29 September 1995 External T.I. 9515015 - SUBSECTION 110.6(19) AND PREFERRED BENEFICIARY ELECTION

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) When a deemed capital gain is realized by a discretionary trust pursuant to an election under subsection 110.6(19), do all beneficiaries alive as at December 31, 1994 regardless of whether they were born before or after February 22, 1994 have to be included in the denominator in paragraph 2800(3)(f) of the Regulations?

2) Could a discretionary trust allocate the deemed capital gain only to beneficiaries born prior to February 22, 1994 if there are other preferred beneficiaries alive at the end of the taxation year who may be entitled to share in accumulating of the trust?

3) Could the deemed taxable capital gain be reflected in the annual gains limit of an unborn beneficiary?

Position TAKEN:

1) yes, 2)no, 3) no

Reasons FOR POSITION TAKEN:

1) The preferred beneficiary's share is calculated at the end of the taxation year which includes February 22, 1994 and all preferred beneficiary alive at the end of the year and who are entitled to share in the accumulating income are included in the denominator.

2) CCM # 9504985 (statement 6) and CCM # 9503120

3) For the 1994 and 1995 taxation years, gains resulting from an election under subsection 110.6(19) by a trust will be included in the definition of and individual's "annual gains limit" only if the individual was a beneficiary under the trust on February 22, 1994 and only to the extent that gains cannot reasonably be considered to have been included in computing the individual's income because of an interest in the trust that was acquired after February 22, 1994. Subsection 108(1) defines the word "beneficiary" specifying that under a trust a beneficiary includes a person beneficially interested. Therefore, we have to determine if an unborn child is a person for tax purposes. Based upon the tax cases cited below, an unborn child is not a child nor a person as those words are defined respectively in subsections 252(1) and 248(1) of the Act.

On the other hand, even if the word "person" could be interpreted to include an unborn child, it is arguable that such unborn beneficiary cannot reasonably be considered to have acquired an interest in a trust before he or she is born viable.

For all the above reasons, we took the conservative and logical result that a deemed capital gain cannot be reflected in the annual gains limit of an unborn beneficiary.

			951501
XXXXXXXXXX(613) 957-8953

Attention: XXXXXXXXXX

September 29, 1995

Dear Sirs:

Re: Subsection 110.6(19) of the Income Tax Act (the "Act")

We are replying to your letter dated May 26, 1995, wherein you requested our opinion concerning the application of paragraph 2800(3)(f) of the Income Tax Regulations (the "Regulations") where a personal trust elects under subsection 110.6(19) of the Act to have a deemed disposition of capital property owned on February 22, 1994. We apologize for the delay in responding to your inquiry.

As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating proposed transactions are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate tax services office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Where the preferred beneficiaries' share of accumulating income of a trust1 is discretionary, paragraph 104(15)(c) of the Act and paragraph 2800(3)(f) of the Regulations apply to determine each preferred beneficiary's share of the accumulating income. Where paragraph 2800(3)(f) of the Regulations applies, we confirm your views that all the beneficiaries who may be entitled to share in the accumulating income of the trust and who are living at end of the fiscal year that includes February 22, 1994, are included in the denominator regardless of whether they were born before or after February 23, 1994. It should be noted that all contingent preferred beneficiaries are included in the denominator of the formula in paragraph 2800(3)(f) of the Regulations even though they cannot share in accumulating income of the trust for the year.

Before allocating any portion of the deemed capital gain to a preferred beneficiary, the terms of the trust have to be respected. The preferred beneficiary has to be entitled to any capital gain of the trust. Even if a preferred beneficiary is not entitled to capital gains it may be entitled to accumulating income and thus included in the denominator of the formula in paragraph 2800(3)(f) of the Regulations. Therefore, we agree with your statement that where paragraph 2800(3)(f) of the Regulations applies, a discretionary trust cannot allocate the entire deemed capital gain to beneficiaries born prior to February 23, 1994, if other preferred beneficiaries are alive at the end of the year and are included in the denominator of the formula for the taxation year which includes February 22, 1994.

For the 1994 and 1995 taxation years, gains resulting from an election under subsection 110.6(19) by a trust will be included in the definition of an individual's "annual gains limit" only if the individual was a beneficiary under the trust on February 22, 1994, and only to the extent that gains cannot reasonably be considered to have been included in computing the individual's income because of an interest in the trust that was acquired after February 22, 1994. Consequently, it is our opinion that gains resulting from an election under subsection 110.6(19) cannot be reflected in the annual gains limit of a beneficiary if that beneficiary was not born on or before February 22, 1994.

The above comments do not reflect the July 19, 1995 amendments to subsections 104(14) and 104(15) as proposed by the Minister of Finance.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust that these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

ENDNOTES

1.other than a pre-1972 spousal trust