Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: For a subsection 104(21) designation to be effective with respect to a taxable capital gain designated by the trust in respect of a particular beneficiary, is it necessary for the trust to also pay or make payable the non-taxable portion of the capital gain realized by the trust?
Position: No. However, the terms of the trust instrument must permit or authorize the trustee to determine whether or not to pay or make payable such amounts and to make any such designations.
Reasons: See below.
Author: Harris, Judith
2020 STEP CRA Roundtable – November 26, 2020
Question 3. Distribution of Taxable Capital Gain by Trust
A trust realizes a capital gain for a particular taxation year and would like to designate this to be a taxable capital gain of a beneficiary for that year. Is it sufficient for the amount of the taxable capital gain so designated to be paid or made payable pursuant to the provisions of subsections 104(21) and (24)?
The question implies that the trust will pay or make payable to the beneficiary only the taxable portion of the trust’s capital gain realized in the particular taxation year of the trust, and that the trust will not pay or make payable to the beneficiary any amount referable to the non-taxable portion of the trust’s capital gain for that taxation year.
For purposes of simplifying our response, we have assumed that neither the preferred beneficiary election nor section 105 is applicable and that the trust in question is a personal trust. Further, we have assumed that the trust has realized a net taxable capital gain for the year.
If the designation of the amount distributed is made by the trust in its T3 return for the year as required, and if all of the requirements set out in subsection 104(21) are met (including the requirements that the trust and, unless the trust is a mutual fund trust, the beneficiary, are resident in Canada), then for purposes of the provisions of the Act set out in the preamble to subsection 104(21), the beneficiary will be considered to have realized a taxable capital gain from the disposition by the beneficiary of capital property.
It is our view that the provisions of subsection 104(21) do not require that any additional amount, other than the net taxable capital gain so designated, be paid or made payable by the trust to the beneficiary such as an amount reflecting the non-taxable portion of any capital gain realized by the trust. We note that any amounts that the trust pays or makes payable to beneficiaries must be authorized or permitted by the trust instrument and the applicable law. We further note that we have assumed that the amounts that are paid or payable to the beneficiary, and designated under subsection 104(21), are for the beneficiary’s own account and benefit, and that the beneficiary is under no obligation to pay any part of such amounts to or for the benefit of another person.
Notwithstanding the above comments, it should be noted that CRA has applied the general anti-avoidance rule (“GAAR”) to certain abusive transactions involving the allocation of capital gains. The determination of whether the GAAR would apply to any particular situation would require a full consideration of all the facts and circumstances.
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