A trust realizes “phantom income,” for example, a deemed capital gain under a s. 48.1 when its shares of a CCPC become publicly listed. How does the trust meet the requirement that the income is paid or made payable to the beneficiary by the end of the year? Can the payment be made “in kind” by distributing such shares?
CRA indicated that, as the deemed capital gain is not recognized as income or capital for trust law purposes, in order for it to be paid or payable, the trust indenture must specifically permit or require an amount equal to the deemed capital gain to be paid or payable, or the trustees must have the discretionary power to pay out that deemed amount and actually irrevocably exercise that discretion (in writing, and with notice before the year end to the beneficiaries) such that the beneficiary is entitled to enforce payment of that amount in the year.
It is possible to make the distribution by way of a payment in kind provided the trust indenture so provides. The resolution should indicate that it is coming first out of the deemed taxable capital gain before being paid in satisfaction of the beneficiary's capital interest.