A resident personal trust ("Trust 1") realized a capital gain from the disposition of "qualified small business corporation shares" ("QSBCS"), and made a designation of its net taxable capital gains eligible taxable capital gains to a beneficiary that was another resident personal trust ("Trust 2") under ss. 104(21) and 104(21.2), respectively. Subsequently, Trust 2 paid and designated to its individual beneficiaries its net taxable capital gain from Trust 1 pursuant to s. 104(21). Can Trust 2 designate under s. 104(21.2) an amount to a beneficiary as an eligible taxable capital gain with respect to the net taxable capital gain that Trust 1 designated to it under s. 104(21)?
In responding negatively, CRA noted that the "annual gains limit" of Trust 2 would only include the amount determined under s. 3(b) in respect capital gains from the disposition of property listed in the definition in s. 108(1) including QSBC, CRA stated:
[T]the determination of element A in the calculation of the "annual gains limit" must take into account the preamble to subsection 104(21), which indicates that an amount in respect of a trust’s net taxable capital gains designated to a beneficiary by the trust is deemed to be a taxable capital gain from the disposition of capital property of the beneficiary "[f]or the purposes of sections 3 and 111, except as they apply for the purposes of section 110.6… .”
…Consequently, the amount received by Trust 2 from Trust 1, which is deemed by subsection 104(21) to be a taxable capital gain for Trust 2's taxation year from the disposition of a capital property by Trust 2, cannot be included in the calculation of element "A" in the definition of "annual gains limit" of Trust 2.