CRA finds that the QSBC character of capital gains, including previous years’ reserves, can be flowed out in a 2-tier trust structure

Q.17 of the 2020 STEP Roundtable (2020-0837001C6) reversed 2016-0667361E5 and found that (with the proper designations at both levels under ss. 104(21) and (21.2),) taxable capital gains realized by a lower-tier personal trust from the disposition of qualified small business corporation (QSBC) shares could retain their character as such when distributed to personal trusts that were its beneficiaries which, in turn and in the same year, distributed those gains to their individual beneficiaries.

The Rulings Directorate has now published the internal technical interpretation on which Q.17 is based. The facts are somewhat more elaborate. (The capital gains were recognized over two years as a result of the lower-tier trust claiming a capital gains reserve, and the upper-tier trusts also realized other capital gains which also were distributed.) However, the answers were substantially the same.

Neal Armstrong. Summary of 13 August 2020 Internal T.I. 2019-0818301I7 F under s. 104(21.2).