CRA indicates that s. 104(13.4)(b) cannot be used to redirect only a targeted portion of a trust’s income

Any income arising from the application of the deemed disposition rules in s. 104(4) on the death of the relevant beneficiary, is subject to taxation in the trust unless a valid joint election is made under s. 104(13.4)(b.1) for that income to fall into the terminal return of the deceased. CRA is of the view that this election operates on all of the trust’s income.

Therefore, in the situation where the surviving spouse beneficiary of a spousal trust died in 2017 and all the s. 104(13.4)(b.1) conditions for making the joint s. 104(13.4)(b) were met, it nonetheless would not be possible to elect on only a portion of the capital gains deemed to be realized on the death of the surviving spouse respecting the trust’s portfolio of marketable securities. Thus, it would not be possible for only this amount to be included in the terminal return (where it would be subject to graduated rates), with the remaining portion of the deemed capital gains being retained at the trust level in order to use up trust capital loss carryforwards.

However, CRA noted that s. 104(13.1) or (13.2) designations generally are available to soak up trust losses.

Neal Armstrong. Summary of 16 August 2019 External T.I. 2018-0742431E5 under s. 104(13.4)(b).