ARCHIVED - Flow-through of taxable dividends to a beneficiary - After 1987
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SUBJECT: INCOME TAX ACT Trusts - Flow Through of Taxable Dividends to a Beneficiary - After 1987
NO.: IT-524 DATE: March 16, 1990
REFERENCE: Subsection 104(19) (also sections 105 and 121, subsections 104(13), 104(14) and 112(1) and paragraph 82(1)(b))
The comments in this bulletin apply for the 1988 and subsequent taxation years. For the 1987 and prior taxation years, as well as a 1988 taxation year of a non-resident trust which commenced in 1987, IT-372R as amended by the Special Release continues to apply.
This bulletin deals with the receipt of taxable dividends by a trust resident in Canada and the subsequent flow-through of such trust income to a beneficiary resident in Canada. As a result of this flow-through, the provisions for the dividend gross-up, dividend tax credit, intercorporate dividend deduction, or Part IV or IV.1 tax can apply to the beneficiary, as the case may be. Expenses incurred by the trust may in certain circumstances be allocated in a manner which maximizes the flow-through to the beneficiary of the dividend tax credit, where applicable.
DISCUSSION AND INTERPRETATION
1. A trust that is resident in Canada throughout a taxation year in which it receives a taxable dividend on a share of the capital stock of a taxable Canadian corporation may, pursuant to subsection 104(19), designate in its return of income for a particular taxation year, in respect of a beneficiary resident in Canada, such portion of the taxable dividend as may reasonably be considered to be part of the amount that is required to be included in computing the beneficiary's income for that particular year as:
(a) an amount "payable" under subsection 104(13), (b) an amount upon which the trust and a preferred beneficiary have elected under subsection 104(14), or (c) a benefit under section 105 conferred upon a beneficiary by the trust.
2. In determining whether the portion of a taxable dividend to be designated in respect of a particular beneficiary may reasonably be considered to form part of that beneficiary's income, all the circumstances, including the terms and conditions of the trust arrangement, are considered. An amount so designated is deemed to be received by the beneficiary and not by the trust for purposes of computing dividend income of both the trust and the beneficiary.
3. The particular beneficiary is required to include the deemed dividend in income. If the beneficiary is an individual (other than a trust which is a registered charity), the dividend gross-up under paragraph 82(1)(b) and the dividend tax credit under section 121 apply. If the beneficiary is a corporation, it is normally eligible for the intercorporate dividend deduction under subsection 112(1). However, the corporate beneficiary may be subject to the provisions of Part IV or of Part IV.1 of the Act in respect of the dividend it is deemed to have received.
4. To the extent that taxable dividends received by a trust from taxable Canadian corporations are not designated to beneficiaries under subsection 104(19), the gross-up provisions of paragraph 82(1)(b) apply to the trust and it is eligible for the dividend tax credit under section 121. While the dividend tax credit is available to the trust in respect of undesignated taxable dividend income, it can be fully utilized only if the tax otherwise payable by the trust under Part I of the Act is equal to or is in excess of the credit.
5. In a case where there is only one beneficiary or where all beneficiaries share pro-rata in each type of income, the trust may deduct, to the greatest extent possible, expenses against income other than taxable dividends in order to obtain the maximum possible flow-through of the dividend tax credit to such beneficiary or beneficiaries, provided that an allocation of the expenses in this manner is not contrary to trust law or the trust agreement. However, in a case where all beneficiaries do not share pro-rata in each type of income, expenses that clearly pertain to the dividend income must be deducted against such income prior to its being designated to the beneficiaries.
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