In response to questions as to whether the lifetime capital gains exemption (LCGE) was available where a personal trust claimed a capital gains reserve, and then distributed the reserve amount in the subsequent year to a beneficiary, and whether the beneficiary was only allowed to use the LCGE maximum that was in place when the trust reported the original disposition and claimed the reserve, the Directorate stated:
- [The reserve amount … is included in calculating its capital gain in the following year. Where a net taxable capital gain in respect of this gain is designated to a beneficiary by a personal trust, the trust must also designate an amount in respect of its eligible taxable capital gains (if any). Such a designation results in the relevant property being deemed to have been disposed of by the beneficiary of the trust, for purposes of the capital gains deduction in section 110.6.
- …[S]ubsection 110.6(31) ensures that the capital gain deduction which may be claimed by the beneficiary is based on the LCGE for the taxation year in which the property was disposed.
- [Where the] amount … included in the calculation of the trust’s capital gain for the following year … is in turn included in the income of a beneficiary of the trust and designations pursuant to subsections 104(21) and (21.2) are made in respect of the amount, it is our view that subsection 110.6(31) applies because the amount is included in the beneficiary’s income because of subparagraph 40(1)(a)(ii).