An individual transfers shares to a trust of which he is the trustee, and he, his wife and children are the capital and income beneficiary. In order to avoid the attribution of the capital gain to him under s. 75(2), which would eliminate any ability to split the gain among the other beneficiaries so as to benefit from the capital gain deduction, the individual may renounce his beneficial interest in the trust's capital a few days before the sale of the shares and resign as trustee. After discussing the potential for a valid renunciation to avoid the application of s. 75(2), CRA addressed the question as to whether the non-taxable portion of the capital gain that remains in the trust could be allocated to any capital beneficiary of the trust without immediate tax consequences, and stated:
If the trust indenture so permits, the trust will be able to make payment of the portion of the capital gain that is non-taxable to the beneficiaries of the capital without immediate tax consequences if the payment is made in cash and is described in paragraph (i) of the definition of "disposition" in subsection 248(1). Under that paragraph, where the property is a taxpayer’s capital interest in a trust, a payment to the taxpayer after 1999 in respect of the capital interest to the extent that, inter alia, the payment is out of the income of the trust (determined without reference to subsection 104(6)) for a taxation year or out of the capital gains of the trust for the year, if the payment was made in the year or the right to the payment was acquired by the taxpayer in the year.
Subsection 107(2.1) would still apply if the payment does not constitute a disposition by virtue of paragraph (i) of the definition of "disposition" in subsection 248(1). Even if subsection 107(2.1) applies, there should be no tax consequences either to the trust if the payment of the non-taxable portion of the capital gain is made in cash or to the beneficiary because the proceeds of disposition of the interest, as calculated by the provisions of that subsection, will be reduced by the payment referred to in paragraph (i) of the definition of "disposition" in subsection 248(1).