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 the "amount payable" under 104(6) is the fair
market value of the preferred shares distributed
2 -whether beneficiaries who are entitled to both income and
capital of a discretionary inter vivos trust can take
advantage of the capital gains deduction in respect of a
taxable capital gain realized by the trust in respect of
qualified small bus shares
Position:
1 -def'n of "amount" of pref shares is the fair market value
at the time of distribution
2- provided that the trustees have the power to encroach on
capital, the amount of taxable capital gain actually
realized by the trust can be allocated to the beneficiaries
under 104(21.2)
Reasons:
a capital gain is not income under trust law but is income
for tax purposes - as a result, any distribution of the gain
must be to capital beneficiaries (unless trustee has power
to encroach) but can be designated as income for the
purposes of 104(6) and (13)
A. Humenuk
XXXXXXXXXX 962934
December 12, 1996
Dear Sir:
Re: Crystallization of Capital Gains in respect of Trust Property
We are replying to your letter of August 30, 1996 in which you ask for our comments in respect of a series of transactions designed to allow the beneficiaries of a trust to utilize the capital gains deduction in respect of certain shares held by the trust. We apologize for the delay in responding to your letter.
It appears that the interpretation you seek relates to specific transactions and taxpayers and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990, and the Special Release thereto dated September 30, 1992, issued by Revenue Canada. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for particular taxpayers with
respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted as outlined in IC 70-6R2. Nevertheless, we offer the following general comments in response to your letter.
In your letter, you describe a situation in which an inter vivos trust holds common shares which have a fair market value in excess of the adjusted cost base to the trust. You state that all the beneficiaries are both income and capital beneficiaries and that the terms of the trust permit the trustee to distribute all or part of either the income or the capital to the beneficiaries on a discretionary basis.
Assuming that these shares meet the definition of qualified small business corporation shares in subsection 110.6(1) of the Income Tax Act (the "Act") and that the trust realizes a capital gain of $500,000 on the exchange of the shares for preferred shares of the same operating company by means of an election under subsection 85(1) of the Act, you would like to know whether the amount of the capital gain recognized by the trust can be allocated to the beneficiaries so that they are able to claim a capital gains deduction under subsection 110.6(2.1) of the Act.
Assuming that the trust distributes such portion of the preferred shares as has a fair market value equal to the taxable capital gain of the trust, you ask whether the fair market value of the preferred shares so distributed to the beneficiaries is an "amount" as defined in subsection 248(1) for the purpose of paragraph 104(6)(b) and subsection 104(13) of the Act. If so, you conclude that
- the trust would be entitled to a deduction under 104(6) in respect of the fair market value of the preferred shares distributed to the beneficiaries and
- the beneficiaries would include same amount in income as a taxable capital gain eligible for the enhanced capital gains deduction,
provided that the trust makes the appropriate designations under subsections 104(21) and (21.2) of the Act and documents that the payment was made out of the income of the
trust.
References in the Act to "an amount" generally means money, rights or things, expressed in terms of the amount of money or the value, in terms of money, of the right or thing. As a result, the "amount" of a distribution in kind is the fair market value of that right or thing distributed at the time it is distributed. Accordingly, if the distribution to the beneficiaries is made by means of a distribution of the preferred shares, the amount of the distribution would be the fair market value of the shares at the time of the distribution.
To the extent that the amount so distributed is payable out of the income of the trust, the trust would be entitled to a deduction for that amount under subsection 104(6) and each of the beneficiaries would be required to include in income their share of the amount under subsection 104(13) of the Act. Generally, each beneficiary would then acquire the property so distributed at a cost equal to the cost amount of that property to the trust immediately before the distribution. The flow-through of taxable capital gains is explained in Interpretation Bulletin IT-381R2, Trusts - Deduction of Amounts Paid or Payable to Beneficiaries and Flow-Through of Taxable Capital Gains to Beneficiaries. As stated in paragraph 7 of IT-381R2, the beneficiaries of an inter vivos trust that is not a personal trust would not be entitled to a capital gains deduction because such a trust cannot hold qualified small business corporation shares.
As indicated in paragraph 21 of Information Circular 70-6R2, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada.
We trust our comments will be of assistance to you.
Yours truly,
T. Murphy
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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