Principal Issues: 1. Where a trust has realized a capital gain and has paid only the net taxable capital gain to a beneficiary that is a Canadian corporation, and has designated such payment under subsection 104(21), what amount will be added to the corporation’s capital dividend account? 2. Is the answer different if the entire capital gain is paid to the corporate beneficiary in the particular tax year? 3. When is such amount added to the capital dividend account?
Position: 1. No amount is added to the corporation’s capital dividend account. 2. Yes. One-half of the capital gain (the non-taxable portion of the capital gain distributed to the corporate beneficiary) will be added to the corporation’s capital dividend account. 3. The addition to the capital dividend account will be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation.
Reasons: The wording of the provisions in the definition of capital dividend account in subsection 89(1).
2023 STEP CRA Roundtable – June 20, 2023
QUESTION 12. Trust, Corporate Beneficiary and Capital Dividend Account
An inter vivos Canadian resident trust has realized a net taxable capital gain for a particular tax year. An amount equal to the net taxable capital gain is paid to a corporation that is a Canadian corporation, as defined in subsection 89(1) of the Income Tax Act (the “Act”) (footnote 1) , and that is a beneficiary of the trust in the particular tax year. A designation is made pursuant to subsection 104(21) in respect of the amount paid. The non-taxable portion of the trust’s capital gains is paid out to other beneficiaries.
What amount is added to the capital dividend account of the corporation and when does the addition (if any) arise?
Is the answer different if the entire capital gain is paid to the corporation in the particular tax year?
CRA Response
It is assumed that the Canadian corporation is a private corporation, as defined in subsection 89(1), that is entitled to maintain, and make additions to, a capital dividend account at all relevant times. Further, it is assumed that the trust’s net taxable capital gain for the year is as defined in subsection 104(21.3).
In the first situation, in which an amount equal to the net taxable capital gain of the trust is distributed by the trust to the Canadian corporation and the total amount distributed is designated under subsection 104(21) as a taxable capital gain of the Canadian corporation, provided that all of the requirements set out in subsection 104(21) are met, the entire amount distributed will be treated as a taxable capital gain of the Canadian corporation from the disposition of capital property for purposes of the provisions of the Act set out in the preamble to subsection 104(21). Based on the wording of subparagraph (a)(i.1) of the definition of capital dividend account in subsection 89(1), no amount will be added to the corporation’s capital dividend account.
In the second situation, we assume that the entire amount of the capital gains of the trust is distributed by the trust to the Canadian corporation, and one-half of the amount distributed, that is, the amount of the trust’s net taxable capital gain, is designated as a taxable capital gain of the corporation under subsection 104(21). Provided that all of the requirements set out in subsection 104(21) are met, the amount so designated will be treated as a taxable capital gain of the corporation from the disposition of capital property for purposes of the provisions of Act set out in the preamble to subsection 104(21). The remainder of the amount distributed, that is, the amount distributed out of the non-taxable portion of capital gains of the trust, net of any applicable amount of the corporation’s allowable capital losses as described in paragraph (a)(ii) of the definition of capital dividend account in subsection 89(1), will be added to the corporation’s capital dividend account. This is based on the wording of subparagraphs (a)(i.1) and (a)(ii) of the definition of capital dividend account with respect to a distribution made by a trust after September 15, 2016. (footnote 2)
Any such addition to the corporation’s capital dividend account will be considered to occur at the end of the taxation year of the trust in which the trust made the distribution to the corporation. The addition to the corporation’s capital dividend account cannot be made before the end to the trust’s taxation year because the designation under subsection 104(21) cannot be made before the end of the trust’s taxation year.
Judith Harris
2023-095959
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.
2 Paragraph (f) of the definition would apply with respect to a distribution made by a trust before September 16, 2016. The result would be similar except that subparagraph (a)(ii) would not apply to reduce the amount added to the corporation’s capital dividend account by certain capital losses of the corporation.