Schedule 1 - Dispositions of Capital Property

Schedule 1 - Dispositions of Capital Property

If the trust disposed of capital property in the year, see Guide T4037, Capital Gains, for the general rules regarding capital gains and losses. We explain the rules that relate to trusts in this section.

Complete Schedule 1 and file it with the T3 return if the trust had dispositions of capital property during the year. Do not include any deemed dispositions that are reported on Form T1055, Summary of Deemed Dispositions (2002 and later tax years). For more information, see "Form T1055, Summary of Deemed Dispositions (2002 and later tax years)" on page 39.

Transfer any taxable capital gains from line 23 of Schedule 1 to line 01 of the return.

A disposition of capital property includes any of the following:

• the sale of property

• the sale of the principal residence

• the distribution or exchange of property

• the making of a gift

• a redemption of shares

• a debt settlement

• a theft

• the destruction of property

  Note
  We do not consider a disposition to have occurred if two corporations or a parent corporation and its subsidiary have amalgamated and there is no consideration for the redemption of shares. For more information, call 1-800-959-8281.

Certain gifts - zero inclusion rate

Generally, a trust's taxable capital gain from the disposition of capital property is 50% of the trust's capital gain with certain exceptions.

If the trust donated certain types of capital property to a registered charity or other qualified donee, the trust may not have to include in its income any amount of capital gain realized on such gifts. The trust may be entitled to an inclusion rate of zero on any capital gain realized on such gifts.

Donated capital property, where an inclusion rate of zero may apply, includes all of the following:

• a share, debt obligation, or right listed on a designated stock exchange

• a share of the capital stock of a mutual fund corporation

• a unit of a mutual fund trust

• an interest in a related segregated fund trust

• a prescribed debt obligation

• certified ecologically sensitive land including a covenant or an easement to which land is subject or, in the case of land in the Province of Quebec, a personal servitude where certain conditions are met or a real servitude gifted to certain qualified donees other than private foundations. For more information, see "Gifts of ecologically sensitive land" in Pamphlet P113, Gifts and Income Tax, and Income Tax Folio S7-F1-C1, Split-receipting and Deemed Fair Market Value.

If there is no advantage in respect of the gift, the full amount of the capital gain realized on the gift is eligible for an inclusion rate of zero. However, if there is an advantage, only part of the capital gain is eligible for the inclusion rate of zero. The remainder is subject to an inclusion rate of 50%.

For deaths that occur after 2015, a zero inclusion rate may also apply to a gift of certain capital property made to a qualified donee by a GRE (or by a former GRE). The donated property must be property that was acquired by the estate on and as a consequence of the death of the individual (or property that was substituted for such property). Where conditions are met, the zero inclusion rate will apply to any capital gain realized on the deemed disposition of the property immediately before the individual's death reported on the individual's final return as well as to any capital gain realized by the estate on the transfer of the property to the qualified donee.

For more information, see T3 Schedule 1A, Capital Gains on Gifts of Certain Capital Property, section "Capital gains realized on gifts of certain capital property" in Pamphlet P113, Gifts and Income Tax, and Income Tax Folio S7-F1-C1, Split-receipting and Deemed Fair Market Value.

Distribution of property to beneficiaries

If a personal trust distributes property to a beneficiary (to settle in whole or in part the beneficiary's capital interest in the trust), attach a statement to the return that includes all of the following information about the distributed property:

• the name and address of the recipient or recipients

• a description of the property

• the fair market value (FMV) on the day it is distributed

• the cost amount on the day it is distributed

For information regarding the distribution of property to a non-resident beneficiary, see "Capital dispositions - Rules for trusts" on page 34.

Graduated rate estate elections (losses)

For 2016 and subsequent tax years, if you are a legal representative administering the graduated rate estate of a deceased person, you may:

• elect under 164(6) to treat certain capital losses and terminal losses, arising in the first tax year of the deceased person's graduated rate estate, as losses of the deceased person for that person's final tax year

• elect under 164(6.1) to carryback certain amounts relating to employee stock options, arising in the first tax year of the deceased person's graduated rate estate, to be deducted in computing the deceased person's income for that person's final tax year

Prior to January 1, 2016, these elections were available to all estates. However, effective January 1, 2016, these elections are only available to an estate that is a graduated rate estate.

These elections apply only to the first tax year of a deceased person's estate. The elections do not affect the return of the deceased person for any year before the year of death.

Due date of election and amended final T1 return

In addition to filing the election you are also required to file an amended final T1 return of the deceased person to give effect to the rules. Both the election and amended final T1 return must be filed by the later of:

• the filing due date of the deceased person's final T1 return that the legal representative is required to file or has elected to file

• the filing due date for the estate's T3 return for its first tax year

When filing the amended T1 return, you must clearly identify the amended final T1 return of the deceased person as a "164(6) election" or a "164(6.1) election."

164(6) election

Generally, you can make this election for:

• all or any portion of the capital loss (to the extent the graduated rate estate's capital losses exceed its capital gains) resulting from the disposition of the graduated rate estate's capital property as reported on Schedule 1

• all or any portion of the terminal loss (not exceeding the total of the graduated rate estate's non-capital loss and farm loss before the election) resulting from the disposition of all of the depreciable property of a prescribed class of the graduated rate estate

If you are making an election under 164(6) for the graduated rate estate, attach the following to the T3 return:

• a letter indicating that you are making an election under 164(6) and providing all of the following information:

  • the amount of the capital loss you elect to be a capital loss of the deceased person

  • the amount of the terminal loss you elect to be deductible in computing the income of the deceased person

• a schedule with details of the capital loss

• a schedule with the details of the terminal loss and a statement of the amounts that would have been the non-capital loss and the farm loss of the estate for its first tax year had the election not been made

The graduated rate estate cannot claim a loss that you have elected to transfer to the deceased person's final T1 return. However, you have to report the dispositions of the estate property on Schedule 1. If the total is a loss, enter the amount elected under subsection 164(6) on line 19.

Tax tip
If you know you want to apply a loss to the deceased person's final T1 return before that return is due to be filed, you can submit a request to apply the loss with the return. Clearly identify the return as a 164(6) election. Although we will not allow the claim on the initial assessment of the T1 return, we will hold your request until we assess the T3 return and verify your claim. If we accept your claim, we will adjust the T1 return, and issue a notice of reassessment.

164(6.1) election

This election applies to certain unexercised employee security options held by a person, at the time of death, in respect of which a benefit has been included in the person's income under paragraph 7(1)(e) for the tax year in which the person died. Generally, where the value of those unexercised options subsequently declines and the options expired or were exercised or disposed of in the first year of the estate, the deceased's legal representative may elect to treat an amount determined under 164(6.1) as a loss of the deceased from employment for the year in which the person died.

You can only make this election for employee security options that expired, or that you exercised, or disposed of in the first tax year of the graduated rate estate.

If you are making an election under 164(6.1) for the graduated rate estate, attach the following to the T3 return:

• a letter indicating that you are making an election under 164(6.1) and providing all of the following information:

  • the amount of the benefit included in the deceased person's income for the tax year in which the person died

  • the amount, if any, by which the value of the right immediately before it was exercised or disposed of exceeds the amount, if any, the deceased person paid to acquire the right

  • the amount of the loss you elect to be a loss of the deceased taxpayer from employment in the year in which the taxpayer died

Use the following calculation to determine the amount that can be carried back to the deceased person's final T1 return:

A - (B + C) where: A = the deemed benefit for the option included on the deceased person's final return B = the amount by which the value of the option immediately before it expired, was exercised, or disposed of, is more than the amount the deceased person paid to acquire it C = the amount by which A is more than B, if a security option deduction for this option was claimed on the deceased person's final return, multiplied by 50%

If you make this election, reduce the trust's adjusted cost base of the option by A minus B, without considering C.

Capital dispositions - Rules for trusts

After March 22, 2004, a trust is considered to be affiliated with its majority interest beneficiary and any person who is affiliated with such a beneficiary. As a result, the rules that apply to affiliated persons may apply to a trust and its beneficiaries, settlors, or contributors. For more information, call 1-800-959-8281.

After February 27, 2004, a trust that distributes property to a non-resident beneficiary in satisfaction of all or part of the beneficiary's capital interest in the trust, is deemed to have disposed of such property for proceeds equal to the property's fair market value (FMV) at that time. This rule does not apply to property that meets any of the following conditions:

• a share of the capital stock of a non-resident owned investment corporation

• real or immovable property situated in Canada, a Canadian resource property or a timber resource property

• capital property used in, Class 14.1 (eligible capital property before January 1, 2017) in respect of or property described in the inventory of, a business carried on by the taxpayer through a permanent establishment in Canada at the particular time

• an excluded right or interest of the taxpayer, and the conditions in subsection 107(2) are met and subsection 107(4.1) is not applicable

A trust that ceases to be resident in Canada is deemed to have disposed of all property, including certain taxable Canadian property, for proceeds equal to the property's FMV at that time, and reacquired the property, at the same value, immediately thereafter.

These rules do not apply to any of the following properties, among others:

• real property situated in Canada, Canadian resource property, or timber resource property

• property of a business carried on by the trust through a permanent establishment in Canada, including capital property, property included in Class 14.1 (eligible capital property before January 1, 2017) in respect of or, and property described in the inventory of the business

• pension or other similar rights or interests

• payments out of an AgriInvest Fund 2

The trust or beneficiary can defer paying tax resulting from the deemed disposition by providing acceptable security. To arrange security, call 1-800-959-8281.

A trust that ceases to be resident in Canada, and that owns property with a total FMV of more than $25,000 at that time, has to file Form T1161, List of Properties by an Emigrant of Canada, with its T3 return for that year, listing each property the trust owned at that time. For the purposes of determining whether Form T1161 is required, property does not include:

• money that is legal tender in Canada and all deposits of such money

• pension or other similar rights or interests

• any item of personal-use property, with a FMV of less than $10,000 at the time the trust ceased to be a resident in Canada

Canadian cultural property

For information on dispositions of Canadian cultural property, see "Selling or donating certified Canadian cultural property" in Guide T4037, Capital Gains, archived Interpretation Bulletin IT-407, Dispositions of Cultural Property to Designated Canadian Institutions, Pamphlet P113, Gifts and Income Tax, and Income Tax Folio S7-F1-C1, Split-receipting and Deemed Fair Market Value.

Proceeds of disposition

This is usually the amount that the trust received or will receive for its property. In most cases, it refers to the sale price of the property. In certain situations, the proceeds of disposition are set by rules in the Act.

Personal trust - When this kind of trust distributes property to a beneficiary, and there is a resulting disposition of all or part of the beneficiary's capital interest in the trust, we generally consider the trust to have received proceeds of disposition equal to the "cost amount" of the property. The cost amount of a capital property (other than a depreciable property) is its adjusted cost base. We define "Adjusted cost base" on page 35.

The cost amount of a depreciable property is calculated as follows:

• if the property was the only property in the class, the cost amount is the undepreciated capital cost (UCC) of the class before the distribution

• if there is more than one property in the class, the cost amount of each property is as follows:

Capital cost of the property ÷ Capital cost of all properties in the class that have not been previously disposed of × UCC of the class = Cost amount of the property

Where a personal (or prescribed) trust distributes property to a beneficiary to settle all or part of the beneficiary's capital interest in the trust, the trust can elect under subsection 107(2.001) of the Act to not have the trust's proceeds of disposition equal to the cost amount of the property.

A subsection 107(2.001) trust election is applicable to distributions made after October 1, 1996 when:

• the trust was resident in Canada when it distributed the property

• the property is taxable Canadian property

• the property is property of a business carried on by the trust through a permanent establishment in Canada. This includes capital property and property described in the inventory of the business, immediately before the time of distribution

To elect under subsection 107(2.001), the trust must attach a letter to its T3 return for the tax year in which the property was distributed.

The letter should include all of the following information:

• a declaration to elect under subsection 107(2.001)

• name of the trust

• trust account number

• type of trust

• trust's tax year-end date

• residency status of the trust, (resident trust or non-resident trust)

• if applicable, the date the trust became a resident of Canada in the year

• if applicable, the date the trust became a non-resident of Canada in the year

• name, address and signature of trustee making the election

If you file an election, we consider the trust, if resident in Canada, to have received proceeds of disposition equal to fair market value (FMV) of the property at the time of distribution.

Effective for distribution of property after December 20, 2002, a personal (or prescribed) trust is deemed to have disposed of property for proceeds equal to the property's FMV at the time of the distribution if both of the following conditions are met:

• at a particular time before December 21, 2002, there was a qualifying disposition (within the meaning assigned by subsection 107.4(1)) of the property, or of other property for which the property is substituted, by a particular partnership or a particular corporation, as the case may be, to the trust

• the beneficiary is neither the particular partnership nor the particular corporation

Post-1971 spousal or common-law partner trust - When this kind of trust, whose beneficiary spouse or common-law partner is still alive, distributes property such as capital property, resource property, or land inventory to a person who is not the beneficiary spouse or common-law partner, we consider the trust to have received proceeds of disposition equal to the property's FMV.

This also applies to both of the following:

• a joint spousal or common-law partner trust that distributes property to a person who is not the settlor, beneficiary spouse or common-law partner and the settlor, beneficiary spouse or common-law partner is still alive

• an alter ego trust that distributes property to a person who is not the settlor and the settlor is still alive

Trust other than a personal trust - When this kind of trust distributes property to a beneficiary and there is a resulting disposition of all or part of the beneficiary's capital interest in the trust, we consider the trust to have received proceeds of disposition equal to the property's FMV.

For more information, see Chapter 2 in Guide T4037, Capital Gains.

Adjusted cost base (ACB)

This is usually the cost of the property plus expenses incurred to obtain it. The adjusted cost base can differ from the original cost if changes have been made to the property between the time it was acquired and the time it was sold. For more information, see Guide T4037, Capital Gains, and archived Interpretation Bulletin IT-456, Capital Property - Some Adjustments to Cost Base, and its Special Release.

Generally effective after February 27, 2004, the cost of a capital interest in a trust that is not held by the taxpayer as capital property is deemed to be equal to the cost amount used for inventory valuation purposes less the total of all returns of capital and non-taxable capital gains payable to the taxpayer in respect of the interest, prior to the disposition. At any particular time, inventory valuation is deemed to be the FMV of the capital interest plus the sum of all returns of capital and non-taxable capital gains payable before that time.

Beneficial interest in a trust - A trust may receive a T3 slip with an amount showing in box 42. Use this amount to determine the ACB of your interest in that trust. Reduce the cost of your interest by the total of the positive amounts shown in box 42 of the T3 slips received from the trust for all tax years after 2003. Also reduce it by all amounts (other than amounts received as proceeds of disposition or as a distribution of income of the trust) received from the trust before 2004. If the amount in box 42 is in brackets, it will result in an increase in the ACB. You may want to contact the trustee of the trust to determine if there are any other adjustments required in calculating the ACB of your interest. For more information on how to account for box 42 amounts, see Information Sheet RC4169, Tax Treatment of Mutual Funds for Individuals.

Note
If your ACB is reduced to an amount below zero at any time in the tax year, we consider a deemed disposition to have occurred. The negative amount is deemed to be a capital gain. Your ACB is then reset to zero. For more information, see "Line 3 - Mutual fund units and other shares" on page 37.

Property acquired before 1972

Before 1972, capital gains were not taxed. If the trust sold property acquired before 1972, you have to use special rules when calculating the capital gain or capital loss to remove any capital gains accrued before 1972. These rules are found on Form T1105, Supplementary Schedule for Dispositions of Capital Property Acquired Before 1972. Use Form T1105 to calculate the gain or loss from selling property the trust owned before 1972.

Outlays and expenses

These are amounts incurred to sell a capital property such as finder's fees, commissions, broker's fees, legal fees, and advertising costs. You can deduct outlays and expenses from the proceeds of disposition when calculating the capital gain or capital loss.

In the case of depreciable property sold at a loss, these outlays and expenses reduce the proceeds from the sale to be credited to the class. Do not claim them as deductions from the trust's income.

Note
Outlays and expenses made or incurred in respect of deemed dispositions cannot be claimed.