Re: Disposition of Capital Units in 24(1)
We have been asked to reply directly to your memorandum of June 21, 1991, to the Tax Avoidance Section, Special Audits Division. A taxpayer has requested that a capital gain he originally reported be excluded from income and relies on a statement contained in the prospectus (copy enclosed with your memorandum) for the issuing of capital units in the above-noted trust.
You did not indicate whether the taxpayer disposed of his unit to a third party or whether the trust distributed property to the taxpayer in satisfaction of his capital interest. We will therefore address both these situations
The applicable provision of the Income Tax Act ("the Act") include subsection 107(1), 107(2) and 107(2.1) and paragraph 108(1)(d), all of which were either amended or added to the Act by Bill C-139.
Subsection 107(1) of the Act contains special rules concerning the disposition of a capital interest in a trust. Paragraph 107(a) ensures that such a disposition will not give rise to a capital gain unless the proceeds of disposition exceed both the adjusted cost base and the cost amount of the interest. Subsection 107(1) is restricted in its application to personal trust (defined in subsection 248(1) of the Act).
Disposition of capital units in non-personal trusts, such 24(1) 24(1) are subject to subsection 107(1), however, where the disposition occurs before 1991 (or such earlier time after October 1, 1987 as the trust issues a beneficial interest in the trust) and the units were listed on a prescribed stock exchange on October 1, 1987.
Subsection 107(2) of the Act provides a rollover on the distribution of trust property to beneficiaries on the termination of their interests. Thus, where trust property is distributed to a beneficiary in satisfaction of all or any part of his capital interest in the trust, the beneficiary is deemed to have acquired the property at its cost amount to the trust and to have received that amount as proceeds of disposition for his interest. Again, subsection 107(2) is restricted to personal trusts except where the distribution occurs before 1991 (or the earlier date after October 1, 1987 described above) and the units were listed on a prescribed stock exchange on October 1, 1987.
Subsection 107(2.1) is applicable to distributions by non-personal trusts for taxation years commencing after 1987 where subsection 107(1) does not apply. In this situation, the beneficiary is deemed to have acquired the property at a cost equal to the fair market value, and is deemed to have disposed of his interest in the trust for proceeds equal to that fair market value.
24(1)
To summarize, a taxpayer in the situation you have described does not include any amounts in income resulting from a distribution from the trust in satisfaction of his capital interests or from a disposition of his capital interest in the trust where the transaction occurred prior to 1991.
We trust these comments will assist you.
for DirectorFinancial Industries DivisionRulings Directorate