21 March 1995 External T.I. 9506275 - LIFETIME CAPITAL GAINS EXEMPTION DRAFT LEGISLATION

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.

Principal Issues:

(1) Whether a "spousal trust" holding qualified farm property can utilize draft subsection 110.6(19) to create a deemed capital gain of $500,000 which may be designated to the beneficiaries with capital gains exemptions being claimed by them totalling $500,000. (2) Whether the beneficiaries of the trust can elect with respect to their capital interests in the trust.

Position TAKEN:

(1) No. (2) Yes.

Reasons FOR POSITION TAKEN:

(1) It is intended to flow the gain to the beneficiaries via a preferred beneficiary election. As the trust is a trust described in paragraph 104(4)(a), only the spouse is entitled to make a preferred beneficiary election with the trust under subsection 104(14) by virtue of paragraph 104(15)(a). The gain included in the spouse's income under subsection 104(14) is the amount the trust would designate under draft subsection 104(21.2). The maximum capital gains exemption the spouse would be able to claim is $75,000 in accordance with the amendments to paragraph 110.6(2)(d) and subsection 110.6(3) announced in Bill C-59 (inserted as coming into force provisions). As stated in the November Explanatory Notes re Bill C-59 (page 110):

In applying (110.6(2)(d)and 110.6(2)(d.1)) to the 1994 and 1995 taxation years, (they) are to be read as if gains from the disposition of qualified farm property and qualified small business corporation shares that resulted from an election made under subsection 110.6(19) were excluded. This will ensure that gains that resulted from an election in respect of properties that would ordinarily qualify for the $500,000 exemption under subsection 110.6(2) or (2.1) will qualify for the exemption but only to the extent of the deduction available under subsection 110.3(3) - that is, the $100,000 exemption.

And at page 97:

In applying (subsection 110.6(3) to the 1994 and 1995 taxation years, its preamble is amended to clarify that gains from the disposition of qualified farm property and qualified small business corporation shares that result from an election made under subsection 110.6(19) are included in determining the amount deductible under subsection 110.6(3). Such gains are not eligible for the $500,000 exemption under subsection 110.6(2) or (2.1).

(2) As a capital interest in a personal trust is capital property and is not one of the restricted capital interests it would be an eligible property. The valuation of such an interest is a question of fact.

            950627
XXXXXXXXXX  T. Murphy
(613) 957-8953

Attention: XXXXXXXXXX

March 21, 1995

Dear Sirs:

Re: Lifetime Capital Gains Exemption Draft Legislation

This is in reply to your facsimile dated February 8, 1995 which was forwarded to us by Bill Lutha of the Ottawa Tax Services Office and received by us on March 7. All references herein to sections and components thereof are references to the Income Tax Act.

In your letter you describe a fact situation involving a trust described in paragraphs 70(6)(b) and 104(4)(a) which holds farm property that has increased significantly in value. The terms of the trust provide that capital of the trust may be encroached upon for the benefit of the spouse, and that on the death of the spouse the residue will be divided among the four children. For purposes of draft subsection 110.6(19), you have enquired whether the trust can elect on $500,000 or $100,000 of capital gains and whether the spouse and children can each elect a capital gain of $100,000 on their capital interests in the trust.

In responding to your enquiry we have assumed that: the trust is a personal trust as defined in subsection 248(1), the trust holds qualified farm property as defined in subsection 110.6(1), no capital gains deductions have previously been claimed by the beneficiaries, the conditions in draft subsection 110.6(20) are met, and the capital gain will be allocated via a preferred beneficiary election.

As the trust is a trust described in paragraph 104(4)(a), only the spouse is entitled to make a preferred beneficiary election with the trust pursuant to paragraph 104(14) by virtue of paragraph 104(15)(a). Relative to draft subsection 110.6(19), the taxable capital gain included in the spouse's income under subsection 104(14) is the maximum amount that the trust would be able to designate under draft subsection 104(21.2) for purposes of draft section 110.6. The maximum capital gains deduction the spouse would be able to claim is $75,000 (75% of $100,000) (see the coming into force amendments to paragraph 110.6(2)(d) and subsection 110.6(3)).

In making the election with respect to qualified farm property it must be noted that the property will have a new acquisition date of February 23, 1994, pursuant to draft subparagraph 110.6(19)(a)(ii). As the definition of qualified farm property varies for real property acquired pre and post June 17, 1987, it is important to consider whether by virtue of the new acquisition date the property will continue to qualify as qualified farm property.

With respect to your query of whether the spouse (as opposed to the trust making the election with respect to the property) and children can each file an election with respect to their capital interests in the trust, we note that it is possible to make the election with respect to those capital interests provided the conditions in draft subsection 110.6(20) are met. In determining the value of the capital interest of any particular beneficiary the terms and conditions of the trust would have to be taken into account, including the fact that the capital of the trust may be encroached upon for the benefit of the spouse; i.e., the value of the capital interest is not merely a percentage of the value of the underlying property of the trust.

This opinion represents our opinion of the law and the draft legislation as they would generally apply. This opinion is not an advance income tax ruling and, accordingly, it is not binding on Revenue Canada.

We trust our comments will be of assistance to you.

Yours truly,

Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch