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Losses of Previous Years

15.36. While the scheme of Division 6 goes some distance towards treating income moving through a trust to a beneficiary in the same manner as income derived directly by a beneficiary, there are respects in which this is not so. The treatment of accumulated income is one instance. Another is the treatment of losses.

15.37. The present law, while taxing an income beneficiary on a share of the income subject to tax by reference to his present entitlement to income of the trust, does not allow him a deduction of an equivalent share of a loss for tax purposes suffered by the trust. Such a loss suffered by the trust is normally carried forward as a deduction against income otherwise subject to tax in a later year in accordance with the general principles for the application of losses established by the Act. Where there has been a loss for tax purposes in a particular year, there will normally have been a trust law loss in that same year. In this case, if the trust law loss is carried forward and charged against the trust law income in the later year in determining the amount of the entitlement of an income beneficiary, the tax law loss will be carried forward in determining the net income of the trust estate in that later year. If, however, the trust law loss is not charged against the trust income in the later year in determining the amount of the entitlement of an income beneficiary, the deduction of the tax loss is denied in determining the net income of the trust estate for purposes of the tax liability of that beneficiary in the later year. There is an exception to the rule denying the carry forward of the tax loss: the rule is not applied where the income beneficiary has an interest, presumably any interest, in the corpus of the trust estate. Where the income is accumulating income, the carry forward of the tax loss is allowed.




  ― 216 ―

15.38. It has been put to the Committee that the law should allow the income beneficiary a current deduction against his other income of a loss suffered by the trust. Where, under trust law, a loss is carried forward against future income, the denial to the income beneficiary of a deduction for the amount of a tax loss incurred by the trust in the current year seems to the Committee generally appropriate. If there is a prospect of a different income beneficiary replacing the present one in a later year, allowing the deduction to the present income beneficiary would not only produce complications but operate unfairly. In the later year the amount of trust income, but not the income of the trust for tax purposes, would be diminished by the trust loss.

15.39. Where, under trust law, a loss is charged against corpus, the denial to the income beneficiary of a current deduction also seems generally appropriate. In this case, too, there is the prospect that the income beneficiary will not be the person who in fact bears the loss.

15.40. It follows from the preceding paragraphs that a tax loss will not be deductible, whether the trust law directs that the loss be charged against corpus or directs that it be made good from future income of the trust, if the trust is terminated before the tax loss is fully absorbed. In the latter instance, the loss, in substance, will be borne by corpus so that in both instances the capital of the trust will have been diminished. Where there is a tax loss, which is thus not deductible, there is a case for treating it as deductible against the part included in income of any capital gains arising on the termination of the trust. This proposal is again raised in Chapter 23.

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