CRA indicates that a general power to encroach on capital is not sufficient to make a deemed gain payable to a trust beneficiary

CRA indicated (similarly to the 2016 STEP Roundtable ) that in order for a deemed gain (e.g., under s. 48.1) to be made payable for purposes of s. 104(24):

• the terms of the trust must specifically permit an amount equivalent to the deemed capital gain to be paid or payable, or
• the trustee must have the discretionary power to pay out amounts that are defined as income under the Act.

CRA provided an expanded rationale for this position in the following terms:

Under trust law, capital gains would typically be considered to be part of the capital of a trust; however, a deemed capital gain created under a provision of the Act is a “nothing” for trust purposes. It is not possible to define a deemed capital gain to be income (or a capital gain) for trust purposes. A power to encroach on capital is not in and of itself sufficient to make a deemed capital gain payable.

Neal Armstrong. Summary of 8 June 2016 External T.I. 2015-0604971E5 under s. 104(24).