2014-0526581C6 STEP CRA Roundtable - June 2014 - Q18

Principal Issues: 1. Whether the subsection 107(2.001) election applies to all the property distributed to a beneficiary in full or partial satisfaction of the beneficiary's capital interest in a trust or whether the trust can make the election on a property by property basis? 2. Subsection 107(2.001), (2.11), and (2.002) each require an election to be made in prescribed form. As there are no prescribed forms available, how should each election be made?

Position: 1. The 107(2.001) election can be made in respect of a single property. 2. In the case of the subsection 107(2.001) and (2.11) elections a letter should be attached to the trust's return of income, for the 107(2.002) election a letter should be attached to the beneficiary's return of income. Where the beneficiary files electronically the election should be sent to the CRA separately.

Reasons: 1. Subsection 107(2.001) refers to a "distribution of a property to a beneficiary". The words " a property" refers to a singular property such that the election can be used in respect of only one property of all the property distributed. 2. See document

Author: White, Julie
Section: 107(2.1); 107(2.001); 107(2.11); 107(2.002)

STEP CRA Roundtable – June 2014

QUESTION 18.  Electing to have Subsection 107(2.1) Apply

Subsection 107(2) provides the rules for the “rollout” of the property of a personal trust to a beneficiary under the trust in full or partial satisfaction of the beneficiary’s capital interest in the trust. In certain circumstances a trust resident in Canada may elect out of the rules in subsection 107(2) by filing an election under subsection 107(2.001) such that the rules in subsection 107(2.1) apply to the disposition.  Subsection 107(2.11) provides that where a trust resident in Canada makes a distribution to a beneficiary to which subsection 107(2.1) applies, the trust can file an election for certain distributions with the result that the gains will be included in income of the trust rather than the beneficiary. As well, a beneficiary of a non-resident trust may elect out of the rules in subsection 107(2) by filing an election under subsection 107(2.002) such that the rules in subsection 107(2.1) apply to the disposition.

We have the following questions in respect of the subsection 107(2.001), (2.11), and (2.002) elections:
a)    Does the 107(2.001) election apply to all the property distributed to a beneficiary in full or partial satisfaction of the beneficiary’s capital interest in a trust or can the trust make the election on a property by property basis?
b)    Subsections 107(2.001), (2.11) and (2.002) each require an election to be made in prescribed form.  As there are no prescribed forms available, how should each election be made?

CRA Response (a):

Subsection 107(2.001) applies where a trust makes a distribution of a property to a beneficiary of the trust in full or partial satisfaction of the beneficiary’s capital interest in the trust.  Subsection 107(2.001) allows the trust to elect out of the rules in subsection 107(2) where:
(a)   the trust is resident in Canada at the time of the distribution,
(b)   the property is taxable Canadian property, or
(c)   the property is capital property used in, eligible capital property in respect of, or property described in the inventory of a business carried on by the trust through a permanent establishment (as defined by regulation) in Canada immediately before the time of the distribution.

If the election under subsection 107(2.001) is made, the distribution is subject to the rules in subsection 107(2.1) of the Act.  Where subsection 107(2.1) applies the trust is deemed to have disposed of the property for proceeds equal to fair market value. The beneficiary will be deemed to have acquired the property at a cost equal to those proceeds, and generally, the beneficiary will be treated as having disposed of the capital interest for an amount equal to the fair market value of the property less any capital gain realized by the trust.

Subsection 107(2.001) refers to a “distribution of a property to a beneficiary”.  The words “a property” refers to a singular property, such that the election can be used in respect of only one property of all the property distributed.  For example, if the property being distributed is shares of a corporation, the trust may elect in respect of a single share out of all the shares being distributed to the beneficiary in settlement of his capital interest or part thereof to the extent that the conditions in subsection 107(2.001) are otherwise met.  Note, however, that this election cannot be made in respect of a fraction of a share unless the share was legally subdivided prior to the distribution date.

CRA Response (b)

The filing requirements for each of the 107(2.001), (2.11), and (2.002) election is provided below:

Subsection 107(2.001) election

Subsection 107(2.001) requires the election to be made by the trust in prescribed form filed with the trust’s return of income for the year in which the distribution occurred.  As a prescribed form is not available for the election, a letter should be filed with the trust’s T3 Trust Income Tax and Information Return for the year the distribution occurs, setting out all the pertinent information in respect of the distribution.  A list of the information that should be included in the letter is provided on page 31 of the 2013 T3 Trust Guide which is available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4013/t4013-13e.pdf. That information is reproduced below:

The letter should include the following information:
*     a declaration to elect under subsection 107(2.001) of the Act;
*     name of the trust;
*     trust account number;
*     type of trust;
*     trust’s tax year end date;
*     residency status of the trust, (resident trust or non-resident trust);
*     if applicable, the date the trust became a resident of Canada in the year;
*     if applicable, the date the trust became a non-resident of Canada in the year; and
*     name, address and signature of trustee making the election.

Subsection 107(2.11) election

Where a trust resident in Canada makes one or more distributions in the year to which subsection 107(2.1) applies the trust may elect under subsection 107(2.11) not to have subsections 104(6) and (13) apply to certain distributions (other than distributions of cash denominated in Canadian dollars).

The election filed under subsection 107(2.11) must be filed in prescribed form with the trust’s return for the year or preceding taxation year.  As a prescribed form is not available the trust should include the following information in a letter attached to the T3 Trust Income Tax and Information Return:
*     a declaration to elect under subsection 107(2.11) of the Act;
*     the name of the trust;
*     the trust account number;
*     the name of the beneficiary to whom the distribution is being made and whether the particular beneficiary is a resident or non-resident of Canada;
*     a description of the property distributed to the beneficiary;\
*     the adjusted  cost base of the property to the trust; and
*     the fair market value of the property at the time of distribution.

Subsection 107(2.002) election

Where a non-resident trust makes a distribution of a property (other than property described in paragraphs 107(2.001)(b) and (c) of the Act) to a beneficiary in full or partial satisfaction of the beneficiary’s capital interest in the trust, the beneficiary may make an election under subsection 107(2.002) to elect out of the rollover rules in subsection 107(2) such that the rules in subsection 107(2.1) apply.

Where the beneficiary makes the subsection 107(2.002) election, the election must be filed with the beneficiary’s return of income for the taxation year in which the non-resident trust distributes the property.  As there is no prescribed form available for the subsection 107(2.002) election, the beneficiary should attach a letter to their return of income for the year in which the non-resident trust distributes the property.  Where the beneficiary files their return of income electronically, the election should be sent to the CRA separately.  The letter should include the following information:
*     a declaration to elect under subsection 107(2.002) of the Act;
*     the name and address of the beneficiary;
*     the beneficiary’s CRA identification number (for example, social insurance number, business number etc.);
*     the taxation year;
*     a description of the property being distributed in satisfaction of the capital interest in the trust;
*     the cost amount of the property to the trust;
*     the fair market value of the property at the time of the distribution;
*     the adjusted cost base of the beneficiary’s capital interest in the trust;
*     description and name of the trust;
*     name and address of the trustee(s); and
*     country of residence of the trust.

Under paragraph 107(2.002)(b), the cost amount of the capital interest to the beneficiary is deemed, for purposes of subparagraph 107(1)(a)(ii), to be nil.  Generally, the beneficiary’s proceeds of disposition in respect of the capital interest are calculated in accordance with paragraph 107(2.1)(d).  The beneficiary will be treated as having disposed of the capital interest for an amount equal to the fair market value of the property, less the portion of the distribution that is a payment to which paragraph (h) or (i) of the definition of “disposition” in subsection 248(1) applies, and any eligible offset as defined in subsection 108(1).  As a result, the beneficiary may realize a capital gain on the disposition of their capital interest in the trust.

Julie White
2014-052658

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