An inter vivos Canadian resident trust pays an amount equal to its net taxable capital gain for the year to a Canadian private corporation that is a beneficiary and designates that amount pursuant to s. 104(21). What amount is added to the capital dividend account (CDA) of the corporation if the non-taxable portion of the trust’s capital gains is paid out to other beneficiaries – and when does the addition occur? What if the entire capital gain is paid to that corporation?
CRA indicated that, by virtue of a valid s. 104(21) designation, the entire amount distributed would be treated as a taxable capital gain of the Canadian corporation from the disposition of capital property. However, no amount would be added to the corporation’s capital dividend account, based on the wording of s. (a)(i.1) of the CDA definition.
Where the entire amount of the trust capital gains was distributed to the corporate beneficiary, again an s. 104(21) designation could be made. The ½ distributed that was the non-taxable portion of the trust’s capital gains, would be added to the corporation’s CDA, net of any applicable amount of the corporation’s allowable capital losses.
The addition to the corporation’s capital dividend account would be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation, given that the s. 104(21) designation cannot be made before the end of the trust’s taxation year.