Principal Issues: 1- When must income amounts paid by a trust to a corporate beneficiary be included in computing the beneficiary's income?
2- After receiving an income distribution from a trust in its 2007 taxation year, a corporation disposes of all its trust units before the end of that year. Is the ACB of the trust units reduced by the amounts paid as income distributions for purposes of computing the gain or loss on the disposition of the trust units?
Position: 1. The income amounts payable in a trust's taxation year must be recognized by the beneficiary in the beneficiary's taxation year in which the relevant trust taxation year ends.
2. The amounts paid by a trust that are included in the taxpayer's income by virtue of subsection 104(13) would be included in the 2008 taxation year. The corporation would have to reduce in its 2007 taxation year the ACB of its units by virtue of subparagraph 53(2)(h)(i.1), increasing the gain computed pursuant to section 40 of the Act by an amount equal to the amount eventually included in the corporation's income by subsection 104(13) of the Act. The exception in clause 53(2)(h)(i.1)(A) is not applicable.
However, subsection 39(1) of the Act provides that a gain that is otherwise included in computing the taxpayer's income for the year or any other taxation year is not a capital gain. Therefore, the part of the gain that would be included in income by virtue of subsection 104(13) in the 2008 taxation year would not be considered as a capital gain in 2007 pursuant to subsection 39(1). When filing the 2008 income tax return, the corporation will be able to request an adjustment to its 2007 income tax return to reduce the capital gain consequently.
Reasons: 1. Paragraph 104(13)(a) of the Act.
2. The wording of the subparagraph 53(2)(h)(i.1) allows a reduction of the ACB because the amounts paid that are included in the taxpayer's income by virtue of subsection 104(13) of the Act after the date of the ACB computation. However, an adjustment to reduce the capital gain included in 2007 may be requested after the inclusion of the amounts in income pursuant to subsection 104(13) in 2008 pursuant to the definition of capital gain in subsection 39(1) of the Act even if the ACB is reduced.
