4 June 2012 External T.I. 2012-0439271E5 - QSBCS deduction by the beneficiary

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: Whether the beneficiary of an inter vivos, discretionary trust is subject to the holding period requirement of the QSBC definition in case the trust designates its taxable capital gain on QSBC to him, for the purposes of claiming the capital gain deduction under s. 110.6(2.1).

Position: No, in general

Reasons: Law

XXXXXXXXXX
						2012-043927
						Lata Agarwal
      					613-957-8968
June 4, 2012

Dear XXXXXXXXXX:

Re: Disposition of shares by a personal trust

This is in response to your correspondence dated March 5, 2012, concerning your request for our views on a taxpayer’s ability to claim a capital gains deduction under subsection 110.6(2.1) of the Income Tax Act (“Act”) in the fact situation described in your correspondence.

Briefly, in your correspondence you indicate that an inter vivos personal trust has owned shares of a Canadian-controlled private corporation for a number of years. The personal trust is resident in Canada and the trustee has the power to allocate income or capital to the beneficiaries as required. The shares owned by the personal trust are qualified small business corporation shares (“QSBCS”) as that term is defined in subsection 110.6(1) of the Act. The trustee intends to have the trust sell the shares and designate the resultant net taxable capital gain, in accordance with subsections 104(21) and 104(21.2) of the Act, to a Canadian resident individual who has only been a beneficiary of the trust for 12 months prior to the share sale.

It is your view that even though this beneficiary has only been a capital and income beneficiary for 12 months, the beneficiary would not, by that fact, be precluded from claiming a capital gain deduction under subsection 110.6(2.1) of the Act in respect of the taxable capital gain designated by the trust in accordance with subsections 104(21) and 104(21.2) of the Act.

Our Comments

Very generally speaking, where a Canadian resident individual, other than a trust, realizes a taxable capital gain on the disposition of a share that is a QSBCS, that individual may be entitled to a capital gains deduction under subsection 110.6(2.1) of the Act provided certain other conditions set out in the Act are otherwise met. While a determination of an individual’s ability to claim a capital gains deduction remains a question of fact, we can provide our comments on the particular issue that appears to be of particular concern to you.

In order for a share of a corporation to be considered as a QSBCS, paragraph (b) of that definition requires that the particular share must not have been owned by any person or partnership other than the particular individual or a person or partnership that was related to the individual at any time throughout a period of 24 months immediately preceding the determination time (the “Holding Period Test”). However, where a personal trust designates an amount in respect of a beneficiary in respect of its net taxable capital gains from a disposition of QSBCS for a taxation year pursuant to subsection 104(21) and subsection 104(21.2) of the Act, the beneficiary is, inter alia, deemed for the purposes of sections 3, 74.3 and 111 as they apply for the purposes of section 110.6, to have a disposition of a capital property that is a QSBCS. As such, as long as the particular personal trust itself meets the Holding Period Test, the designated beneficiary would not necessarily be precluded from claiming a capital gain deduction under subsection 110.6(2.1) of the Act solely because he or she was not a beneficiary of the trust throughout the entire 24 month period prior to the sale of the QSBCS by the trust.

The term "personal trust" is defined in subsection 248(1) of the Act. An inter vivos trust will be a personal trust where no beneficial interest in the trust was acquired for consideration payable directly or indirectly to the trust or to a person who has contributed to the trust by way of transfer, assignment or other disposition of property.

We trust that these comments will be of assistance.

Yours truly,

Michael Cooke
Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch