25 February 2014 Internal T.I. 2014-0517191I7 - Late or amended 104(21) designation

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 a late or amended designation under 104(21) is available in the current case?

Position: No.

Reasons: Designation has to be made in the return of its income for the year.

February 25, 2014

Gordon Clifford HEADQUARTERS
Audit Division Dominic Tiu
Winnipeg Taxation Service Office (416) 973-8002
7th Floor, 360 Main Street
Winnipeg MB R3C 3Z3
2014-051719

Late or Amended Designation under Subsection 104(21)

We are writing in response to your revised query dated February 3rd, 2014 as to whether a late or amended designation under subsection 104(21) of the Income Tax Act (the "Act") may be submitted in the circumstances described below.

It is our view that a late or amended designation in favour of XXXXXXXXXX subject adult children or the subject taxpayer under subsection 104(21) of the Act is not available to the subject trust in the current case.

Facts

The T3 return of a fully discretionary family trust for taxation year ending XXXXXXXXXX was filed and processed on time. Subsequently, the subject trust reported through a taxpayer requested adjustment dated XXXXXXXXXX an overlooked capital gain of $XXXXXXXXXX for the taxation year ending XXXXXXXXXX. It is our understanding that concurrent with the taxpayer requested adjustment, the subject trust purported to designate under both subsections 104(21) and (21.2) of the Act the net taxable capital gain associated with the said gain to the XXXXXXXXXX adult children of the subject taxpayer. It is also our understanding that each of the XXXXXXXXXX subject adult children filed amended personal returns, reported their appropriate share of the taxable capital gain and claimed an equal amount as a capital gains deduction. The subject taxpayer and his XXXXXXXXXX adult children are both income and capital beneficiaries of the subject trust. It is our understanding however that the amount of $XXXXXXXXXX was actually paid to the subject taxpayer.

Our Comments

The capital gain realized by a trust is generally considered to be part of the capital of the trust under trust law. For tax purposes, a taxable capital gain realized by a trust is included in the income of the trust under section 3 of the Act. Subsection 104(21) of the Act allows a trust to designate a portion of its net taxable capital gains as a taxable capital gain in the hands of a beneficiary of the trust, where certain requirements are met. In order for the designation under subsection 104(21) of the Act to apply, the subject trust must make this designation in the return of its income for the year. It is our view that a late or amended designation in favour of XXXXXXXXXX subject adult children or the subject taxpayer under subsection 104(21) of the Act is not available to the subject trust. Note that in respect of the XXXXXXXXXX subject adult children, one of the requirements under subsection 104(21) in this case is that the amount designated can reasonably be considered to have been included in computing their respective incomes for the year pursuant to paragraph 104(13)(a) or section 105.

In order for an amount to be included in a taxpayer's income for a taxation year pursuant to subsection 105(1) it must, inter alia, constitute a benefit to the taxpayer during the year. Amounts included in income pursuant to paragraph 104(13)(a) must have become payable in the trust's taxation year. By virtue of subsection 104(24) of the Act, for purposes of subsection 104(13), an amount is deemed not to have become payable to a beneficiary in a taxation year unless it was paid in that year to the beneficiary, or the beneficiary could enforce payment of the amount in the year.

Given the facts provided and to the extent the Trust is a fully discretionary trust, it is our view that:

• the taxable portion of the capital gain in an amount representing the lesser of the net payment received by the subject taxpayer or $XXXXXXXXXX would be included in the subject taxpayer's income under subsection 104(13) of the Act; and
• the non-taxable portion of the capital gain in an amount representing the lesser of the net payment received by the subject taxpayer or $XXXXXXXXXX would be a tax-free distribution of trust capital in the hands of the subject taxpayer.

Phil Kohnen
for Director
Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch