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 distributed it, 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.
The Directorate went on to find that the s. 110.6(31) limitation applies as well where a personal trust realized the capital gain (e.g., from qualified small business corporation shares), claimed the reserve, and then distributed the reserve amount to a beneficiary in the subsequent year utilizing ss. 104(21) and (21.1) designations.