Tax Type
Individual Income Tax
Description
Nonresident estates and trusts; Taxable income; Canadian trust income
Topic
Estates and Trusts
Date Issued
08-29-1997
August 29, 1997
Re: Request for Ruling: Individual Income Tax
Dear**************
This will reply to your letter in which you request a ruling regarding whether income received from a Canadian trust qualifies for the foreign source income subtraction. I apologize for the delay in responding to your letter.
FACTS
Your wife, a Virginia resident, is the beneficiary of a Canadian trust. The income that she receives from the trust consists entirely of interest and dividends. You are requesting a ruling on whether this income may be subtracted on the Virginia return as foreign source income.
RULING
Code of Virginia § 58.1-322(C)(7), copy enclosed, provides a subtraction from federal adjusted gross income for "[A]ny amount included therein which is foreign source income as defined in § 58.1-302," copy enclosed. Code of Virginia § 58.1-302, defines "foreign source income" as:
1. Interest, other than interest derived from sources within the United States;
2. Dividends, other than dividends derived from sources within the United States;
3. Rents, royalties, license, and technical fees from property located or services performed without the United States or from any interest in such property, including rents, royalties, or fees for the use of or the privilege of using without the United States any patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like properties;
4. Gains, profits, or other income from the sale of intangible or real property located without the United States; and
5. The amount of an individual's share of net income attributable to a foreign source qualified business unit of an electing small business corporation (S corporation). For purposes of this subsection, qualified business unit shall be defined by § 989 of the Internal Revenue Code, and the source of such income shall be determined in accordance with §§ 861, 862 and 987 of the Internal Revenue Code.
-
- In determining the source of "foreign source income," the provisions of §§ 861, 862, and 863 of the Internal Revenue Code shall be applied except as specifically provided in subsection 5 above.
As a result, interest and dividends received from sources outside of the United States is considered foreign source income that is exempt from Virginia income tax.
Title 23 of the Virginia Administrative Code (VAC) 10-110-142 § 2, copy enclosed, provides that:
-
- a. Under federal law certain income received by a partnership, estate, trust or regulated investment company (pass-through entity) and distributed to a partner, beneficiary or shareholder (recipient) retains the same character in the hands of the recipient. If a pass-through entity receives interest or dividends on U.S. or Virginia obligations which is distributed to the recipients in a manner that the distributions retain their character in the hands of the recipients under federal law, then such interest or dividends may be subtracted by the recipients in computing Virginia taxable income.
-
- b. A pass-through entity may invest in several types of securities, some of which are U.S. or Virginia obligations. When taxable income is commingled with exempt income all income is presumed taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. The determination must be made for each distribution to each shareholder.
The principle set forth in this administrative code section also applies to pass-through entities, such as trusts. Such income, which is received by a trust and distributed to a beneficiary, retains the same character in the hands of the beneficiary. To the extent, therefore, that foreign source income received by a trust is exempt pursuant to Code of Virginia § 58.1-322(C)(7), it is also exempt from Virginia taxation when distributed to the beneficiary.
In the instant situation, if the income received from a Canadian trust consists of interest or dividends received from sources outside of the United States, then the income is exempt from Virginia taxation when distributed to the beneficiary. If, however, the Canadian trust receives interest and dividend income from sources inside the United States, then such income would be taxable in Virginia to the beneficiary. Where interest and dividend income received by the Canadian trust is commingled between such income from sources both inside and outside of Virginia, all income is presumed taxable to the beneficiary unless the portion of income which is exempt foreign source income can be determined with reasonable certainty and substantiated.
I trust that this letter addresses your concerns. If you need additional assistance, please contact **********of the Office of Tax Policy at***********.
Sincerely,
Danny M. Payne
Tax Commissioner
OTP/12538N
Rulings of the Tax Commissioner