CRA comments on the expansive effect of ss. 104(1) and s. 251(5)(b)(i) on related person status re trusts may be incorrect
Comments on how to characterize the relations of a trust or its beneficiaries to other taxpayers include:
- CRA considers that s. 104(1) applies, and therefore a trust is related to each person related to the trustee of the trust. This position, which appears to be incorrect, is not supported by Wright Estate, and its reasoning seems to break down when a trust has more than one trustee.
- Obiter comments in Propep suggest that the broad definition of “beneficially interested” in s. 248(25) may also apply wherever the term “beneficiary” is used. However, these comments are inconsistent with the presumption of consistent expression, under which the expanded meaning of “beneficially interested” should apply only when the Act expressly states that it does.
- The rights referred to in s. 251(5)(b)(i) include those “in equity.” CRA has considered that s. 251(5)(b)(i) could apply to a beneficiary of a trust unless, under the terms of the trust agreement, the beneficiary could never obtain ownership of the shares or control the voting rights attached to the shares. However, Lyrtech RD Inc. stated that a beneficiary's interest in a discretionary trust does not come within the scope of s. 251(5)(b) [but see, more recently, CO2 Solution Technologies].
- In order for various beneficiaries of a trust, for example, a mutual fund trust which might be subject to a loss restriction event, to be considered to be a majority-interest group of beneficiaries, they must inter alia constitute a group. It is suggested that:
[C]ase-law principles should be applied to determining whether beneficiaries of a trust constitute a group of persons in the following manner:
1) There must be sufficient common connection between the beneficiaries in addition to their being beneficiaries of the same trust. A common identifying feature (such as being non-residents, as in Silicon Graphics) is insufficient to establish such a connection.
2) The common connection might include but is not limited to a voting agreement, an agreement to act in concert, or a business or family relationship.
3) Beneficiaries may share a mutually beneficial objective, such as maximizing the value of their investments in the trust, without being considered a group.
4) Beneficiaries can participate in modern corporate or commercial steps, such as granting a proxy or participating in a reorganization of the trust (for example, a fund merger pursuant to section 132.2), without being considered a group.
5) Whether the beneficiaries know, can identify, or communicate with each other is relevant in determining whether they are a group.
Neal Armstrong. Summaries of Jeffrey T. Love and Kenneth R. Hauser, “How Various Aggregation Rules Apply to Trusts,” 2018 Conference Report (Canadian Tax Foundation), 28: 1-79 under s. 248(25)(a), s. 248(25)(b)(ii), s. 248(25), s. 251.1(1)(g), s. 251.1(3) – majority-interest beneficiary, s. 251.1(4)(d)(i), s. 251.1(3) – majority-interest group of beneficiaries, s. 251(2)(c)(i), s. 251(5)(b)(i), s. 251(1)(b), s. 256(1.2)(f).