12 February 1996 External T.I. 9524995 - CDC - DESIGNATION TAXABLE CAPITAL GAIN BY A TRUST

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.

Principales Questions:

Interaction between subsections 104(21) and 89(1) of the Act

Position Adoptée:

The non-taxable portion of a trust's capital gain is not added in computing a corporate beneficiary's CDA under subsection 89(1) of the Act.

Raisons POUR POSITION ADOPTED: FINANCE

										5-952499
XXXXXXXXXX			(613) 957-8953

Attention: XXXXXXXXXX

February 12, 1996

Dear Sirs:

Re: Capital Dividend Account - designation of a taxable capital gain to a corporate beneficiary of a trust

We are replying to your letter dated September 13, 1995, wherein you requested our opinion concerning the interaction between subsections 104(21) and 89(1) of the Income Tax Act (the "Act"). 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.

Subsection 104(21) of the Act allows a trust to designate a portion of its net taxable capital gains for a taxation year as a taxable capital gain of a beneficiary of the trust. In essence, the designated portion of the net taxable capital gains of a trust is deemed to be the taxable capital gain of a particular beneficiary. Paragraph 104(21) of the Act does not deem beneficiaries to have triggered the entire capital gain themselves. Therefore, we are of the opinion that the non-taxable portion of a trust's capital gain is not added in computing a corporate beneficiary's CDA under subsection 89(1) of the Act as a consequence of an allocation to the corporation of a portion of a trust's net taxable capital gains. This Department had previously brought this result to the attention of the Department of Finance and they concur with our analysis.

In addition, we disagree with your comments on the T3 Summary and Supplementary forms. In fact, the T3 guide states that when the T3 Supplementary is prepared, the amount included in Box 21 is 4/3 of the beneficiary's share of the net taxable capital gains. This adjustment does not deem the beneficiary to have realized the entire capital gain.

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