9 December 2008 External T.I. 2008-0281441E5 - ACB of cap.int. in a trst-non-tax. port.ofcap.gain

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.

Principal Issues: Does 53(2)(h)(i.1)(B)(I) apply when the non-taxable portion of a capital gain is payable and is distributed by a unit trust in the year subsequent to the year that the taxable capital gain was realized and paid to unitholders where those taxable capital gains were designated by the trust under 104(21)?

Position: Yes

Reasons: Consistent with previous position

									2008-028144
XXXXXXXXXX 								Vivian Shih
(613) 957-2103
December 9, 2008

Dear XXXXXXXXXX :

Re: Subclause 53(2)(h)(i.1)(B)(I) - non-taxable portion of capital gains

This is in response to your letter of June 5, 2008 and fax of September 9, 2008 requesting our comments with respect to the above-noted matter. In particular, you ask whether there would be no reduction in the adjusted cost base ("ACB") of a capital interest of a unit trust pursuant to subclause 53(2)(h)(i.1)(B)(I) where:

1. the unit trust has distributed the taxable portion of capital gains in the year that the capital gains were realized;
2. the taxable capital gains were designated by the unit trust under subsection 104(21);
3. in a subsequent year, the non-taxable portion of the capital gain is payable to the beneficiaries; and
4. the unit trust distributes the non-taxable portion of those capital gains to its beneficiaries in that subsequent year.

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this irectorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve 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 assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

In general, subparagraph 53(2)(h)(i.1) would apply to reduce the ACB of a capital interest of a taxpayer in a unit trust by any amount that has become payable in respect of the capital interest to the taxpayer by the trust after 1987 and before that time where the amount is not considered to be proceeds of disposition.

Clauses 53(2)(h)(i.1)(A) and (B) provide exceptions to the general rule in subparagraph 53(2)(h)(i.1). Where the amount has been included in the taxpayer's income by virtue of subsection 104(13), the taxpayer's ACB of the capital interest in the trust will not be reduced pursuant to clause 53(2)(h)(i.1)(A). Where the trust was resident in Canada throughout the taxation year in which the amount became payable, one of the exceptions in clause 53(2)(h)(i.1)(B) may apply. In particular, an amount equal to the amount that has been designated by the trust for that year under subsection 104(21) does not reduce the ACB pursuant to subclause 53(2)(h)(i.1)(B)(I).

Subsection 104(21) permits a trust to designate, in respect of a particular beneficiary, a portion of its net taxable capital gains for a taxation year in an amount that may reasonably be considered to have been included in computing the beneficiary's income for that year by virtue of subsections 104(13), 104(14) or section 105. The amount equal to the amount designated under subsection 104(21) in respect of a taxpayer referred to in clause 53(2)(h)(i.1)(B) represents the non-taxable portion of the net capital gains that have been so designated that are payable to the beneficiary in that year or in a subsequent year.

It is a question of fact as to whether the conditions outlined in either clause 53(2)(h)(i.1)(A) or (B) are met in any particular circumstances.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

Yours truly,

Robin Maley
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch