2015-0600081I7 Adjusted income & income from Support Trust

Principal Issues: Whether income from a support trust (a personal trust for the benefit of a person with a disability) is required to be included in the determination of “adjusted income” under subsection 122.5(1) for the purpose of determining eligibility for the provincial Newfoundland and Labrador Home Heating Rebate Program.

Position: Yes, unless the support trust is an RDSP.

Reasons: Income from the trust that is included in the beneficiary’s income is also included in the determination of “adjusted income” under subsection 122.5(1) of the Act. There does not appear to be a provision in the Act that would exclude it from adjusted income.

Author: El-Kadi, Randa
Section: 122.5; 104(13); 104(13.1).

XXXXXXXXXX
                                                      2015-060008
                                                      Randa El-Kadi

November 30, 2015

Dear XXXXXXXXXX:

Re:   Income from a support trust and its inclusion in “adjusted income”

This is in response to your email of April 29, 2015, in which you ask us to confirm your view that income from a “support trust” set up for the benefit of an individual with a disability is required to be included in the determination of “adjusted income,” in subsection 122.5(1) of the federal Income Tax Act (the “Act”). You indicate that the province of Newfoundland and Labrador uses the definition of “adjusted income” in subsection 122.5(1) of the Act to determine financial eligibility for its provincial Home Heating Rebate Program. 

It is our understanding that the “support trust” you are referring to is defined in paragraph 2(i) of the provincial Income and Employment Support Regulations, NLR 144/04, to mean “a trust fund established for the use and benefit of a person requiring supportive services as defined in paragraph (g).” (footnote 1)  Where a support trust meets the conditions in subsection 25(1) of Regulations NLR 144/04, the income from the support trust will not affect the beneficiary’s eligibility for certain provincial income supports. The conditions specified in subsection 25(1) of the Regulations are:

      (a)   the support trust does not exceed a total of $100,000; and
      (b)  the person requiring supportive services annually uses the total interest income from the support trust, plus at least 2% of the capital of the support trust; and
      (c)   the support trust is established and maintained in a manner and under terms and conditions that the minister may establish or approve.

Additionally, it appears that assets of a support trust are meant to be non-appreciating assets, such as cash. (footnote 2)  

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

In substance, subsection 122.5(1) of the Act provides that the “adjusted income” of an individual for a tax year in relation to a month specified for the tax year, means the total of the individual’s income for the tax year and the income for the tax year of the individual’s qualified relation, if any, in relation to the specified month, both calculated as if in computing that income no amount were

a)    included in relation to registered disability savings plan (“RDSP”) and universal child care benefit (“UCCB”) payments, and certain gains, or

b)    deductible as RDSP repayments or as repayment of UCCB.

Although it appears that it may be possible for an RDSP to be used as a support trust, there are significant disincentives in the RDSP grant and bond conditions that would make such a scenario unlikely. Therefore, we have assumed that a support trust would not be an RDSP.

The categorization as to what type of trust a relationship might be for tax purposes can only be determined based on the facts of each case and the nature of the constituting document or the trust agreement. As we have not seen any draft or sample trust documents purporting to establish a support trust, we have assumed that such a trust would be categorized as a personal trust. Therefore, we can provide only the following general comments which may have application.

Generally, where income from a trust has been paid or becomes payable in the year to a beneficiary of a trust, that income is included in the beneficiary’s income in accordance with subsection 104(13) of the Act. Consequently, that income would also be included in the calculation of the beneficiary’s adjusted income under subsection 122.5(1) of the Act.

On a separate note, assuming the support trust is a personal trust that holds only non-appreciating assets such as cash or interest-bearing bank accounts, subsection 107(2) would permit the distribution of trust capital to a beneficiary in full or partial satisfaction of their rights as a capital beneficiary under the trust without tax consequences. As the annual use of 2% or more of the capital of the support trust for the benefit of the beneficiary will not result in an income inclusion for the beneficiary, it will not affect his or her adjusted income as this term is defined in subsection 122.5(1) of the Act.

We trust that these comments will be of assistance.

Yours truly,

Pamela Burnley, CPA, CA
Manager - Tax Credits and Ministerial Issues
Business and Employment Division
Income Tax Rulings Directorate

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained  in the original document are shown below instead:

1  Paragraph 2(g) of Regulations NLR 144/04 provides that a “ “person requiring supportive services” means a person who, as certified by an approved professional, requires supportive services to assist with daily living;”

2  See page 8 of the document entitled Support Trust Guide by the Newfoundland and Labrador Association for Community Living.

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