29 March 1995 External T.I. 9505075 - CAPITAL GAINS ELECTION AND PERSONAL TRUSTS

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

				950507

XXXXXXXXXX		L. Holloway
(613) 957-8953

Attention: XXXXXXXXXX

March 29, 1995

Dear Sirs:

Re: Capital Gains Exemption and Trusts - Proposed Subsection 110.6(19) of the Income Tax Act (the "Act")

This is in reply to your letter dated December 2, 1994, in which you pose several questions concerning the operation of proposed subsection 110.6(19) of Bill C-59 and ability of a trust to flow out it's eligible capital gains.

In particular you had asked whether elected capital gains could be made payable to beneficiaries by issuing a note payable to each beneficiary equal to the capital gain so allocated and, if so, would the note have to be issued before December 31, 1994. In addition you inquired if taxable capital gains would form part of accumulating income for purposes of the preferred beneficiary election where a trust document is silent as to the treatment of capital gains and payment of income is discretionary.

Our Comments

A promissory note is ordinarily given and received as acknowledgement of the existence of a debt, but does not itself create a debt. A trustee cannot create a right of a beneficiary to enforce payment of an amount unless the terms of the trust allow or require the trustee to do so. Deemed gains and other "phantom income" would not be recognized as income for trust law purposes. Consequently, in order to have an amount payable for purposes of subsection 104(24) of the Act, the terms of the trust must specifically permit an amount equivalent to the "phantom income" to be paid or payable or the trustees must have discretionary power to pay out amounts that are defined as income under the Act.

Therefore, a promissory note cannot be issued to a beneficiary in order to make a deemed gain payable. Rather, as stated above, the terms of the trust must allow or require payment of an amount equivalent to the deemed gain to the beneficiary. Where a power to pay out an amount equivalent to the deemed gain is exercised during the year and a decision is made not to pay out assets in kind or to distribute cash before year-end, a valid payable under subsection 104(24) of the Act will be created where the promissory note is payable on demand without restriction.

With respect to your last question, accumulating income as defined in subsection 108(1) of the Act will include the deemed taxable capital gain created by the proposed subsection 110.6(19) election except where a power to pay an amount equivalent to the deemed gain is exercised during the year. If in addition to the trust terms specified on page one, the terms of a trust contain a power to encroach on capital for all beneficiaries and the interests of the capital beneficiaries are vested, then all beneficiaries (income and capital) may make a preferred beneficiary election with the trust in respect of the deemed taxable capital gain under subsection 104(14) of the Act with the amounts calculated in accordance with paragraph 104(15)(c) of the Act. ATR-30 and ATR-34 provide examples of the application of the preferred beneficiary election.

The above represents our interpretation of the law and the draft legislation as they would generally apply. These opinions are not advance income tax rulings and, as stated in paragraph 21 of Interpretation Bulletin 60-6R2, they are not binding on Revenue Canada.

We trust these comments will be of assistance.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch