CRA comments on the application of s. 74.4(2) to a freeze transaction effected by a family trust in favour of a new family trust

S. 74.4(2) imputes interest income where a resident individual transfers property to a non-SBC corporation (which is deemed under s. 84(9) or 51(1)(e) to occur on a s. 86 or 51 reorganization) if one of the main purposes of the transfer was to reduce the individual’s income and benefit designated persons respecting the individual (e.g., non-arm’s length minors) who also will be specified shareholders (under a modified definition).

CRA found that where a family trust which held common shares of the corporation and with minor (grandchildren) beneficiaries (Trust A) did a s. 51 exchange of its common shares for preferred shares, and a new family trust with a similar but expanded list of beneficiaries (Trust B) subscribed for new common shares, the grandchildren would be considered to be designated persons in respect of the old trust, viewed as the "individual" for s. 74.4(2) purposes. In particular, CRA stated "that a designated person in respect of Trust A would include…a person under 18 years who would be beneficially interested in Trust A if subsection 248(25) applied without taking into account clauses (b)(iii)(A)(II) to (IV), or a person under 18 years who did not deal at arm’s length with a [beneficially interested] person… ."

CRA was not asked the further question how the purpose test in s. 74.4(2) could or should apply where the designated persons in question (the grandchildren) are already beneficiaries of the old trust (Trust A).

Neal Armstrong. Summary of 2 June 2015 T.I. 2015-0570071E5 F under s. 74.4(2).