23 January 2002 External T.I. 2001-0092005 - TRUST & CAPITAL GAINS EXEMPTION

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:

1. Can beneficiaries under a trust claim an enhanced capital gains deduction on the amount of the capital gain designated to them by the trust in respect of the sale of farmland?

Position:

1. If certain conditions are met, generally they can.

Reasons:

1. Reading of the particular legislation in section 110.6 and section 104 of the Act.

							2001-009200
XXXXXXXXXX 						Allan Nelson, C.M.A.
(613) 443-7253

January 23, 2002

Dear XXXXXXXXXX:

Re: Technical Opinion Request

We are writing in reply to your letter to us dated July 4, 2001, wherein you asked us to comment on whether the beneficiaries can claim their enhanced capital gains deductions on the amount of the capital gain that is designated to them by a trust.

You have asked us to consider the following hypothetical situation:

• Mr. A dies prior to 1987.
• At the time of his death, Mr. A owned farm property that satisfied the definition of qualified farm property in subsection 110.6(1) of the Income Tax Act (the "Act").
• Under the terms of Mr. A's will, the property is held in a long-term trust for his children and grandchildren. The trust is a personal trust, as defined in subsection 248(1) of the Act.
• In the current year, the trust will sell one of the parcels of land. The sale will result in a capital gain to the trust. The trust wishes to designate the full amount of the gain as a capital gain of each of the beneficiaries so that the beneficiaries can use their capital gains deductions for qualified farm property.
• It is assumed that each of the beneficiaries is otherwise entitled to claim the capital gains election in accordance with subsection 110.6(2) of the Act. While we have not been provided with sufficient information to make such a determination, for purposes of this reply, we assume that the land would be "qualified farm property", as defined in subsection 110.6(1) of the Act, of the trust immediately before its disposition.

Your Analysis

Generally, it is your view that

• subsection 110.6(2) of the Act applies to the taxable capital gain of an individual and it does not apply to the taxable capital gain of a trust.
• subject to the comments below, when the trust sells one of the parcels of its qualified farm property, for income tax purposes, the trust will be treated as having disposed of the land, not the individual beneficiaries.
• in order for a beneficiary to claim a capital gains exemption, under subsection 110.6(2) of the Act, in respect of a disposition of a portion of the trust's qualified farm property, the beneficiary must be deemed to have disposed of that particular property.
• the formula contained in subsection 104(21.2) of the Act provides a mechanism for a personal trust to allocate taxable capital gains from dispositions of qualified farm property to its beneficiaries.
• if the personal trust disposes of a portion of its qualified farm property, it is able to designate under paragraph 104(21.2)(b) of the Act so that the taxable capital gain is deemed, to the extent provided in that paragraph, to be that of the individual beneficiaries from the disposition of their qualified farm property. This would allow the beneficiaries to claim their respective capital gains exemption under subsection 110.6(2) of the Act.

Our Comments

As explained in Information Circular 70-6R4, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments, which may be of some assistance to you.

Based on the above hypothetical facts and assumptions, generally, we concur with your analysis. A personal trust may allocate to its beneficiaries the trust's taxable capital gain from the disposition of qualified farm property, pursuant to and to the extent provided in subsections 104(21) and (21.2) of the Act. Further, each beneficiary would be entitled to claim the enhanced capital gain exemption on the capital gain allocated by the trust, pursuant to and to the extent provided in section 110.6 of the Act.

Reference is made to Interpretation Bulletin IT-381R3 (copy enclosed for your convenience) for a discussion of the CCRA's position concerning trusts and the
flow-through of taxable capital gains to beneficiaries. In particular see paragraphs 5-7, which state in part

¶ 5. A trust that has realized taxable capital gains in a particular taxation year may, within the limits of subsection 104(21), designate in its return of income for the year all or part of the amount of those gains as a taxable capital gain for the year of one or more beneficiaries. An amount designated to a beneficiary under subsection 104(21) must reasonably be considered to be part of the amount included in the beneficiary's income for that year under any of the provisions referred to in ¶ 1 above (see also ¶ 3 above)...

¶ 6. If a "personal trust", as defined in subsection 248(1) of the Act, designates to a beneficiary an amount under subsection 104(21) in respect of its net taxable capital gains for a taxation year (see ¶s 4 and 5 above), subsection 104(21.2) provides that the trust shall also designate to the beneficiary an amount or amounts in respect of its eligible taxable capital gains, if any, for the year...A subsection 104(21.2) designation can occur only if the amount designated to the beneficiary under subsection 104(21) pertains to net taxable capital gains of the trust from the disposition of qualified farm property...

¶ 7. An amount designated to a beneficiary by a personal trust under either formula in subsection 104(21.2) is deemed to be a taxable capital gain of the beneficiary from a disposition (by the beneficiary) of his or her qualified farm property...The beneficiary's deemed taxable capital gain occurs in the beneficiary's taxation year in which the taxation year of the trust (for which the subsection 104(21) designation was made) ends. This deeming rule in the subsection 104(21.2) formulas applies only for purposes of the beneficiary's claiming a section 110.6 capital gains deduction. It is important to note that the beneficiary must still meet all of the requirements of section 110.6 in order to claim a capital gains deduction. For example, a beneficiary who has already claimed the full $500,000 capital gains exemption in prior years would not be able to use a subsection 104(21.2) designation to claim any further capital gains deduction.

Additional Comments

In accordance with paragraph 22 of Information Circular 70-6R4, the above comments are only an expression of opinion, and as such should not be construed as an advance income tax ruling, nor are they binding on the CCRA.

We hope the above will be of assistance to you.

Yours truly,

Milled Azzi, C.A.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch