26 January 1999 External T.I. 9816425 - TRUST ELECTING UNDER SECTION 48.1 OF THE ACT48.1

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: Whether section 48.1 of the Act can apply to trusts?

Position: Yes.

Reasons: Wording refers to "individual". Consistent with Finance's policy w.r.t. capital gains exemption. No reason in policy terms for beneficiaries of a trust which owns shares of a SBC to be penalized only because they own shares indirectly through the trust. Other elections w.r.t. capital gains (e.g. 110.6 (19) election) allowed to be made by trusts. Flow through of capital gains to beneficiaries allowed under 104(21).

XXXXXXXXXX 						M. Lemire
							5-981642
Attention:  XXXXXXXXXX 

January 26, 1999

Dear Sirs:

Re: Trust Electing Under Section 48.1 of the Income Tax Act (the “Act”)

We are writing in reply to your letter of June 15, 1998 in which you requested our opinion regarding the ability of a testamentary trust to make an election under section 48.1 of the Act. We apologize for the delay in our response.

We are not able to provide you with any specific comments other than by way of an advance tax ruling. The procedure for requesting an advance tax ruling is laid out in Information Circular 70-6R3 dated December 30, 1996. Nevertheless, we are prepared to provide some general comments.

It is our opinion that a testamentary trust would generally be able to make an election under section 48.1 of the Act when all the conditions in this section are satisfied.

If an election is made under section 48.1 of the Act by a testamentary trust with respect to its shares of a class of the capital stock of a corporation, the trust would be deemed to have disposed of its shares for proceeds equal to the greater of the adjusted cost base to the trust of the shares and the lesser of the fair market value of the shares and such amount designated in prescribed form by the trust in respect of the shares and it would be deemed to have reacquired them immediately after the disposition at a cost equal to the same amount. If a deemed capital gain is realized in the trust because of the election, the deemed capital gain would be included in computing the trust’s income unless the deemed capital gain can be made payable to the trust beneficiaries pursuant to subsection 104(24) of the Act. Therefore, although a testamentary trust can elect under section 48.1 of the Act, the question of whether the deemed capital gain can be flowed out to the beneficiary is one which is governed by the terms of the trust indenture. It is our understanding that a deemed capital gain is a “nothing” for trust law purposes. A general power to encroach on capital is not, in and by itself, sufficient to make a deemed capital gain payable. For a deemed capital gain to be considered payable under subsection 104(24) of the Act, the terms of the trust must first specifically give the trustees the discretion to pay out or make payable an amount equivalent to the deemed capital gain or the discretion to pay out or make payable amounts that are defined as income under the Act. Additionally, the trustees are required to exercise their discretion before the end of the trust’s taxation year and the exercise of such discretion must be irrevocable with no conditions attached to the beneficiaries’ entitlement to enforce payment of the amount in the year. The apportionment of the trust’s income to each beneficiary must also be established. Furthermore, the beneficiaries must be advised before the end of the trust’s taxation year of the trustees’ decision. The trustees’ exercise of such discretion and notification given to the beneficiaries of their decision should be in writing (e.g. a resolution signed by the trustees, minutes of the trustees’ meeting).

To the extent that an amount equivalent to the deemed capital gain becomes payable to the beneficiaries, the trust would be entitled to a deduction under subsection 104(6) of the Act and each of the beneficiaries would be required to include in income their share of the amount under subsection 104(13) of the Act.

The flow-through of taxable capital gains (including deemed taxable capital gains) is explained in Interpretation Bulletin IT-381R3 Trusts Capital Gains and Losses and the Flow-Through of Taxable Capital Gains to Beneficiaries.

Our comments are provided in accordance with paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

- 2 -