Principal Issues: [TaxInterpretations translation] A) Can a partnership dispose of a QSBCS and allow a partner to benefit from the capital gains deduction under subsection 110.6(2)?
B) Can an individual as a beneficiary of a trust use the individual’s capital gains deduction under 110.6(2) when a partnership disposes of a QSBCS and allocates the capital gain to the trust that is a member of the partnership?
Position: (A) Yes, paragraph 110.6(14)(d) provides that a partnership is deemed to be related to a person for each period throughout which that person is a member of the partnership. Consequently, it allows an individual who is a member of a partnership that disposes of QSBCSs to benefit from the capital gains deduction under subsection 110.6(2.1) since that member is deemed to be related to the partnership.
B) Yes, the Act allows a beneficiary of a trust, who is a member of a partnership that disposes of QSBCSs, to benefit from the capital gains deduction under subsection 110.6(2.1) even though the beneficiary is not deemed to be related to the partnership.
Reasons: Income Tax Act
XXXXXXXXXX 2009-034171 Anne Dagenais April 21, 2010
Dear Madam,
Subject: Capital Gains Exemption
This is further to your email of September 27, 2009 in which you made various requests for information regarding the capital gains exemption.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Specifically, you described a situation where an individual is a member of a partnership ("Partnership"). The Partnership owned shares of Corporation A. For all relevant periods, Corporation A was a Canadian-controlled private corporation ("CCPC") as defined in subsection 125(7). The individual held an interest in the Partnership for more than 24 months and the Partnership held the shares of Corporation A for more than 24 months as well. The shares were shares of a SBC as defined in subsection 248(1). In addition, the shares were qualified small business corporation shares ("QSBCS") for the purposes of the definition in subsection 110.6(1). The Partnership disposed of the shares of Corporation A.
Therefore, you wish to know if a Partnership can dispose of a QSBCS, permitting a partner to benefit from the capital gains deduction under subsection 110.6(2.1). You also wish to know if our answer would be the same if the partner of the Partnership was a trust under which the individual was a beneficiary.
Our Comments
It appears to us that the situation described in your letter and summarized above could constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office (TSO) for its opinion. However, we can offer the following general comments that may be helpful.
Paragraph 110.6(14)(d) provides that a partnership is deemed to be related to a person for any period throughout which that person was a member of the partnership. Consequently, it allows an individual who is a member of a Partnership that disposes of QSBCS to benefit from the capital gains deduction under subsection 110.6(2.1) since that member is deemed to be related to the partnership.
With respect to your second question, generally, subsection 104(2) provides that for the purposes of the Act “a trust shall … be deemed to be in respect of the trust property an individual… .” Since the term "individual" is defined in subsection 248(1) as a "person other than a corporation", it follows that a trust is not only an "individual" but also a "person" for all purposes of the Act. Consequently, we are of the view that a trust is also covered by paragraph 110.6(14)(d) when reference is made to a person.
Since a trust is a "person" for the purposes of paragraph 110.6(14)(d), regardless of the applicable private law, a trust that has realized taxable capital gains in a particular taxation year may, within the limits set out in subsection 104(21) allocate all or part of the amount of such gains to a beneficiary as a taxable capital gain if the taxable capital gain is payable to the beneficiary in the trust's taxation year and is included in the beneficiary's income under subsection 104(13) (assuming that a preferred beneficiary election is not available under subsection 104(14) and the amount is not included under subsection 105(1)).
Thus, any amount designated to a beneficiary by virtue of subsection 104(21) will be deemed to have been received by the beneficiary as a taxable capital gain rather than as trust income. However, a capital gain designated under that subsection will not allow a beneficiary to benefit from the capital gains deduction. In order for the beneficiary of the trust to be eligible for the capital gains deduction under subsection 110.6(2.1) in respect of the taxable capital gain realized by the trust, the trust must designate an amount in respect of its eligible taxable capital gains under subsection 104(21.2) so that the beneficiary is, inter alia, deemed to have disposed of qualified small business corporation shares. Consequently, we are of the view that the Act allows a beneficiary of a trust, who is a member of a partnership that disposes of QSBCSs, to benefit from the capital gains deduction under subsection 110.6(2.1) if the capital gain is designated by virtue of subsection 104(21.2).
These comments do not constitute an advance income tax ruling and are not binding on the CRA in respect of any particular factual situation.
We hope that the above comments will be of assistance and will be able to answer your questions.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.