Capital gain splitting on the sale of business interests, owned by family trusts with several beneficiaries, continues to be a valuable tool for tax planning purposes, including the opportunity under certain circumstances to access the super capital gains exemption more than once in such a transaction. However, the beneficiaries of a trust who are designated an allocation of proceeds from a share sale and stand to benefit from applying the capital gains exemption to minimize tax, must actually receive and keep the proceeds.
I wrote about this in 2017 and again in 2019: Family trusts and allocations of proceeds from sale | Baker Tilly Canada
When I refer above to receiving and keeping the proceeds, I had in mind the entire proceeds – taxable and non-taxable (i.e., the full capital gain). Recently I was involved in a transaction with capital gains splitting opportunities already planned for. My client who was selling his opco (being a qualifying small business eligible for the capital gains exemption) on behalf of his family trust was advised that he need only to pay to the designated beneficiaries the taxable portion of the capital gain (essentially half of the allocated the proceeds) to secure the benefit of the capital gain splitting. I must admit I was worried about this advice, but it was offered by known practitioners with intimate knowledge of and experience with this area of taxation, so I did not contest the advice.
Subsequently (and to my relief), the Canada Revenue Agency issued a technical bulletin (2020-0839881C6) which appears to confirm this advice. The CRA was asked whether the designation that income paid or payable to a beneficiary be deemed to be a taxable capital gain of the beneficiary required the full capital gain or only the taxable portion be paid (or payable) to the beneficiary. The CRA indicated only the taxable capital gain was required to be paid (or payable) to the beneficiary.
The CRA noted that the amounts paid (or payable) must be permitted under terms of the trust deed (to a designated beneficiary) and the amount paid must be paid to the beneficiary’s own account and benefit, with no obligation to pay any portion to or for the benefit of another person.
I think this is helpful advice for families spreading the wealth for maximum tax advantages and adding a little bit of flexibility dollars wise to do so, but as always consult with your pros before you do anything.
As featured on All About Estates Blog where Baker Tilly WM Partner, Steven Frye, is a regular contributor.
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