Family trusts may impose difficulties in avoiding Part VI.1 tax

Opco redeems freeze preferred shares held by a family trust and the trust distributes the resulting large deemed dividend out to Holdco (who in addition to being a beneficiary, is also an Opco shareholder). Unfortunately, the s. 104(19) designation made on the dividend does not deem it to have not been received by the trust. Accordingly, to avoid Part VI.1 tax on Opco, both Holdco and the trust must have a substantial interest in Opco.

Although this could be a challenge for Holdco, there may be even greater difficulties for the trust, e.g., where it has independent trustees, or where unrelated trusts are beneficiaries.

Neal Armstrong. Summary of Austin del Rio, “Part VI.1 Tax on Dividend Paid Through Family Trust,” Tax for the Owner-Manager, Vol. 19, No. 3, July 2019, p. 9 under s. 191.1(2).