Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether the non-taxable portion of a trust's capital gains can be added to a corporate beneficiary's CDA account where the trust allocates a portion of its net taxable capital gains to the beneficiary pursuant to subsection 104(21).
Position: No.
Reasons: As per E9524995 and questions 7 and 20 at the 1999 APFF conference. The beneficiary is deemed for purposes of sections 3 and 111 (except as they apply for purposes of section 110.6) to have a taxable capital gain, but the beneficiary is not deemed to have a capital gain and it cannot otherwise be determined that the beneficiary has a capital gain.
1999-001233
XXXXXXXXXX J.D. Brooks
(613) 957-2103
Attention: XXXXXXXXXX
May 11, 2000
Dear Sirs:
This is in reply to your letter of July 6, 1999 in which you requested us to consider your interpretation of the effect of the deeming provision of subsection 104(21) of the Income Tax Act. The hypothetical situation concerns net taxable capital gains of a trust that are designated in respect of a particular beneficiary that is a corporation. The issue is whether the non-taxable portion of the trust's capital gains can be added to the corporate beneficiary's capital dividend account. We apologize for the delay in replying.
You recognized that the effect of that paragraph is not to deem a beneficiary to have triggered a capital gain itself. However, it is your view that the beneficiary would have a capital gain by virtue of section 38, which defines a taxpayer's taxable capital gain to be 3/4 of the taxpayer's capital gain.
Subsection 104(21) applies for purposes of sections 3 and 111 (except as they apply for purposes of section 110.6) and deems a portion of a trust's "net taxable capital gains" to be a taxable capital gain of the particular beneficiary. While it is true that, where a taxpayer has a capital gain as defined in section 39, the taxpayer's taxable capital gain is determined pursuant to section 38 and it is brought into income in section 3, the deeming provision of subsection 104(21) does not enable one to trace backwards from section 3 through section 38 to section 39.
As stated in our document #9524995 to which you referred, we have previously raised this point with the Department of Finance. This issue was also recently addressed in questions 7 and 20 at the 1999 APFF (Association de planification fiscale et financière) conference. In responding to these questions, the Department of Finance stated that they agree with our interpretation and they are examining this and related issues to determine whether it would be appropriate to amend the Act.
Yours truly,
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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