CRA considers that a note issuance by a personal trust does not qualify as a trust property distribution for s. 107(2) rollout purposes

Although a capital beneficiary of a family trust generally will have a nil cost for her interest, a distribution of her share of trust property generally will not generate a capital gain because she will be deemed to have an adjusted cost base for her interest equal to the cost amount of the "property of the trust ... distributed by the trust to the taxpayer in satisfaction of ... [her] capital interest."

What if the trust instead issues a note to her in satisfaction of her capital interest? CRA considers that "the issuance of a note does not constitute the distribution of property of a trust to a beneficiary for [these] purposes," so that she would realize a capital gain equal to the note amount – and, by the way, the interest on the note would be non-deductible to the trust.

Neal Armstrong. Summaries of 10 October 2014 APFF Roundtable, Q.9, 2014-0538261C6 F under s. 108(1) – cost amount and s. 20(1)(c).