CRA (reversing position) finds that the QSBC character of capital gains can be flowed out in a 2-tier trust structure

A graduated rate estate distributed a taxable capital gain - realized from the sale of qualified small business corporation (QSBC) shares - to the two testamentary trusts that were its beneficiaries with those trusts, in turn, distributing the taxable capital gains in the same year to their individual beneficiaries. CRA found that (with the appropriate designations made at both trust levels under ss. 104(21) and (21.2)) the taxable capital gains would retain their character in the individuals’ hands as being from QSBC shares dispositions for s. 110.6(2.1) deduction purposes.

This reverses 2016-0667361E5, which found that the eligibility of a gain for the capital gains deduction is lost when it is distributed by a lower-tier to upper-tier trust.

Neal Armstrong. Summary of 2020 STEP Roundtable, Q.17 under s. 104(21.2).