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.
October 24, 1994
HALIFAX DISTRICT OFFICE HEAD OFFICE
Technical Assistance Rulings Directorate
L. Holloway
Attention: Madeleine Chiasson (613) 957-2104
942042
Capital Gains Exemption & Personal Trusts
This is in reply to your memorandum of August 9, 1994, requesting the clarification of the operation of the draft legislation in respect of the elimination of the $100,000 lifetime capital gains exemption as of February 22, 1994. We note that your request for assistance was received in Head Office only shortly before the draft legislation was made available to the general public; therefore, XXXXXXXXXX will likely be in a position to answer their own questions. Nevertheless we will address their specific concerns in the following paragraphs.
SCENARIO ONE
- There are 3 beneficiaries who share 1/3 each per the terms of the will.
- Beneficiary 1 has $75,000 of capital gains exemption available.
- Beneficiary 2 has $10,000 of capital gains exemption available.
- Beneficiary 3 has no capital gains exemption available.
- At February 22, 1994 the trust has an asset on hand with a fair market value ("FMV") of $200,000 and an adjusted cost base of $100,000.
Questions posed by XXXXXXXXXX Representative
A.Do we realize the full deemed gain and allocate it according to each beneficiary's share per the terms of the will...$25,000 taxable capital gain each?
B.Do we realize the full deemed gain and allocate it according to the capital gains exemption available; i.e. beneficiary 2 gets $10,000 and beneficiary 1 gets the balance of $65,000?
C.Do we realize the full deemed gain and allocate based on each beneficiary's share in light of their capital gains exemption available? A 1/3 share is $25,000; beneficiary 1 gets $25,000; beneficiary 2 gets $10,000 and beneficiary 3 gets nil? Does the balance get taxed in the trust?
D.Can we only realize sufficient deemed gains to allocate to each beneficiary?
New subsection 110.6(19) allows personal trusts to elect to recognize capital gains accrued to February 22, 1994 on capital property (other than an interest in a related segregated fund trust or a prescribed trust) so that those gains can be sheltered by the $100,000 lifetime capital gains exemption which is being eliminated for gains on dispositions occurring after that date.
Generally, this election provides that the trust will be considered to have disposed of the property on February 22, 1994 for proceeds equal to the amount designated in the election. The "elector" trust will then be considered to have reacquired the property immediately after the deemed disposition at the designated amount.
In addition, a personal trust is only allowed to make an election where the application of all the elections under subsection 110.6(19) would result in an increase in the eligible taxable capital gains of the trust flowed out under subsections 104(21) and (21.2) or would result in an increase in the amount deductible by the trust under 110.6(12).
Therefore, while the amount of capital gains to be triggered on February 22, 1994 is an elective amount, the triggered gain should be treated as any other capital gain realized by the trust with respect to distributions. As explained in paragraph 10 of IT-381R2 "The terms and conditions of a trust arrangement will usually establish the rights of the beneficiaries to a share of capital gains realized by a trust."
SCENARIO TWO
RE: the stop loss rules
Questions posed by XXXXXXXXXX Representative
Assume we are preparing the final T3 and an election to deem a disposition has been made. Do the stop loss rules continue to apply to beneficiaries who receive assets in specie? We issue a specie distribution schedule to each beneficiary showing the asset description and the cost. If the stop loss rules continue should we show both the original cost and the "deemed" figure to each beneficiary, or do the stop loss rules end with the estate being finalized?
We assume that this question concerns statements made in the February 22, 1994 Notices of Ways and Means under the caption Capital Gains Exemption as follows:
(d) where an individual, trust or partnership has recognized a gain in respect of a property by virtue of an election referred to in subparagraph (a) or (b)
(i)any loss realized by a person on a subsequent disposition of the property be reduced to the extent of the gain so recognized by that person or by another person with whom that person did not deal at arm's length,
(ii)any loss realized by the trust or partnership, or by any beneficiary under the trust, any member of the partnership or any other person with whom such trust, partnership, beneficiary or member did not deal at arm's length, on a subsequent disposition of the property be reduced to the extent of the gain....
We have confirmed with the Department of Finance that these particular stop loss rules never materialized in the form of draft legislation. Therefore, if a personal trust has made an election in respect of capital property owned on February 22, 1994, by virtue of new subparagraph 110.6(19)(a)(ii), the property (other than property that is an interest in or a share of the capital stock of a flow-through entity or a disposition that results in an income inclusion for the purpose of section 7 or 35) will be deemed to have been reacquired by the trust immediately after that time for the lesser of:
1) the designated amount; and
2) FMV less the designated amount net of 1.1 times FMV.
Essentially the trust will receive a step up in the cost base of the property to the extent of the gain recognized. It is this new cost amount which is relevant on a subsequent distribution or disposition of the property by the trust.
In distributing property in settlement of a capital interest, subsection 107(2) would apply whereby the trust is deemed to have disposed of the property at its cost amount. The beneficiary is deemed to have acquired the property distributed in satisfaction of the capital interest at this cost amount and the beneficiary is deemed to have disposed of his or her capital interest at proceeds equal to the cost amount of the property acquired.
In the settlement of an income interest in a trust, subsection 106(3) deems the trust to have disposed of all property so distributed for its FMV. Therefore, depending on the amount previously designated under new subsection 110.6(19) the trust may or may not realize a gain or loss. The cost of the property received by the beneficiary is FMV by virtue of subsection 106(2).
T. Murphy
A/Section Chief
Trusts Section
Rulings Directorate
Policy and Legislation Branch
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