Units of a unit trust (“UT”) that does not qualify as a mutual fund trust (“MFT”) are issued for FMV monetary consideration to arm’s length subscribing unitholders, with the proceeds invested in real estate. After noting that although s. 75(2) could apply, CRA noted that, depending on the circumstances, it likely would not apply s. 75(2), and then stated:
It [thus] is not clear to us in what commercial circumstances the CRA would consider the annual income of an UT otherwise payable to the beneficiaries to be income of the beneficiaries under subsection 75(2), rather than under subsection 104(13).
In the event that subsection 75(2) were to apply in respect of monetary consideration received by the UT in consideration for the issuance of units to a taxpayer, the technical application of subparagraph 53(2)(h)(i.1) would involve the deduction of an amount against the ACB of the taxpayer's capital interest equal to the income designated under subsection 75(2) for a particular year that is otherwise payable to the taxpayer under the trust indenture. This is so because the designated income is not an amount included in the taxpayer's income under subsection 104(13).
Thus … the application of these provisions is likely to result in double taxation for the taxpayer for any taxation year in which subsection 75(2) applies or for a taxation year subsequent thereto, on the disposition of all or part of the taxpayer's capital interest or under subsection 40(3). [However] … IT-369R [, para. 10, provides] that income subject to the application of subsection 75(2) is not otherwise included in the income of a beneficiary or trust, as the case may be.
… [T]he CRA could extend this position so that no reduction to the ACB of a beneficiary's capital interest would be made by virtue of subparagraph 53(2)(h)(i.1).