5-910381
Dear Sirs:
Re: Preferred Beneficiary Election Spousal Trust
In your letter of February 4, 1991, you asked whether 2 surviving spouse may make a preferred beneficiary election together with the trust under subsection 104(14) with respect to a capital gain realized by the trust in the year.
You described the following conditions surrounding the election
1. The trust qualifies under subsection 70(6) of the Income Tax Act (the "Act").
2. The surviving spouse is the sole income beneficiary during her lifetime and no capital may be distributed to her or anyone else during her lifetime.
Pursuant to subparagraph 104(15)(a)(i) of the Act, if the spouse of the spouse trust is alive at the end of the year, only that spouse can make a preferred beneficiary election on an amount up to the total accumulating income of the trust as defined under paragraph 108(1)(a) of the Act.
If the trust indenture specifies that capital gains are income for trust purposes, then the spouse could elect up to the full amount of the taxable portion of the capital gain, even if no encroachment power exists.
In this case we are assuming that the trust indenture does not define capital gains to be income.
For purposes of subparagraph 104(4)(a)(iii) of the Act, the income of a trust is its income computed without reference to the provisions of the Act (less certain types of dividends) pursuant to subsection 108(3) of the Act. Under the foregoing assumption, trust law will normally consider capital gains to be capital and not income of the trust. Consequently, in our view, pursuant to subsection 108(3) of the Act, the taxable capital gain would not form part of the accumulating income of the trust in this situation. Therefore, while the spouse could make a preferred beneficiary election (because she is a preferred beneficiary), the maximum amount she could elect upon would be nil. The taxable capital gain must be taxed in the trust as it would accrue for the benefit of the capital beneficiaries thereof.
Since our answer to your first question is negative your second question cannot be answered as posed.
While we hope our comments are of assistance to you, they are an expression of opinion only and are not binding on the Department.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate