| 19(1) | File No. 5-8371 |
| Maureen Shea-DesRosierss | |
| (613) 957-8953 |
August 29, 1989
Dear Sirs:
Re: Taxation of Capital Distributions of Personal Trusts
This is in reply to your letter of July 12, 1989 concerning the above-mentioned subject.
A beneficiary can share in the taxable gain of the trust die to the power of encroachment on capital on his behalf. Pursuant to section 3 of the Income Tax Act (the Act), the taxable capital gain is income for tax purposes.
Where the power to encroach on capital has been exercised by the trustee in a taxation year, and there are taxable capital gains realized by the trust in that year, subsections 104(13) and 104(6) of the Act will be applicable to the amount of the capital so distributed provided it is less than or equal to the taxable portion of the capital gain realized by the trust. The beneficiary will have ti include the amount of the "distribution of capital" in computing his taxable income up to the amount of the taxable capital gain and the amount of accumulating income on which preferred beneficiary elections can be made will be reduced by the same amount.
We trust the above comments will be of assistance to you.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate