CRA illustrates the generation of a loss to a capital beneficiary attributable to an eligible offset amount

CRA ran through two simple numerical examples showing the somewhat contrived operation of the rules in ss. 107(2)(a) and (c), and 107(1)(a) in computing a beneficiary’s capital gain or loss on receiving a distribution of shares from the personal trust in satisfaction of the beneficiary’s capital interest. The shares had an ACB of $100,000, the beneficiary did not have an (actual) cost for that capital interest, and there was a $20,000 liability respecting of the shares satisfying the “eligible offset” definition.

CRA noted that s. 107(1)(a) deemed the ACB of the capital interest to be the $100,000 cost amount of the distributed shares for capital gains purposes, so that there was no capital gain (i.e., the deemed $80,000 proceeds of disposition of the capital interest under s. 107(2)(c), being the excess of the $100,000 cost amount of the distributed property, being their deemed cost to the beneficiary, over the $20,000 eligible offset amount) – whereas, for capital loss purposes, the ACB of the capital loss was determined as nil on ordinary principles, so that there also was no loss.

In a variant of this example, the beneficiary’s interest was previously acquired at an actual cost of $100,000, so that there is a $20,000 capital loss on the beneficiary’s capital interest, reflecting the excess of the ACB over the 107(2)(c) proceeds of disposition of $80,000.

Neal Armstrong. Summary of 26 November 2020 STEP Roundtable, Q.6 under s. 107(1)(a).