Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Impact on subsection 104(13.1) and (13.2) designations.
Position: See comments
Reasons: See below.
Author: Bogdan, John
Section: 104(6), 104(13.1), 104(13.2), 104(13.3)
STEP CRA Roundtable - June 18 2015
Question 5. Designations to Include Income in a Trust
New subsection 104(13.3) prohibits a designation under subsections 104(13.1) or 104(13.2) (to include income and taxable capital gains in the income of a trust, where that income is paid or made payable to a beneficiary of the trust) unless the taxable income of the trust for the year is nil. It would appear from this that the designations can only be made in circumstances where losses of other years (capital or non-capital) can be applied such that taxable income is nil.
a. Do you agree with our interpretation, and can you add any additional comments?
b. If a trust realizes a loss (capital or non-capital) in one of its subsequent three taxation years, is it permissible to amend the trust’s tax return for a particular year to include the amount of income otherwise paid or payable to the beneficiaries in the income of the trust, offset the resulting net income of the trust by the loss carried back (so that taxable income is nil), and request an adjustment to the beneficiaries’ tax returns?
The Department of Finance’s Explanatory Notes indicate that subsection 104(13.3) ensures that 104(13.1) and (13.2) designations “are made only to the extent that the trust's tax balances (e.g., loss carry-forwards) are applied, under the rules that apply in Division C, against all of the trust's income for the year determined after the trust claims the maximum amount deductible by it under subsection 104(6)”.
Therefore, any situation in which the trust’s taxable income is greater than nil, will render the subsection 104(13.1) or (13.2) designation invalid. Such would be the case where a trust chooses to have taxable income in order to utilize certain credits (for example, the dividend tax credit, donation credit or investment tax credits) to reduce or eliminate the trust’s tax payable.
The Act does not specifically provide for the late filing of such designations. However, at the 2009 APFF Conference, we noted that the CRA would accept a late-filed subsection 104(13.1) designation where the trustee can demonstrate that an honest mistake was made or where the designation is made in respect of a carry-back of a non-capital loss. We expect the CRA would generally accept a late-filed subsection (13.2) designation, where the trust has a capital loss carry-back to apply against capital gains, subject to the caveats mentioned in respect of the 104(13.1) designation.
The CRA will only reassess beneficiaries’ returns if the tax years to which they relate are not statute-barred. The CRA will not reassess the beneficiary’s income when a corresponding adjustment to the trust’s income tax return cannot be made because the year is statute-barred or in cases of retroactive tax planning.
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