2018-0759521E5 Tax on split income & preferred beneficiary

Principal Issues: Is tax on split income applicable to income designated under 104(14) - preferred beneficiary election?

Position: No - unless a 104(19) designation is made in respect of the 104 (14) elected amount.

Reasons: If no 104(19) designation is made, 104(14) income does not fall within the definition of split income. If a designation under 104(19) is made in respect of the 104(14) elected amount-- the amount is deemed to be a taxable dividend of the recipient-- and would therefore get picked up under paragraph (a) of the definition of split income.

Author: Holloway, Lena
Section: 104(14); 120.4

XXXXXXXXXX                                                                                   2018-075952
                                                                                                            L. Holloway
July 6, 2018

Dear XXXXXXXXXX:

Re: Subsection 104(14) and Section 120.4

This is in reply to your letter of May 10, 2018.  Every reference herein to a part, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter (the “Act”) and each reference to a technical tax term has the same meaning as such term has in the Act.

Your letter described a scenario whereby a limited partnership (“LP”) provides back office support to a general partnership (“Partnership”) which provides professional accounting services.  The limited partners of LP are family trusts set up by the partners of Partnership.  LP derives all its income from the provision of services to Partnership and issues a T5013 slip each year to each family trust.

One of the trusts has a minor disabled beneficiary who meets the definition of a “preferred beneficiary” in subsection 108(1).  Each taxation year, this trust and the disabled beneficiary jointly elect under subsection 104(14) that the income of the trust be included in the income of the disabled beneficiary.  It is your opinion that the definition of “split income” in section 120.4 does not appear to include income allocated under subsection 104(14).  It is also your opinion that the amendments to section 120.4 in Bill C-74 (which received Royal Assent on June 21, 2018), do not appear to include income allocated under subsection 104(14) in determining split income.

You have asked that we confirm your interpretation of the application of section 120.4 in these circumstances.

Our Comments

This technical interpretation provides general comments about the provisions of the Act.  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 70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Subsection 120.4(1) sets out definitions for the purpose of calculating a specified individual’s tax on split income in subsection 120.4(2).  Paragraph (c) of the definition of “split income” includes “a portion of an amount included because of the application of subsection 104(13) or 105(2) in respect of a trust (other than a mutual fund trust or a trust that is deemed to be in existence by subsection 143(1)) in computing the individual’s income for the year…..” that can reasonably be considered to be in respect of certain types of income such as certain income derived from the provision of services (such as in the scenario you have provided).

We agree that the definition of split income does not extend to the amounts in your fact scenario that are included in income because of the application of subsection 104(14).  The legislative amendments to the definition of “split income” in subsection 120.4(1) in Bill C-74 did not change this conclusion.  Therefore, we agree with your interpretation that the income allocated to a preferred beneficiary under subsection 104(14) in the fact scenario you have provided is not included in the definition of split income and therefore is not subject to tax on split income.

Yours truly,

Phillip Kohnen
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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