Can a family trust use the lifetime capital gains exemption when it sells business shares?

A family trust that sells shares of a business is not the one who claims the capital gains deduction. The Income Tax Act gives the deduction to an individual other than a trust. What a trust can do is pass the gain to a beneficiary through a designation, and whether the deduction is then available turns on the beneficiary and the conditions in s.110.6 and s.104(21.2). This page describes that path in the Act’s terms and gives no planning advice.

Who the Act gives the deduction to

Section 110.6(2.1) of the Income Tax Act speaks of an individual, other than a trust, who was resident in Canada throughout the year and who disposed of a share that was a qualified small business corporation share of the individual at the time of disposition. The definition of that term in s.110.6(1) refers to a share “of an individual (other than a trust that is not a personal trust)”, and s.110.6(16) deems a personal trust, for that definition, to include a trust described in s.7(2). The Act’s term is therefore “personal trust”, and whether a particular family trust is one is a question for its advisers.

How a gain reaches a beneficiary

Section 104(21) of the Income Tax Act deems an amount of a trust’s net taxable capital gains for a year to be a taxable capital gain of a taxpayer, for the purposes of sections 3 and 111 except as they apply for section 110.6, if its conditions are met. They include that the trust designates the amount for the taxpayer in its return of income, the taxpayer is a beneficiary and resident in Canada (unless the trust is a mutual fund trust throughout the year), the trust is resident in Canada throughout the year, and the total designated for all beneficiaries is not greater than the trust’s net taxable capital gains for the year. Subsection 104(21.2) applies where a personal trust, or a trust referred to in s.7(2), designates an amount for a beneficiary under s.104(21): the trust must designate an amount of its eligible taxable capital gains for that beneficiary, and for the purposes of s.110.6 the beneficiary is deemed to have a taxable capital gain from the disposition of a qualified small business corporation share or qualified farm or fishing property, worked out by the subsection’s formulas.

What the CRA lists, and what still matters

The CRA’s line 25400 guidance lists the allocation and designation by a trust of taxable capital gains on the disposition of qualified small business corporation shares or qualified farm or fishing property among the amounts that can support the deduction. The beneficiary still has to meet the conditions in s.110.6 of the Income Tax Act, including residence in Canada throughout the year, which s.110.6(5) deems for an individual resident in Canada at any time in the year and throughout the year before or the year after, and the shares have to pass the qualified-share tests when they are sold. Whether a given trust, beneficiary and set of shares qualifies is for an accountant or tax lawyer to confirm.

If your question is about selling a business into a trust rather than out of one, see the answer on selling to a family trust.