CRA finds that shares distributed out of an inter vivos trust on an active individual’s death were received as a consequence of death for s. 120.4(1.1)(b)(ii) purposes

An individual (Mr. X) had been actively engaged in a business of a corporation (Investco). CRA found that where a discretionary inter vivos trust provided, on his death, for the distribution of Investco common shares to Mr. X’s adult children, s. 120.4(1.1)(b)(ii) deemed a specified individual (one of such children) who received a dividend on such shares to have also been actively engaged etc. in the Investco business for the same five years, so that such dividend qualified in her hands as being from an excluded business. S. 120.4(1.1)(b)(ii) was so engaged on the basis of a CRA position that that property received from an inter vivos trust, the terms of which unconditionally require that it distribute the property to the individual on the death of another person, can be considered as property acquired by the individual as a consequence of that person’s death. (Regarding GAAR where s. 120.4(1.1)(b)(ii) has been engaged, CRA looks for a sufficient connection between the deceased person and the property that is being distributed, and the specified individual, to support the application of the s. 120.4(1.1)(b)(ii) deeming rule.)

However, if it instead was preferred shares of Investco that Mr. X bequeathed to his children, and the inter vivos trust at all relevant times held the common shares of Investco, s. 120.4(1.1)(b)(ii) would not apply to a dividend paid, following Mr. X’s death, on those common shares to the trust and distributed by it to the children.

Neal Armstrong. Summary of 3 December 2019 CTF Roundtable, Q.7 under s. 120.4(1.1)(b)(ii).