Suppose a trust has gains that can be sheltered with the capital gain exemption and gains that cannot. In that case, it will be impossible to allocate all of the eligible gains to one beneficiary because of the formula in clause 104(21.2)(b)(ii)(B), which is (A x B x F)/(D x E). A is the amount of the eligible gains, B is the trust’s designation under 104(21) for the beneficiary and D is the total of all designations under 104(21) for beneficiaries. B will usually be less than D, and so the fraction of eligible gains that can designated will usually be less than one.
STEP Round Table 2022, question 1, summarized in CCH Tax Topics no 2656 (January 31, 2023)
