24 April 1992 Income Tax Severed Letter 9211087 - 21-year deemed realization rule — accumulating income

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.

SUBJECT: 21-YEAR DEEMED REALIZATION RULE, ACCUMULATING INCOME SECTION: 104(4), 104(14), 104(21), 108(l)(a), 104(5.3)]

PRAIRIE TAX CONFERENCE

DRAFT/EBAUCHE May 19 & 20, 1992
Question 15

Under the proposed trust rules issued by the Department of Finance on December 20, 1991, a trust, that does not have any exempt beneficiaries or has not previously made an election under proposed subsection 104(5.3) and that is not a pre-1972 spousal trust at the end of the year and is not described in proposed revised paragraph 104(4)(a), is deemed to dispose of all its capital property (other than excluded property or depreciable property) and land included in the inventory of the trust for proceeds equal to their fair market value on the 21st anniversary date of the trust. Under the definition of "accumulating income" in proposed revised paragraph 108(1)(a), income of the trust from the 21-year deemed realization (including capital gains) is not specifically excluded. Since capital gains arising as a result of the 21-year deemed realization are included in "accumulating income", can the trust allocate these capital gains to the preferred beneficiaries of the trust by making a preferred beneficiary election pursuant to subsection 104(14) in the year of the deemed realization?

Department's Position

Yes, the trust as described above may allocate the net taxable capital gains arising as a result of the 21-year deemed realization to the preferred beneficiaries of the trust by making a preferred beneficiary election pursuant to subsection 104(14) in the year of the deemed realization and by virtue of subsection 104(21). Author: Peter Lee

Statement of Principal Issues
Re: 21-Year Deemed Realization Rule
Accumulating Income
Preferred Beneficiary Election
1992 Prairie Provinces Tax Conference - Round Table (Q.15)

Peter Lee
7-921108
April 24, 1992

Issue

The Department of Finance issued the proposed trust rules on December 20, 1991. Under the proposed trust rules, the issue is whether a trust, that does not have any exempt beneficiaries or has not previously made an election under proposed subsection 104 (5.3) and that is not a pre-1972 spousal trust at the end of the year and is not described in proposed revised paragraph 104(4)(a), can allocate the net taxable capital gains arising as a result of the 21-year deemed realization to the preferred beneficiaries of the trust by making a preferred beneficiary election pursuant to subsection 104(14) in the year of the deemed realization and by virtue of subsection 104(21)?

Position Taken

Yes, under the proposed trust rules issued by the Department of Finance on December 20, 1991, the trust as described above may allocate the net taxable capital gains arising as a result of the 21-year deemed realization to the preferred beneficiaries of the trust by making a preferred beneficiary election pursuant to subsection 104(14) in the year of the deemed realization and by virtue of subsection 104(21).

Under the existing trust rules, only in the case of a spouse trust described in paragraph 104(4)(a), the net taxable capital gain arising as a result of the deemed disposition of property under subsections 104(4) is excluded from accumulating income. (See paragraph 11 of Interpretation Bulletin IT-394R and the letter of D.S. Delorey dated November 7, 1990 (#5-902500).)