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International Annual Review 2012

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Service: Tax, International Corporate Tax, International Executive Services, Global Compliance Management Services
Type: Regulatory update
Date: 9/18/2012

Canada - Capital gains deduction for trust beneficiary (holding-period test)

September 18: The Canada Revenue Agency (CRA), in a recent technical interpretation, concluded that when an individual has been a beneficiary of an inter vivos trust for less than 24 months, that person may still be able to claim the capital gains deduction for a taxable capital gain designated by the trust.

The CRA noted that the deduction may be available when the trust meets the 24-month holding period (as discussed in the definition of "qualified small business corporation" (QSBC) share).

Summary

The CRA considered the following facts:

An inter vivos trust is resident in Canada, and the trustee has the power to allocate income or capital to the beneficiaries as required.
The trust has owned QSBC shares of a Canadian-controlled private corporation for several years.
The trustee intends to have the trust sell the shares and designate the resulting net taxable capital gain to a Canadian resident individual who has only been a capital and income beneficiary of the trust for 12 months prior to the share sale.

The issue is whether a taxpayer / beneficiary who has only been a beneficiary of the trust for 12 months prior to the sale could claim a capital gains deduction in these circumstances.

The CRA commented that the determination of an individual's ability to claim a capital gains deduction remains a question of fact.

However, the CRA found that as long as the particular personal trust satisfies the holding-period test, the designated beneficiary would not necessarily be precluded from claiming a capital gains deduction solely because that person was not a beneficiary of the trust throughout the entire 24-month period before the trust sold the QSBC shares.

Read a September 2012 report prepared by the KPMG member firm in Canada: Trust Beneficiary Doesn't Need to Meet CGE Holding Period Test

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© 2013 KPMG International Cooperative ("KPMG International"), a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. All rights reserved.