Trusts are used as part of tax planning, but the planning doesn’t stop with the set-up of a trust. Where a Canadian resident trust that meets the definition of a “personal trust” in subsection 248(1) of the Income Tax Act holds property that has appreciated in value since it was acquired by the trust, the gain may be further deferred. If the trust is to be wound up the trustee can distribute property to a capital beneficiary.
A trust has an outstanding amount that is owed to a capital beneficiary in respect of a loan that was previously extended to the trust. Can the transfer of property by the trust to the capital beneficiary settle the debt owing and also constitute a rollover pursuant to subsection 107(2) of the Income Tax Act?
No. A settlement of debt does not represent a settlement of a capital interest. A capital interest is the right of a taxpayer as a beneficiary of a trust.