Avoidance of double taxation on distribution of non-taxable portion of capital gain
2. Subsection 52(6) ensures that the non-taxable capital gains realized by the trust can be passed on to the unitholder tax free. To accomplish this, a trust must
(a) make certain that the amount that becomes payable (paid within the year or with an entitlement to enforce payment in that year) to the unitholder includes his share of the total capital gains realized by the trust in that year, and
(b) settle the obligation to the unitholder in one of the following ways:
(i) by the distribution of cash or other assets of the trust, or
(ii) by the capitalization of the liability transferred from a liability of the trust to the capital of the trust with a simultaneous allocation of additional units of the trust equal in value to the liability capitalized.
3. Where an amount becomes payable as described in 2(a) above to a unitholder that represents his share of the property income and the capital gains of the trust, he is deemed to have acquired the right at a cost equal to the total amount (including the non-taxable portion of the capital gains) that became payable minus any deductions to which he is entitled pursuant to subsections 65(1) and 104(16). When the income is subsequently paid to the taxpayer, it will not result in either a capital gain or a capital loss as long as the amount paid is equal to the cost of the right acquired. Similarly on a subsequent redemption of his unit the unitholder will not be subject to a tax on the non-taxable portion of the capital gains realized by the trust.
