A personal trust (the “Trust”) owns all the common shares (the “Shares”) of a corporation with an ACB of $100,000, and has a $20,000 liability respecting the Shares satisfying the definition of “eligible offset.” The Trust distributes all of the Shares to the beneficiary in satisfaction of the beneficiary’s capital interest in the Trust, for which that resident individual did not pay. The consequences indicated by CRA included:
- S. 107(2)(a) deems the Trust to dispose of the Shares for proceeds of disposition (“POD”) equaling their “cost amount” of $100,000;
- S. 107(2)(b) deems the beneficiary to acquire the Shares at a cost equaling the total of their $100,000 “cost amount” to the Trust immediately before the distribution and any excess of the ACB to the beneficiary of the capital interest (nil) over its $100,000 “cost amount” – so that the beneficiary acquires the Shares at a cost of $100,000;
- S. 107(2)(c) deems the POD of the beneficiary’s capital interest to equal to the excess of the $100,000 cost to the beneficiary of the Shares over the $20,000 of eligible offsets, so that the beneficiary’s POD of the Trust capital interest is $80,000.
- Under s. 107(1)(a). the ACB of the beneficiary’s capital interest for purposes of computing the beneficiary’s capital gain is the greater of its ACB otherwise determined (nil) and the Beneficiary’s cost amount ($100,000), so that the computation of the capital gain produces a negative amount (POD of $80,000 minus the deemed ACB of $100,000), so that the capital gain is nil. In computing a capital loss under s. 40(1)(b), the ACB of the beneficiary’s capital interest is nil for purposes of computing the (nil) capital loss under s. 40(1)(b).
Under a variation of this example, $100,000 was paid by the beneficiary for the Trust capital interest in the Trust. The results under ss. 107(2)(a) and (b), and 107(1)(a), remain the same so that, for example, the POD of the beneficiary’s capital interest were still deemed to equal $80,000 and for the purpose of determining the capital gain on the disposition of the beneficiary’s capital interest, s. 107(1)(a) deems the beneficiary’s ACB to be $100,000 (producing, as before, a negative amount of $20,000 that results in a nil capital gain.)
However, in computing the capital loss under s. 40(1)(b), the excess of the $100,000 ACB of the beneficiary’s capital interest over the $80,000 POD under s. 107(2)(c) results in a $20,000 capital loss.