11 January 1996 External T.I. 9521525 - EFFECT OF NET CAPITAL LOSS ON ACB OF TRUST UNITS

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:

Effect of carry-forward of net capital losses on ACB of units of unit trust.

Position:

ACB of units reduced by amount of net capital losses.

Reasons:

Subparagraph 53(2)(h)(i.1) as it pertains to the assumptions made in the letter re entitlement of unitholders to income and capital gains.

		952152
XXXXXXXXXX                         	(613) 957-8953

Attention: XXXXXXXXXX

January 11, 1996

Dear Sirs:

Re: Adjusted Cost Base of Trust Units

This is in reply to your letter of August 9, 1995, concerning the calculation of the adjusted cost base ("ACB") of units of a unit trust resident in Canada pursuant to subparagraph 53(2)(h)(i.1) of the Income Tax Act (the "Act") where the trust has designated an amount under subsection 104(13.2) of the Act. All references herein to sections or components thereof are references to the Act unless otherwise indicated.

In responding to your letter we will assume that all unitholders are resident in Canada, the trust did not receive any non-taxable dividends and the trust indenture provides that all income and net realized capital gains (realized capital gains less capital losses in the year) are payable to unitholders of record on the last day of the trust's taxation year.

In computing the ACB of a capital interest of such a unit trust, subparagraph 53(2)(h)(i.1) basically provides that an amount payable to a unitholder (otherwise than as proceeds of disposition) reduces the ACB except to the extent of the portion thereof that was included in income by reason of subsection 104(13) or is equal to 1/3 of the amount designated by the trust under subsection 104(21) in respect of the unitholder.

Subsection 104(13.2) would permit a unit trust to make a designation to include taxable capital gains in its income rather than in the income of its unitholders. To utilize this provision, the trust must have made a designation under subsection 104(21) with respect to net taxable capital gains (defined in subsection 104(21.3)) and it must choose to deduct less than the amount it would otherwise be entitled to deduct under subsection 104(6). The maximum amount that may be designated is determined by the formula in the provision. The amount under subsection 104(13.2) is deemed not to have been paid or payable to the unitholder for purposes of subsection 104(13) (except in the application of subsection 104(13) for the purposes of subsection 104(21)) and reduces the amount of taxable capital gains otherwise included in computing the unitholder's income by reason of subsection 104(21). The designated amount, as stated in the Department of Finance Technical Notes (1988):

...will reduce the adjusted cost base to the beneficiaries of their capital interests in the trust unless that interest was acquired for no consideration where the trust was a personal trust...Notwithstanding the subsection 104(13.2) designation, the non-taxable portion of a capital gain will be able to be flowed through to a beneficiary without reducing the adjusted cost base of a trust interest in accordance with clause 53(2)(h.1)(B).

If the unit trust had one unitholder, interest income of $1,000, capital gains of $600, net capital losses (as defined in subsection 111(8)) of prior years of $400 and designated $400 under subsection 104(13.2), the following calculation would be made under subparagraph 53(2)(h)(i.1):

Amount payable $1,600

Less:

(A) 104(13) ($1,050)
(B) 1/3 amount designated under 104(21) ($ 150)

ACB Reduction $ 400

The subsection 104(13) amount is calculated as the interest income of $1,000 plus the taxable capital gain of $450 (3/4 of $600) less the amount designated under subsection 104(13.2) of $400. The amount designated under subsection 104(13.2) is calculated as $450/$450 (being the taxable capital gain designated to the unitholder under subsection 104(21)) * ($1,450 - $1,050) (the amount that would otherwise be included in income under subsection 104(13) less the amount deducted under subsection 104(6)).

The amount designated under subsection 104(21) would be $450 (3/4 of $600) as a designation under subsection 104(13.2) does not affect that amount by virtue of the excluding words in paragraph 104(13.2)(a).

These comments represent our general views on the subject matter of your letter. We trust that they will be of assistance to you.

Yours truly,

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