Income Tax Severed Letters

Principales Questions: Where a first trust makes a designation pursuant to subsection 104(21.2) with respect to an amount paid to a second trust, whether the second trust can make a designation pursuant to subsection 104(21.2) with respect to the same amount paid to its own beneficiaries to allow them to claim the capital gains deduction under subsection 110.6(2.1)?

Position Adoptée: Yes.

Raisons: To determine the "eligible taxable capital gains", as defined in subsection 108(1), of the second trust, it is necessary to take into account the effect of the designation under subsection 104(21.2) that the first trust has made in respect of its beneficiary, the second trust. The effect of paragraph 104(21.2)(b) is that, for the purposes of sections 3, 74.3 and 111 as they apply for the purposes of section 110.6, the beneficiary, the second trust, is deemed to have disposed of capital property that is qualified small business corporation shares, and have a taxable capital gain from such disposition equal to the amount determined by the formula set out in clause 104(21.2)(b)(ii)(B). Therefore, the second trust will be able to make a designation under subsection 104(21.2) in respect of its own beneficiaries as its "eligible taxable capital gains" include the amount designated by the first trust under subsection 104(21.2). This will allow the second trust’s beneficiaries, who are individuals other than trusts, to claim the capital gains deduction under subsection 110.6(2.1), provided all the other conditions are met. As a result of the above, the position set out in document 2016-0667361E5 no longer represents the position of the CRA.