In the course of a preliminary review of the scheme of the Act, Monaghan JA stated (at paras. 17-19):
When a trust purchases for cancellation (redeems) a beneficiary’s interest in the trust, the trust may choose to treat part of the amount it pays for that interest as a distribution of its income, rather than an amount paid to acquire the interest. In that circumstance, only the amount in excess of the income distribution will be proceeds of disposition for the beneficiary’s interest. Consequently, whether the beneficiary has a capital gain (or capital loss) depends on whether those reduced proceeds exceed (or are less than) the beneficiary’s ACB of the repurchased (redeemed) interest.
If the trust’s income includes taxable capital gains, the trust may choose to treat part of the amount it pays on the redemption as a distribution of a capital gain, designating 50 percent as a taxable capital gain. While the distributed capital gain reduces the beneficiary’s proceeds of disposition for the interest in the trust as described in the preceding paragraph, the beneficiary’s overall capital gain (or capital loss) should be the same, albeit comprised of two amounts.
In particular, the capital gain distributed by the trust would reduce the proceeds of disposition for the redeemed trust interest, and would require the beneficiary to include 50 percent as a taxable capital gain in income. The beneficiary would also have a capital gain (or capital loss) on the trust interest redeemed, depending on whether the reduced proceeds of disposition (reflecting the distributed capital gain) exceed (or are less than) the beneficiary’s ACB of the redeemed trust interest. Any resulting allowable capital loss would be deductible against the distributed taxable capital gain.