6 October 1995 APFF Roundtable Q. 17, 9522330 - CAPITAL GAIN PAYABLE

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.

APFF - 1995

Question 17

Application of the provisions of subsections 104(21) and 104(21.2) of the Act - crystallizing the capital gains deduction for eligible small business shares

A personal trust holds qualifying shares in a small business and wishes to internally crystallize the $500,000 capital gains deduction on its shares. The trust wants to allocate the deemed capital gain to its beneficiaries under the provisions of subsections 104(21), (13) and (21.2) of the Act. For purposes of these subsections, the capital gain must be “payable” within the meaning of subsection 104(24) of the Act. In light of subsection 104(24) of the Act, it appears impossible that a deemed capital gain could be payable. How does Revenue Canada plan to interpret these provisions of the Act within the context of a crystallization?

Answer by the Department of Revenue

Subsection 104(21) of the Act allows a personal trust to designate a portion of its net taxable capital gains to a beneficiary to the extent that that portion is included in the beneficiary’s income under subsections 104(13) or 104(14) of the Act. Therefore, taxable capital gains must be paid or payable to the beneficiary or must be covered under a preferred beneficiary election. It should be remembered that the July 19, 1995 draft legislation proposes to change the definition of “preferred beneficiary” and provides that a beneficiary of a trust is a preferred beneficiary only if he or she is entitled to the tax credit provided in subsection 118.3(1) of the Act.

For a deemed capital gain to be included in the beneficiary’s income, it must, first and foremost, be paid or payable within the meaning of subsection 104(24) of the Act. The issue of determining whether an amount is payable to a beneficiary is based on the trust deed. The trustees must comply with the terms of the trust deed. This means that they cannot arbitrarily create for a beneficiary the right to receive an amount if this right is not expressly vested in the beneficiary under the trust deed. If the trust deed specifically includes a clause empowering the trustees to pay an amount equivalent to the deemed capital gain or a clause giving the trustees the power to pay amounts that are defined as income within the meaning of the Act, the Department is of the opinion that a deemed capital gain will be payable to a beneficiary, provided the trustees exercise one of these powers in the year. When the trustees exercise this right during the year without paying property in kind and without distributing funds before the end of the year, an amount will be considered payable within the meaning of subsection 104(24) if a promissory note is issued and is payable on demand without restriction. There must be tangible proof that the trustees will pay the deemed gain. Note that these comments apply also to elections made under subsection 110.6(19) of the Act.