e v e n u e ( 1 9 4 2 ) , 25 T.C. 200 ( K . B . D . ) .  295  T o l l e m a c h e v. I n l a n d R e v e n u e C o m m i s s i o n e r s ( 1 9 2 6 ) , 11 T.C. 277; M i l l e r v. I n l a n d Revenue C o m m i s s i o n e r s , [ 1 9 3 0 ] A.C. 2 2 2 . This accords with the Canadian concept o f "amount p a y a b l e " t o a b e n e f i c i a r y . The d i f f e r e n c e , o f c o u r s e , i s t h a t s u c h amounts a r e d e d u c t i b l e from t r u s t income under C a n a d i a n law.  296  O r w h i c h he i s e n t i t l e d t o h a v e including benefits in kind.  applied  for his benefit,  122 in  the b e n e f i c i a r y ' s  entitled,  grossed-up  tee.  beneficiary  The  into  account  The appear, This  income  i s the net  by  rate  the  is entitled  t h e amount o f  position since  of  amount t o w h i c h  tax deducted  to a c r e d i t which  tax paid  i s not, however,  by  as  the  the d e c i s i o n  the  is  trus-  takes  trustee.  simple  the b e n e f i c i a r y does not  r e s u l t s from  by  he  as  receive  i t might a  i n M a c f a r l a n e v.  full  credit.  Inland  Rev-  9 q7 enue C o m m i s s i o n e r s not d e d u c t i b l e computing  the  which  i n computing income of  his entitlement  higher  tax.  gests he  that  gests  that  this  and  tax  the  latter  the  beneficiary  by  net the  While  i s not  297  [1929]  298  That  so.  include  S.C.  Using  453;  rate) the  i s , L 6 0 x 100 = 100 - 30  his liability v.  gross  o f L30,  to  Archer-Shee  sug-  income t o  t r u s t expenses the  which  sug-  of  L10  result  i n c l u s i o n o f L90.  expenses)  the  14  of  under  Instead,  i n h i s income t h e amount o b t a i n e d  and  t h e sum  f o r the purposes  the Macfarlane case  Assuming  suggest  in  of Baker include  while  are deductible  and  t h e amount a c t u a l l y r e c e i v e d  trustee.  would  the case  includes  of taxes paid  ary  to r e l i e f s  at the basic  case might  t r u s t expenses,  income,  f o r e x a m p l e L100,  (payable  grossing-up is,  trust  t h e b e n e f i c i a r y must  is entitled,  that  the b e n e f i c i a r y  determining rate  held  by  the  figures given of L85.71 ^ 2  T.C.  532.  L85.71.  8  from  the t r u s t  rate  above,  and  would  of  tax  by  (that paid  the b e n e f i c i receive  a  123 credit  f o r taxes paid  As trusts, with  with there  other  o f L25.71  aspects  i s again  rather  of the B r i t i s h  no p a r a l l e l  a credit f o r the beneficiary.  granted  than  the f u l l  system  i n Canadian Instead  to the beneficiary, a deduction  L30. ^ 2  for taxing  law d e a l i n g  of a credit  i s allowed  being  to the  trust.  1.  Accumulation  Whether a  Trusts  and D i s c r e t i o n a r y  a beneficiary  t r u s t depends on whether  is  vested  as  i t a r i s e s and w i l l  interest  indefeasibly.  i s merely  i s taxed  Trusts  on income a c c u m u l a t i n g i n  or not h i s i n t e r e s t i n that  I f s o , t h e income  be t a x e d  i s treated  income as h i s  in hish a n d s . W h e r e his  contingent,  however,  beneficiary's  as i t a r i s e s and indeed  him  as such.  Such  tee  at the basic  the  b e n e f i c i a r y e i t h e r when  income b e a r s  t h e income  i s never  i s not the  received  by  t a x i n t h e hands o f t h e t r u s -  and a d d i t i o n a l r a t e s  and n o t i n t h e hands o f  i t a r i s e s , o r on  its  ultimate  ^ni distribution  since  i t reaches  him as c a p i t a l .  (London:  Although  299  S e e a l s o , J o h n T i l e y , R e v e n u e Law 2nd e d . 1 9 7 8 ) p. 4 8 5 .  Butterworths,  300  Hamilton-Russell's Executors, supra, note 137. Having a l r e a d y b o r n e t a x a t t h e b a s i c r a t e , s u c h income w i l l be l i a b l e only f o r higher or a d d i t i o n a l rate tax i f that. Remember t h a t t r u s t e e s a r e n o t l i a b l e f o r a d d i t i o n a l r a t e t a x o n i n c o m e w h i c h when i t a r i s e s i s t r e a t e d a s t h a t o f the b e n e f i c i a r y .  301  S t a n l e y v. I n l a n d Revenue C o m m i s s i o n e r s, [1944] 255; I n l a n d Revenue Commissioners v. B l a c k w e l l ,  K.B. [1924]  2  124 higher the  rate  tax  converse  claim  a  is also  repayment  from doing f r o m an  A  i s thus  so  since  amount  to  tax  event,  therefore,  The  income  beneficiary that  paid  taxed  the  C a p i t a l P a y m e n t s as further point capital  right  i s to  Being  treated  as  is  from  his  income  subject  enforce  no  P r i o r to  payable  payable  enti-  in  his  that  tax.  a vested  payment of  Where the  be  but  capital.  discretion is exercised  as  to  precluded  i s s i m i l a r under Canadian to  received,  in a position  beneficiary with  hands.  2.  K.B.  the  to  is  a d i s c r e t i o n a r y t r u s t has  is treated  in his  ary's  as  not  to  i s deemed  of  him  i s not  income  income  trustee  he  income  made o u t  the  him.  the  One  by  deducted  by  is entitled  income  no  i s d i s t r i b u t e d to  p o s i t i o n of  accumulating  since  a beneficiary  was  income u n t i l  and  ingly  tax  received  favour  and  true:  b e n e f i c i a r y under  tlement  in  of  avoided,  to  him  law.  trust and  beneficiary  to  interest Such  a  income ^ 3  is  accord-  is a  minor,  him.  Income should  may  be  income, income,  be  noted.  treated that  such  as  i s , to  Payments which  income an  amounts are  i f the  "annual  are  benefici-  payment." ^* 3  subject  to  140,  E.R.  the  302  S a u n d e r s v.  (1841),  303  B r o d i e ' s W i l l T r u s t e e s v. ( 1 9 3 3 ) , 17 T.C. 432.  Cr.  & Ph.  Inland  Revenue  41  3  same  351. Vautier  2  482.  Commissioners  125 rate  of  tax  as  is actual  Presumably law.  The  source, trust  nature  thus  adian  and  of  be  recognized  under our  and  t r u s t and both  as  occurs tax  i s a l l the  tax  to  in place  Canada.  As  for  taxing  trust  be  paid  between  the  income on  the  trust rates,  a d i s c r e t i o n i s p e r h a p s more rate  levels  w o u l d be  case of inter  a  i s avoided taxed  testamentary  vivos both  tax  trust.  trustee  of  at  the  no  at  taxed  50%  i t follows  beneficiary  men-  law  as  trust  Secondly, year  i t  Thus  the  an the  credit  through  income at  the  use  where  rate  case of  clearly are  to  comparable  marginal i n the  in  trust subject  i n Canada:  in Britain  only  counterpart  avoidance  appropriate  t r u s t or  the  Can-  be  on  system.  Thirdly,  income of  fully  the  income can  tax  of  capital.  between  to  its  income a r i s e s and  in Britain,  Finally, and  tax  to  income.  c u r r e n t l y has  question  in excess  for  that  time  by  under Canadian  British  on  Canadian  governed  accretion  i s subject  i n the paid  in Britain  a p p l i c a t i o n of  higher  be  differences  beneficiary  the  in rates  an  i t is distributed is irrelevant.  system  that  to  most o b v i o u s l y ,  system,  alteration  as  notable  methods of  Firstly,  income, not  and  a payment a p p e a r s  a r i s e under  amount d i s t r i b u t e d i n a y e a r  British  the  arises  s i t u a t i o n does not  summary, s e v e r a l  tioned.  time  an  of  income w o u l d  In  one  this  income.  from  in  the  an the  taxed,  fact that  126 the  British  election  system  concept,  from t h e t r u s t IV.  h a s no n e e d o f t h e p r e f e r r e d a method whereby  to the  A Comparative Before  order.  taxation While  to the concluding  of the trust  nominally, from  thus s h i f t i n g him.  Kingdom  sytems o f taxing Canadian  at least,  liability result  rules.  i s obtained  regarding  the  beneficiary,  tee  as owner o f p r o p e r t y  or are  Whether  one o f c r e d i t reached.  to a  entity, i t beneficiary income t o  by t h e o p e r a t i o n  holding  i s taxed  of the  and U n i t e d  of both  the view  trustee  part  and gross-up,  Tax i s l e v i e d  that  of the taxes  essentially  f o r the year  the  and  similar  t h e income  by  the trusfrom i t .  the beneficiary  i s one o f d e d u c t i o n  and  as prepayment  on income a r i s i n g  are similar,  be  but not both.  t h e t w o s y s t e m s may d i f f e r ,  f o r at least  t h e method  differ-  f o rt h e  distributable  f o r taxation  the B r i t i s h  to a credit  and  provides  payment by t h e t r u s t  the results  this  i n c o m e may  Commission proposals  instead  Commissioners  paid.  of  i s a taxable  f o r currently  Conceptually  entitled  the trust  The R o y a l  law provide  practice,  legislation  or the beneficiary,  beneficiary.  In  trust  i t s income amounts p a y a b l e  A similar  American  chapter  summary o f some o f t h e s i m i l a r i t i e s  The c u r r e n t  may d e d u c t  i s shifted  Summary  e n c e s among t h e v a r i o u s in  tax liability  beneficiary.  proceeding  work, a b r i e f  beneficiary  being already  inclusion results i s earned  127 and  d i s t r i b u t e d and i s assessed  at rates  circumstances  of the beneficiary.  The  divergence  not is  principal  among t h e f o u r  surprisingly, i n the taxation here  that  apparent. from  the problems  Income  circumstances  evant  to i t s taxation,  there  which  income  and that  this  i n turn  finally,  giving  rise  income w h i c h  ultimately  The  i s earned  be r e c e i v e d  income.  receive  no  i n which  t o changing  benefit irrel-  the year i n  i t i sd i s t r i b u t e d ,  rates  of t a x a t i o n ; and  as such by t h e t r u s t e e  by t h e b e n e f i c i a r y as  methods o f r e s o l v i n g  It  a r e most  are therefore  i s d i s p a r i t y between  i s received  occurs,  in trust taxation  b y p e r s o n s who  i t and whose p e r s o n a l  to the  systems  of accumulating  inherent  i s held  appropriate  capital.  these d i f f i c u l t i e s  vary.  Kingdom  the  and i s u l t i m a t e l y d i s t r i b u t e d as c a p i -  tal.  Under  British  law there  the  beneficiaries' rates;  may  elect  proposals  system where full  t a x was  trust rates  would  i s no p r o v i s i o n  under Canadian  t o p a y t a x now a n d r e c e i v e at the Royal  or else  have been p a y a b l e  year.  The A m e r i c a n  trust,  and f o r a c r e d i t  paid  have  also  later.  resulted  at the additional rate  rules  provide  f o r taxes paid.  in  law a b e n e f i c i a r y  by t h e t r u s t ,  h a d he r e c e i v e d  i s taxed  f o r taxation at  t h e income  Commission would  initially  income  In  Canada and t h e U n i t e d t r u s t when e a r n e d  accumulating  may  in a  either at  of tax which  t h e income for taxation Both  The  i n that i n the  systems,  being  128 two-tier  i n the  beneficiary Royal  levels  Commission  the  year  the  American  paid  sense of  taxes  i n the  were  of  previous  methods:  the  years,  the  ultimately years. and  adjustments  initially  income.  Royal should  received  t o be  paid,  systems,  accumulated  the  the  credit  taxing both  income,  require  could  based adopt  in  i s true  of  on  tax  to  the  bene-  averaging  the  amount o f  constant  distribution of  be  appropriate  appropriate  the  the  b e n e f i c i a r y over  remaining  and  made  amount o f  the  sets  be  the  the  trust  Under  reverse  systems  by  the  The  Commission v i s - a - v i s be  both  tax  although  Both  American v i s - a - v i s  Both  of  paid.  distribution  at  complexity.  system which determines  ficiary's  which  require greater  rules,  year  credit  e x t r a c t i n g tax  ordering  tax  over  of  the  current  rules  as  well.  ther and into  The  foregoing  one  attempts  appropriate complexity.  d i s c u s s i o n reveals, perhaps, t o go  rates of  that  i n r e s o l v i n g p r o b l e m s due t a x a t i o n , the  f u r t h e r one  to  the  fur-  timing  i s drawn  129 Chapter  Conflicting It the  It  arising  has been rules  difficulty  having against  standard  attempted which  solution;  matter  of the trust  may  fairly  but i n fact,  that  inherent  relationship.  the existing  i s n o t s o much t h a t  to establish  the Canadian that  certain  problems  be  Cana-  criticized,  they  fail  t h a t no i d e a l  rules  i n other  Chapter  will  brief,  a logical  rules  to  standard  proposed  system  One a n d  i n Chapter  are incapable  of perfect  In Chapter  under o t h e r  questions  a review  such  a s who  should  be t a x e d ;  when he s h o u l d  should  be t a x e d .  Each q u e s t i o n  rules  Three  circumstances  considered.  to bring the discussion to a conclusion comprise  Two  i t should  t o the Canadian  income.  or utilized were  i n Chapter  c o u l d be m e a s u r e d ,  problems  to tax trust  jurisdictions  In order  rules  a p p l i c a b l e not just  t o any attempt  certain  in  them  to certain  that while  described the existing  now b e c l e a r  or  with  this  work  be s e t .  Having  but  i s subject  f u r t h e r suggested  meet an i d e a l can  income  out of the nature  governing  o f Change  i n the Introduction to this  taxation of trust  dian the  O b j e c t i v e s and t h e D i f f i c u l t i e s  was s u g g e s t e d  problems  Four  of questions should  be t a x e d ;  be t a x e d ; will  raised  this  earlier:  how m u c h  and on what  be c o n s i d e r e d  he  here i n  he  130 light  of the Canadian  and  the possible  The  competing  again  I.  objectives  The  taxed,  Canadian  Holding  vent massive device  there  of these  here  also,  and as  questions.  to the question  i s no q u a r r e l  has a v e s t e d  liable  rise  be  For conven-  rather  t o d o s o , we  than  of the  with  taxing  the trustee i n order  o r at l e a s t postponement t r u s t under which Such a c t i o n  the trustee  per  to pre-  through  no p o t e n t i a l i s also  i s i n law t h e owner o f  t o t h e income.  the taxation  cause problems,  should  are inapplicable,  i s necessary  interest.  i n that  giving  t o t a x on  o f who  to follow.  tax avoidance  defensible  property  subject  i n mind  of the trustee  the trustee  Likewise, not  be b o r n e  of a discretionary  beneficiary  the  Three.  i t i s a r g u a b l y more c o r r e c t  i n the discussion  clearly  i n Chapter  to i n the Introduction  the a t t r i b u t i o n rules  to taxation  Clearly,  the  rise to,  the trust or the beneficiary.  and because  refer  trust  answer  that  to tax either  will  should  i t gives  Taxpayer  assuming  ience,  se.  Two  referred  the i n t e r r e l a t e d nature  The  is  the problems  a l t e r n a t i v e s as revealed  i n Chapter  should  answer,  of the beneficiary  p e r se does  a t l e a s t not where t h e b e n e f i c i a r y i s  income c u r r e n t l y  a r i s i n g and d i s t r i b u t a b l e .  131 The result the  difficulty  of  the  p o s e d by  distributable  fact  remains  neutral  fashion  time or  of  m e n t s may  paid  be  are  the  for  year  by  which  necessary  the  that  any  and  such  at  and same  directly)  be  taxed  more t h a n  that  in  a  one  certain  adjust-  for  and or  this by  the  the  reasons.  tax at  subject  on  Firstly,  accumulating  which  that  a l l , to  i f he  tax  the  were  amount o f  bear very assessed This  things,  changes  prescribed the  may  tax  little  were  distribution. i n the  e x i s t s whether  beneficiary pursuant  year of  distribution.  rate  difficulty  e l e c t i o n , the  p o s i t i o n of  several  is  rate  taxed  income.  a m o u n t w h i c h w o u l d be  the  income cannot  c o i n c i d e n t a l l y , i f at  i n c o m e a r i s e s may  financial  of  received  because where  trustee,  only  on  trustee  beneficiary  trustee  i n e s s e n t i a l l y the  i n order  b e n e f i c i a r y w o u l d be  Secondly, the  lack  is taxation  party,  i s necessary  corresponds  to which  by  the  a  made.  is paid  that  there  the  i t been  accumulated  more t h a n one  adjustment  income  have b e e n had  unless  taxing  is  income c u r r e n t l y a r i s i n g  i t is treated  that  Adjustments an  Excluding  (since  i t would  of  more a c c u r a t e l y ,  interrelationship.  the  Canadian p o s i t i o n  i n t e r r e l a t e d nature  beneficiary or,  manner as  the  the  paid  for  a  changes  beneficiary ultimately  in  the  income t a x e d  or  paid  year  to  among  is  preferred  the  relation  r e s u l t from, rates  to  tax  in  the  other in  the  receiving  132  Given  that  alternatives? assess  this  difficulty  A l l three  tax l i a b i l i t y  interrelationship Commission  systems  trustee  and  and  with  t e e . T h e  American  rule  beneficiary  receives  a c r e d i t for taxes paid  the extent  originally ginal  paid  rates  amount o f fore  both the  of  trust by  income. *^ 3  taxation. ^ 3  8  and  system  i s also  beneficiary.  the t r u s t  in that  by  i n c o m e may of  on  occasion  See  Chapter  3,  supra,  a t p.  79,  305  See  Chapter  3,  supra,  a t p.  110,  306  See  Chapter  3,  supra,  a t p.  95,  307  See t h e d i s c u s s i o n w i t h C h a p t e r 3, s u p r a , a t p .  308  See  supra,  due  n.  123,  n.  the  there7  taxation  of  anomaly  in  to  i s however,  double more  168. 266,  267.  220.  respect to the throwback 107 f f .  a t p.  of  and  subjected  income  n.  t o an  tax  the b e n e f i c i a r y i s be  n.  by  up  t o mar-  3  In f a c t ,  accumulated  the  the beneficiary. '-'  characterized  304  3,  accumulated  the c r e d i t to which  Taxation  Chapter  the  in i t s determination  t o t a x when r e c e i v e d  trust  that  t a x a t i o n , a n d  c a l c u l a t i o n of  entitled,  by  in  trus-  i s assessed according  considered  Royal  the  the t r u s t e e  British  trustee  l e v i e d on  It differs  5  The  c r e d i t system  i s s i m i l a r i n the sense  income p r o p e r l y  subject  The  of  Three  the  beneficiary.  initially  possible  i n Chapter  conjunction  to  50%  the  recognizes  a s t r a i g h t gross-up  a tax of  what a r e  examined  i n a manner w h i c h  between  proposed  exists,  299.  rule,  133  similar  to  the  Looking tion,  it  and  system.  In  amount  reflect when  the  of  are In  with  to  some  example,  11.  rate Where  the  be  of or  taxed of  be  in  to  made  a  way  these  by  both  income  received  by  the  answer  is  less  the  to  considered, a  question  gross-up  so.  the  since and  time  not  what  and should  trustee,  distributed  Before,  of  the  trustee  to  amounts  at  o r i g i -  would  are  as  to  current  him.  question  comes  both  the  which  questions  whereby  isola-  the  to  beneficiary  receivable  in  taxing  the  it  render  system  could  point  extent  be  preferable  the  proposal  of  be  should  trustee  that  raises  When  ought  to  however,  appropriate  alterations credit  the  rate  to  system,  rate for  unnecessary.  Rate  The  Canadian  of  taxation  tax  For  Any  case  this  The  of  by  received  the  who  would  position  taxed  the  of  interrelated  remembered  simple.  taxation  may  309  be  position.  adjustments  paid  was  beneficiary,  dealing of  tax  separable.  is  an  way,  economic  must  taxed.  the  that  this  beneficiary  answer  question  0  income  entirely  be  the  Canadian  beneficiary^ ^  the  It  at  appears  trustee  nal  current  is  Taxation answer clearly  levied  example,  a  on  to  the  depends  the  gross-up  question on  whom  beneficiary  and  credit  of  the  the  appropriate  taxpayer  either  system.  because  is. income  134 is  payable  to  beneficiary, priate  to  him  t o pay  him,  from other  or  because tax  trust  sources.  arises  as  of  b e n e f i c i a r y at  the  clearly  the  rate  and  latter  propriety his  latter  subjected  are  individuals coincides taxed  c u l t y ^  flat  only  been  310  that once,  to  of  the  rate  with  case  i n the  a  his  approincome  question  former,  i n c o m e he  i  s  to  This  taxation  receives  their  of  the  testamentary.  The  difficulty  the  is  lack, o f only at  elect  50%,  rates  way  rates  to  given  have  the  the  t r u s t pay  "additional rate"  a d d i t i o n a l amount o f  tax  that  pay  Assuming that tax under the present  had  he  the  the  received  i s l e v i e d on system.  this to  f o r whom  his  to  of  to  that  Royal  income at  required  the  neither  appropriate by  vivos  of  applicable  resolve  so.  inter  those  i s that  a beneficiary to  of  c o r r e l a t i o n cannot  suggested  that  is less  Trustees  b e n e f i c i a r y and  in fact,  could  treatment  marginal  The  proposal  the  trustee  approximately  impose t a x  was,  the  the  this  corrected.  accumulating,  the  rate  generally.  with  sequently  "share"  on  e x i s t s between  of  was  timing,  i m p o s e d on  a  It  of  rates  f o r m e r pay  ciary.  i n the  preferred  at  While  are  3  i s taxed  aggregated  those which  is  i t , he  a  income being  currently  inconsistency  trusts  e l e c t s , as  appropriate.  The An  to  on  he  rate income  be  sub-  diffithe  benefi-  Commission. income  tax that  on is,  b e n e f i c i a r y would the  only  income  one  i n the  occasion  as  was  his pay have year  i t is  135 O -|  in which United these is  i t arose.  Neither  Kingdom attempts lines,  although  somewhat s i m i l a r .  legislation tially pays  also  the  tax,  It  income as  the  apparent received  be  1  of  United  States'  i t in favour but  States  a system  d r a f t e r s of  rate,  not  nor  the of  a  the  completely  separate  under which,  i n v o l v i n g the  remembered  beneficiary, or  the  receivable not  share  current system the  trustee  along rule  Canadian essen-  beneficiary  i n numerous  question  Canadian  and  answer  income  i s d i s t r i b u t e d to  where the  to  i f i t is possible applicable  the  difficulty  that  when t h e  the  beneficiary's This  problem  rate  leads  may to  to  income  be a  to  dif-  consid-  timing.  Taxation  i s taxed  problems are  even  rate  of  income  a r i s e s no  that  the  solved.  T i m i n g of  The  it  operate  The  2  United  i t arises according  is still  The  III.  3  to  thus  should  eration  the  the  complex c a l c u l a t i o n s .  tax  ferent  to  rejected  s i m i l a r as  possibly  is  -|  only  problem  the  o n c e , when  question  of  i t arises.  timing  is  Again,  where  the  beneficiary  i n the  year  exists.  Where t h i s  i s not  so,  apparent.  beneficiary  to  For  example,  311  See  Chapter  3,  supra,  at  p.  83,  312  See  Chapter  3,  supra,  at  p.  103,  in  n. n.  pay  180. 249.  tax  for  which  several  c i r c u m s t a n c e s may  i s c a l l e d upon to  that  exist  that  year  136 without is  the  income b e i n g r e c e i v e d result  although with one  which  of p r o v i d i n g  an  receivable  infant  payment p o s t p o n e d .  i s chosen  upon him,  or  by  A  with  him.^ ^  interest  result,  rather  makes a p r e f e r r e d  This  x  a vested  similar  the b e n e f i c i a r y  o c c u r s w h e r e he  by  although  than  imposed  beneficiary  election.  The  second  o n l y when there  problem  i t arises  course  not  also  i s no m e c h a n i s m w h e r e b y  payments can nism,  be  corrected.  there remains  more a p p r o p r i a t e a  and  of  lower  to  the  Even  tax  United States  visions ary,  taxed one,  only  not  desire  by  taxing  income  i t is distributed, underpayments or  i f t h e r e were such problem  as  initially  a  t o whether  overmechai t is  at a high rate  or  at  one.  C a n a d a , w h i c h m a k e s no The  when  earlier  further  impose  i s that  which  d o e s make s u c h  for additional  for receipt  for neutrality  of  subsequent  for simplicity  1 4  an  does  adjustment the  i n t a x law;  and  are  two  two,  pro-  beneficithe  income s h o u l d  adjustment  both.  has  Balanced against  suggests that  twice i n order to allow t h e need  an  payment o f t a x by  a refund.^  which  adjustment,  be  factors:  the  fact  313  A l t h o u g h t h i s p r o b l e m may b e a v o i d e d i n p r a c t i c e b y i n c l u d i n g a b r o a d encroachment power i n the t r u s t instrument o r b y p r o v i d i n g t h a t a l l t a x e s a r e t o be p a i d o u t o f t r u s t funds.  314  Supra,  note  305.  137 that  under  trust  accumulated tion  of  States  income  capital  Both  the  rules  amount o f  does not  received  J  tax  a c c r e t i o n to c a p i t a l  and  contain detailed should  be  is finally  under  the  law, a  distribu-  distribution. and  the  United  provisions for determining  the  p a i d by  whom  the  beneficiary to  distributed.^  United  Kingdom  entitled  income a c c u m u l a t e d  to  1 5  rules  The  since  i t i s taxed  subject  to  question income  t o him  a discretion  as  i t  is  capital.  Royal  w h e r e b y an  Canadian  Commission proposals  f o r a person  as  The  ficiary.  Royal  arise  and  apparently  is a tax-free  income  accumulated  and  i s an  tax which  accumulated  arises  law,  Commission proposed  average  -° T h e  tax  United  credit  c o u l d be  States  throwback  complex, being  specifically  payable  but  the  source  leads  to to  the  the  source final  of  adoption  calculated rule  d i r e c t e d not the  of  q u e s t i o n , what  1 7  formula  for a  bene-  i s somewhat  just  income.^  a  to  The  should  the  tax  matter be  more  of  subject  tax?  315  See C h a p t e r tively.  3,  supra,  a t pp.  83-84 and  316  See  Chapter  3,  supra,  a t pp.  87-88.  317  See  Chapter  3,  supra,  a t pp.  107-108,  108-109,  101-102.  respec-  to  138 IV.  The S u b j e c t o f T a x a t i o n At  present  received payable  to a beneficiary.  he e l e c t s  a vested  capital tion.  3  1  i s taxed  i s accumulated interest  and on  i n which  dis-  income  i t arises.  f o r h i m ( u n l e s s he i s a m i n o r  i n t h e income)  i s r e c e i v e d by him as distribu-  i s a l s o the case  in Britain  in a discretionary  trust.  with  respect  rate tax i s avoided.  inequitably  balanced  income t a x i s a v o i d e d , inequity  appears  This  anomaly  by t h e f a c t  s o a r e some  t o be t h a t  t o accumu-  The t r u s t e e p a y i n g t a x  a t t h e b a s i c r a t e o f 30% and t h e a d d i t i o n a l  higher  f o r income  on income  i tarises  t o p a y t a x on i n t h e y e a r  income  8  lations  haps  i n which  on  allowed  and t h e r e f o r e i s n o t s u b j e c t t o t a x on  This  only  The l a t t e r  t o him f o r the year  Income w h i c h with  the trustee i s taxed  by him, s u b j e c t t o t h e d e d u c t i o n  tributed which  i n Canada,  i s roughly  that although  and persome  income t a x r e f u n d s .  f o r those  i s a s a v i n g and f o r those  r a t e of 15%,  i n higher  income  brack-  there  318  W h e r e t h e t r u s t i s a n i n t e r v i v o s t r u s t , t h i s may r e s u l t i n an overpayment o f t a x ; where t h e t r u s t i s t e s t a m e n t a r y , an underpayment, d e p e n d i n g on t h e b e n e f i c i a r y ' s marginal rate.  319  See Chapter  pp.  123-124.  brackets  The  ets  3, s u p r a ,  i n lower  3 1 9  a  loss.  139 Of  more c o n c e r n p e r h a p s  i s the  Kingdom, d i s t r i b u t i o n s of  capital  income  be  i n t e r e s t s may  problem  does not  income and of  well  arise  tracked the  —  —  only  from  of  would  This  2 0  since  the United  the separation income,  the t r u s t  This  a c c u m u l a t i n g income system  taxation of  for  I t should of  accumulated  be  i s not  apparent income  into  income,  is  separating  trust  t r u s t funds  being instru-  f o r the year.  States  of  trust  the b e n e f i c i a r y  component.  system  latter  the  and  capital  required.  In  conclusion,  governing  the  fering  See  from  trust  further  i f a g r o s s - u p and the problem that  Chapter  of  which would  3,  supra,  p.  that  any  income It also  the problems  i n t r o d u c t i o n of  with  of  r e l a t e d changes.  to resolve  example,  to deal  i t is clear  the t a x a t i o n  number o f  attempt  320  so  the c a p i t a l  components of c u r r e n t  For  income o f  the t r u s t ' s income  i f a two-tier  were adopted  to  to t a x . ^  United  having  i n Canada, d e d u c t i o n s from  properly  version  income  that  and  i n the  made t o p e r s o n s  subject  i n c l u s i o n s i n the  l i m i t e d by  a simpler  ble  that  amounts p a y a b l e t o the b e n e f i c i a r y under  ment and  be  fact  change  requires  discussed  earlier  complexities  be  rate  paid  p a y b l e by  124.  a  seems t h a t  by the  were  rules  consideraany will  i n t o the  c r e d i t system  the  to the  lead system.  introduced  the trustee  dif-  beneficiary,  140 rules  f o r determing  beneficiary  t h e amount o f c r e d i t  was e n t i t l e d w o u l d be r e q u i r e d .  h a v e t o make p r o v i s i o n ous  beneficiaries.  that  some s o r t  t h e need  ther is the  the  neutrality  between  done p r e s e n t l y . taxation  would  involved  among  The  have been  system would  rules  might  be a d o p t e d .  complexity.  a  Such  the credit  thus  would vari-  dictate achieve-  compromised  Likewise, the  create  a need  to fur-  income and c o r p u s d i s t r i b u t i o n s  The i n c r e a s e d  of trust  neutrality  income w h i c h might  of the existing  introduction  system  excessive  of a two-tier  distinguish  alteration  The c o m p l e x i t i e s  to avoid  introduction  for allocating  of averaging  ment o f a b s o l u t e by  t o which  rules  of the complexity  and e q u i t y i n  be g a i n e d  are perhaps required  than  through  not j u s t i f i e d to achieve  by  them.  141 Bibliography Amighetti, Leopold. 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