The will of the deceased created an estate under which amounts are to be paid to a spousal trust. That trust may, in turn, pay amounts to beneficiaries. The graduated rate estate ("GRE") is deemed to receive a taxable dividend on the redemption of shares. If this taxable dividend is designated to an individual, then s. 112(3.2)(b) would not apply. However, if the GRE designates the amount to the spousal trust, which then designates the amount to a beneficiary who is an individual, would s. 112(3.2)(b) apply to reduce the capital loss?
CRA indicated that the exclusion in s. 112(3.32) from the application of s. 112(3.2)(b) should apply where an estate has received an s. 84(3) deemed dividend on a redemption, it designates that dividend, distributes it to the spousal trust, and the spousal trust in turn designates and pays it to the individual beneficiary – so that the taxable dividend does not reduce the loss.
S. 112(3.32) essentially provides that the exception applies where a qualified divided received on the share by the trust, and that is designated by the trust under s. 104(19) in respect of a beneficiary that was a corporation, a partnership or a trust, where the trust establishes two different conditions. The first condition is the relevant one in this context, which is that the trust establishes that the dividend was received by a beneficiary that was an individual other than a trust.
Next it is necessary to determine whether the dividend is a qualified dividend. S. 112(6.1)(a) does not apply as the dividend is an s. 84(3) dividend. However, having regard to s. 112(6.1)(b) then where the estate has received the s. 84(3) dividend, designated it under s. 104(19) to the spousal trust, and the spousal trust has designated it to an individual beneficiary, s. 112(3.32) should apply to exclude s. 112(3.2)(b).
CRA went on to discuss the requirements for an s. 104(19) designation.