Moules Industriels – Tax Court of Canada finds that a numerical cap on trustees’ discretion to allocate income or capital did not stop tainting under s. 256(1.2)(f)(ii)

S. 256(1.2)(f)(ii) provides that where a beneficiary’s share of the income or capital of a trust is in the discretion of the trustees, the beneficiary is deemed to own shares held by the trust for purposes of the associated corporation rules. A trust deed provided that such share of beneficiaries who otherwise would cause corporations held by the trust to become associated was capped at 24.99%. The drafter of this clause evidently thought that it made sense that this would mean that no more than 24.99% of the trust’s shareholdings would then effectively be attributed under s. 256(1.2)(f)(ii) to those beneficiaries.

Lamarre ACJ agreed with the CRA position (foreshadowed in 2003-0052261E5) that 100% of those shares instead were effectively attributed to those beneficiaries, stating:

This clause does not have the effect of eliminating the discretionary power contemplated by … the deeds. This power, despite it being potentially subject to the 24.99% cap, remains fundamentally a discretionary power.

Neal Armstrong. Summary of Moules Industriels (C.H.F.G.) Inc. v. The Queen. 2018 CCI 85 under s. 256(1.2)(f)(ii).