Subsection 104(21) permits a trust to designate, in respect of a beneficiary under the trust, a portion of its net taxable capital gains (“NTCG”), with the result that the amount so designated is deemed, for the purposes of ss. 3 and 111 (except as they apply for s. 110.6 purposes), to be a taxable capital gain (“TCG”) for the year of the beneficiary from the disposition of capital property. In order for a beneficiary to claim the lifetime capital gains exemption (“LCGE”) in respect of the TCG designated to him or her under s. 104(21), a separate designation pursuant to s. 104(21.2) must be made.
Suppose that a resident inter vivos, discretionary personal trust (the “Trust”) - whose two resident adult beneficiaries are Beneficiary A and B, but with only Beneficiary B having access to the LCGE - realizes two capital gains during the year, resulting in total NTCG to the Trust in the amount of $1,000,000, consisting of $300,000 from the disposition of publicly traded shares and a $700,000 TCG from the sale of qualified small business corporation shares (“QSBCS”). Consistently with the trust indenture, the $300,000 TCG is allocated to Beneficiary A and the $700,000 QSBCS TCG is allocated to Beneficiary B. Does the formula in s. 104(21.2) permit this?
CRA responded that under such formula, a proportionate amount of the QSBCS gain was required to be designated to each Beneficiary, i.e., $210,000 to Beneficiary A and $490,000 to Beneficiary B.