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Federal Tax - Trusts. Magren Holdings Ltd v. Canada
In Magren Holdings Ltd v. Canada (Fed CA, 2024) the Federal Court of Appeal dismissed a appeal, this from a dismissed Tax Court appeal, this from a Ministerial assessment "imposing tax on the basis that all of the capital dividends those corporations paid in 2006 were excess dividends", and "where a corporation pays a capital dividend in excess of the balance of its capital dividend account, the corporation is liable for tax":
Here the court summarizes some trust-as-taxpayer law:(1) Taxation of trusts and their beneficiaries
[12] A trust is a taxpayer and therefore must compute its income and taxable income. However, a trust may avoid a tax liability on its income by paying an equal amount to its beneficiaries, who then must include the payment in their income: ss. 104(6)(b), 104(13). The same is not true of losses. Where a trust realizes a loss, it cannot pass that loss out to its beneficiaries; only the trust may use its losses.
[13] Where a trust pays its income to its beneficiaries, any liability for tax on the trust’s income is determined based on the beneficiary’s circumstances. If the beneficiary is a registered retirement savings plan, or other tax-exempt plan, no tax is payable until the income is withdrawn from the plan, typically many years later. If the beneficiary is itself a trust, it in turn may pay the income to its beneficiaries so it becomes their income rather than income of the trust.
[14] With few exceptions, the character of the trust’s income is not maintained when paid to a beneficiary; rather, the beneficiary has income from a property that is an interest in a trust: s. 108(5)(a). Capital gains are one exception to that general principle relevant to this appeal.
[15] Where a trust realizes a capital gain, and distributes an equal amount to a beneficiary, the trust may make a designation so that one-half of the distribution is deemed to be a taxable capital gain realized by the beneficiary: s. 104(21). The other portion of the distribution—reflecting the non-taxable portion of the trust’s capital gain—is not included in the beneficiary’s income. Moreover, the distribution does not affect the beneficiary’s tax cost—the adjusted cost base (ACB)—of their interest as beneficiary in the trust: s. 53(2)(h)(i.1)(A) and (B). That ACB remains unchanged regardless of the distribution’s effect on the value of that interest.
[16] In this way, provided the appropriate designation is made, the trust’s capital gain is taxed as if the beneficiary had realized it directly.
[17] When a trust purchases for cancellation (redeems) a beneficiary’s interest in the trust, the trust may choose to treat part of the amount it pays for that interest as a distribution of its income, rather than an amount paid to acquire the interest. In that circumstance, only the amount in excess of the income distribution will be proceeds of disposition for the beneficiary’s interest. Consequently, whether the beneficiary has a capital gain (or capital loss) depends on whether those reduced proceeds exceed (or are less than) the beneficiary’s ACB of the repurchased (redeemed) interest.
[18] If the trust’s income includes taxable capital gains, the trust may choose to treat part of the amount it pays on the redemption as a distribution of a capital gain, designating 50 percent as a taxable capital gain. While the distributed capital gain reduces the beneficiary’s proceeds of disposition for the interest in the trust as described in the preceding paragraph, the beneficiary’s overall capital gain (or capital loss) should be the same, albeit comprised of two amounts.
[19] In particular, the capital gain distributed by the trust would reduce the proceeds of disposition for the redeemed trust interest, and would require the beneficiary to include 50 percent as a taxable capital gain in income. The beneficiary would also have a capital gain (or capital loss) on the trust interest redeemed, depending on whether the reduced proceeds of disposition (reflecting the distributed capital gain) exceed (or are less than) the beneficiary’s ACB of the redeemed trust interest. Any resulting allowable capital loss would be deductible against the distributed taxable capital gain.
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