CRA treats the application of the purpose test, respecting the acquisition by a private foundation of an indirect interest in a private corporation through a trust, as a question of fact
Where a private foundation or persons with whom it does not deal at arm’s length own more than 20% of the shares of any class of shares of a corporation (the “excess corporate holdings percentage” as defined in s. 149.1(1)), it is obligated to divest itself of the excess shares (the “divestment obligation percentage.” Mr. A, who does not deal at arm’s length with private foundation, settles his freeze shares of a private corporation on an alter-ego trust under s. 73(1), with the trust terms providing that the residue of the trust will be distributed to the private foundation on his death. Will the private foundation will be subject to s. 188.1(3.5) such that it will be treated as owning a portion of the freeze shares?
Along with conditions of a more mechanical nature, CRA noted the purpose test in s. 118.1(3)(d) and (e) – which applied inter alia if it may reasonably be considered that a purpose of the acquisition of a property by the trust was to hold shares and such shares, if they were held by Mr. A, would cause the private foundation to have a divestiture obligation percentage. Perhaps in recognition of potential ambiguities as to how to apply this purpose test to what essentially is a donee, CRA gave the following somewhat muffled response:
…Whether subsections 188.1(3.3) to (3.5) apply to a particular situation is a mixed question of fact and law … . Given the broad nature of these provisions, where a private foundation is a beneficiary under an alter-ego trust, consideration must be given to subsections 188.1(3.3) to (3.5) for the purposes of determining the private foundation’s excess corporate holdings percentage and divestment obligation percentage for a taxation year.
Neal Armstrong. Summary of 8 May 2018 CALU Roundtable Q. 5, 2018-0745861C6 under s. 188.1(3.3).