CRA states that a distribution by a discretionary trust of a taxable capital gain in excess of the trust’s income could be a s. 105(1) benefit
A discretionary family trust realized a taxable capital gain of $200,000, as well as a rental loss from a building of $100,000, with no other items of income or expenses for that year. The trust distributed the $200,000 taxable capital gain to a beneficiary at year end in cash.
CRA rejected the suggestion that the trust could take a s. 104(6)(b) deduction for $200,000, thereby generating a $100,000 loss.
Respecting the status of the distribution in excess of the trust income of $100,000, CRA did not simply indicate that it was a capital distribution, and instead stated:
Depending on the circumstances and terms of the trust deed, where an amount paid to a beneficiary exceeds the trust's taxable income for the year and does not represent a distribution of property as capital by virtue of the trust deed, the excess could be a benefit conferred by the trust to be included in computing the income of the beneficiary under subsection 105(1).
Neal Armstrong. Summary of 18 April 2019 External T.I. 2017-0716451E5 F under s. 104(6)(b).