2019-0798501C6 STEP 2019 - Q13 - TOSI and PBE

Principal Issues: Does paragraph (c) of the "split income" definition in subsection 120.4(1) apply in regard to income allocated pursuant to a preferred beneficiary election?

Position: No. But subparagraph (a)(i) of the "split income" definition must be considered if there is a 104(19) designation.

Reasons: See below.

Author: Kohnen, Phil
Section: 104(13); 104(14); 104(19); 105(2); 120.4(1) and 120.4(2)

2019 STEP CRA Roundtable – June 7, 2019

QUESTION 13.  TOSI and Preferred Beneficiary Election

The preferred beneficiary election is made jointly by a trust and a preferred beneficiary pursuant to subsection 104(14). The term “preferred beneficiary” is defined in subsection 108(1) to be an individual resident in Canada who is a beneficiary of a trust who has either a severe and prolonged impairment in physical or mental functions that qualifies for the disability amount, or, if at least age 18, is dependent on another individual because of mental or physical infirmity and whose income does not exceed an amount referenced to the basic personal tax credit for single status. In addition, the individual must be a settlor of the trust, a spouse, common law partner or former spouse or common law partner of the settlor, or a child, grandchild or great grandchild of the settlor, or the spouse or common law partner of such person.

The preferred beneficiary election allows the trust to “allocate” income of the trust to the preferred beneficiary, whereupon the trust can take a deduction and the amount is included in the income of the preferred beneficiary.

The question is whether an amount included in a beneficiary’s income under a preferred beneficiary election is split income or not under paragraph (c) of the definition of “split income” in the TOSI rules. Paragraph (c) refers to an amount included in a beneficiary’s income because of the application of subsection 104(13) or 105(2) and does not refer to the preferred beneficiary election where the designated amount is included in the beneficiary’s income pursuant to subsection 104(14).

CRA Response

The definition of “split income” in subsection 120.4(1) is relevant in determining income of a specified individual that is subject to the tax on split income, as provided for in subsection 120.4(2). The “split income” definition requires that the total of each amount which is to be included pursuant to paragraphs (a) through (e) be determined for a given taxation year.

In general terms, the preamble to paragraph (c) provides for the inclusion in the split income calculation of the portion of certain trust income described in subparagraphs (i) and (ii) that is included in the income of the specified individual pursuant to subsection 104(13) or 105(2). The amount of income which is allocated to a preferred beneficiary in a given year is included in that beneficiary’s income for that year pursuant to subsection 104(14). Accordingly, paragraph (c) of the “split income” definition is not applicable to this amount.

However, one must also consider subparagraph (a)(i) of the definition, which provides for the inclusion of certain taxable dividends received by the specified individual. If the income allocated to a preferred beneficiary election is also subject to a subsection 104(19) designation, the amount so designated is deemed to be a taxable dividend received by the preferred beneficiary, for purposes of the Act (other than Part XIII). Accordingly, the amount designated under subsection 104(19), if not an “excluded amount” as defined in subsection 120.4(1), and not in respect of shares listed on a designated stock exchange or on shares of a mutual fund corporation, must be considered in the split income calculation.

Phil Kohnen
2019-079850

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2019

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2019