Where a corporation with an October 31 year end receives income distributions from an income trust in February and March 2007 and sells its units in April 2007, the distributions so received by it will reduce the adjusted cost base of its units because the corresponding income allocated to it by the income fund will not be included in its income until its October 31, 2008 taxation year, i.e., at the time of the disposition of the units it was not the case that the amount of the distributions "was included in the taxpayer's income" (s. 53(2)(h.1)(A)). In this regard, CRA stated:
Assuming that the amounts payable are ultimately determined to be part of the trust's income for its taxation year, the amounts will, under paragraph 104(13)(a) of the Act, be income amounts of the beneficiary. However, paragraph 104(13)(a) of the Act requires the beneficiary to include those income amounts payable only for the beneficiary's taxation year in which the trust's taxation year ends. ...
[T]he amounts paid in February and March 2007...will not be included in income until October 2008 and therefore, because of the use, in clause 53(2)(h)(i.1)(A), of the past tense in the expression "was included in the taxpayer's income", these amounts are not described in clause (A).
In light of the provision in s. 39(1) that a capital gain will not include an amount otherwise included in income, the corporation at the time of filing its 2008 return (in which it included the distributions in income under s. 104(13)) would be able to refile ints 2007 return to reduce the capital gain reported in that return.