Hectic, chaotic, busy, stressful, demanding are all words that can easily be a substitute for “wonderful” when thinking about our practice at this time of the year.

With in-person holiday events and functions slowly starting to return to some sort of normalcy after a quiet few years, the added demands for our time have increased this year over last.

For those who typically do not deal with the December “crunch”, you might not know that those of us who practice in the estates/trust area often are called upon by clients or their advisors to answer questions and to provide advice regarding family trusts and, more particularly, what to do with the income generated during the year.  I thought it would be helpful to write today’s blog as a reminder to those who are trustees of discretionary trusts or to those who advise trustees of the importance of documenting income payment decisions before the end of the year.

Now is a good time to start giving some thought and documenting to whom trustees have decided to allocate and make payable the trust’s income for the year.

Making Amounts “Paid” or “Payable” in the Year

An amount is considered to be “payable to a beneficiary” in the year, when either: (i) the amount has been paid directly to the beneficiary in the year; or (ii) the beneficiary is entitled to enforce payment of the amount in the year.  It is important to remember that any amounts paid or payable to a beneficiary is the property of the beneficiary.  A beneficiary is generally considered to be entitled to enforce payment of the amount in the year if all decisions, steps and authorities with respect to the payment of the amount to the beneficiary have been taken in the year.  In the case of the trust, the trustees must actually exercise their discretionary power on or before the trust’s year end in order to make an amount payable in that year.  This exercise of discretion by the trustees should be evidenced by a resolution in writing executed by the trustees before the year end of the Trust – i.e. before December 31^st — or by minutes of a meeting of the trustees passed for the purpose of determining income payments for the year.

These rules raise a number of questions, but the most obvious is what do you do in the situation where the annual net income of the Trust is not calculable prior to December 31st.

If the Amount of Income is Not Known Before the Year End

If the annual net income of the trust cannot be quantified prior to December 31st, the annual net income can be allocated to the beneficiary on a percentage or proportional basis.  A resolution of the trustees should be executed before December 31st to support this decision.  Given that the income will not actually have been paid to the particular beneficiary before the year-end, the resolution should declare the trustees’ intention to pay a percentage or proportion of the amount of income earned by the trust in the year to the particular beneficiary as soon as the amount of income is known. The actual payment will occur after the year-end when the financial statements and tax return for the trust are prepared.

In order to create an enforceable legal right in the beneficiary to the amount the trustees determine to distribute to the beneficiary, the trustees must issue a demand promissory note in favour of the beneficiary.  If the trust is fully discretionary, the purpose of this irrevocable resolution and promissory note is two-fold: (i) it determines the share of each beneficiary in the income for the particular fiscal year ended; and (ii) once the allocation among the beneficiaries has been decided, it establishes that a beneficiary has become legally entitled to enforce payment of his or her allocated amount at that time, even though the trustees are not able to specify the exact monetary amount in the resolution.

Once the monetary amount of the annual net income allocated to the beneficiary is known, the trustees issue payment in that amount to the beneficiary, assuming that the beneficiary is sui juris and able to receive payment.

Two final reminders

T3 Trust Income Tax and Information Returns for trusts must be filed within 90 calendar days from the year end of the trust.  If you have a December 31 year end, this means the return is due March 31 (or March 30 in the case of a leap year) of the following year.

If you have not already done so, I would recommend giving my colleague Pritika Deepak’s blog a read to learn more about the trust reporting requirements that may (or may not) be in effect for trusts with a year end after December 30, 2023.

I hope everyone has a wonderful, safe, healthy and happy holiday season.  Thank you for continuing to read our blogs.  See you in 2023!