The Canada Revenue Agency (CRA) answered several questions regarding a scenario in which a trust claims a capital gains reserve.
- When a trust claims a capital gains reserve, and the amount of the reserve is included in income in the subsequent year and flows through the trust to a beneficiary, does the gain retain all of its attributes?
The reserve amount which the trust claims is included in calculating its capital gain in the following year. Where a net taxable capital gain in respect of this gain is designated to a beneficiary by a personal trust, the trust must also designate an amount in respect of its eligible taxable capital gains (if any). Such a designation results in the relevant property being deemed to have been disposed of by the beneficiary of the trust, for purposes of the capital gains deduction.
- When the beneficiary reports the gain in the subsequent year, are they subject to the lifetime capital gains exemption (LCGE) maximum amount in the year they report the gain, or are they only allowed to use the LCGE maximum that was in place when the trust reported the original disposition and claimed the capital gains reserve?
Where the amount of the reserve from a particular year is included in the trust’s income for the following year, and is included in the income of, and designated in respect of, a beneficiary of the trust, the capital gain deduction which may be claimed by the beneficiary is based on the LCGE for the taxation year in which the property was disposed.
This information is useful especially with the indexed increases in the LCGE.