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 ISSUE: Whether the non-taxable portion of capital gains of a trust can be added to a corporate beneficiary's capital dividend account.
Position: No.
REASON: Where income of a trust is payable to a beneficiary, the trust may be able to designate a portion of its net taxable capital gains to be a taxable capital gain of the beneficiary. However, only the taxable portion of the trust's capital gains will be added to the recipient corporation's capital dividend account. Pursuant to 104(21), the recipient is deemed to have received a taxable capital gain, and thus the non-taxable portion of capital gains recognized by the trust is not deemed to be received by the recipient corporation.
October 17, 2000
Vancouver TSO Trusts Section
J. D. Brooks
Attention: Elizabeth Wan (613) 957-2103
471-30 CSD
2000-004789
XXXXXXXXXX
We are replying to your memorandum of September 19, 2000 in which you requested us to comment on representations made by the representative for the above-named taxpayer.
Although a specific taxpayer is named, the facts presented by the representative appear to be hypothetical.
The representative outlined two hypothetical situations which we have clarified here. In both situations, a corporation purchased an investment in a trust (e.g. it purchased a unit of a mutual fund trust). For ease of presentation, it is presumed that there is only one unitholder in the trust and that the taxable capital gains inclusion rate is 3/4. In the first situation, a $1,000 capital gain is realized by the trust, resulting in a taxable capital gain of $750 in the trust. Pursuant to the terms of the trust agreement, the amount of the taxable capital gain is payable to the unitholder although no cash is distributed. Pursuant to subsection 104(21) of the Income Tax Act (the "Act"), the trust designates $750 to be paid out of its net taxable capital gains to the unitholder (the corporation). The result is that the corporation would be taxed on a taxable capital gain of $750 but the $250 untaxed portion of the trust's capital gain would not be added to the corporation's capital dividend account.
In the second situation, a gain of $1,000 in the trust's property is inherent - it is not actually realized by the trust but it is reflected in the value of the trust interest. If the corporation were to then sell its interest in the trust, the corporation would realize a taxable capital gain of $750, and $250 would be added to its capital dividend account.
The representative feels that the results should be the same in both of these situations. He referred to our letter #9524995 in which we stated that the non-taxable portion of a trust's capital gains cannot be added in computing a corporate beneficiary's capital dividend account. He feels that the opinion is unfair.
Subsection 104(21) of the Act allows a trust to designate a portion of its net taxable capital gains for a taxation year as a taxable capital gain of a beneficiary of the trust. In essence, the designated portion of the net taxable capital gains of a trust is deemed to be a taxable capital gain of a particular beneficiary. However, paragraph 104(21) does not deem beneficiaries to have triggered the entire capital gain themselves. Therefore, we are of the opinion that the non-taxable portion of a trust's capital gains is not added in computing a corporate beneficiary's capital dividend account under subsection 89(1) of the Act as a consequence of an allocation to the corporation of a portion of a trust's net taxable capital gains. You may wish to refer to the Round Table on Federal Taxation, 1999 APFF Conference (see questions 7 and 20) since this issue was addressed by both the Canada Customs and Revenue Agency and the Department of Finance. The Department of Finance noted that there are principle-based arguments in favour of an amendment to the Act to permit the non-taxable portion of a trust's capital gains to be added to a corporate beneficiary's capital dividend account, but other issues need to be considered concurrently.
For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database ("LAD") on the Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.
T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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