Scope of s. 248(25)(a) (p. 28:9)
A person or partnership may be beneficially interested in a particular trust without being directly beneficially interested in the particular trust if the person or partnership is a beneficiary of another trust that is beneficially interested in the particular trust or is a member of a partnership that is beneficially interested in the particular trust. This…arises by virtue of the qualifying language following “as a beneficiary under a trust”—that is, the right to receive any income or capital “of the particular trust either directly from the particular trust or indirectly through one or more trusts or partnerships.” It is not clear whether this qualifying language serves to extend the application of “beneficially interested” in paragraph 248(25)(a) to these indirect persons or partnerships, or whether it only provides a tracing function for the receipt of funds and does not derogate from the principle that what is relevant is the person’s or partnership’s right, as a beneficiary of the particular trust, to receive income or capital of the particular trust.
Under trust law, it appears that the reference in this qualifying language to “whether conditional on or subject to the exercise of any discretion by any person or partnership” is limited to…first… the exercise of discretion by the trustee(s) of the trust since the trustee(s) of the trust generally have exclusive rights to dispose of and manage the trust property; and, second, to a person, other than or in addition to the trustee(s), who under the terms of the trust has a power of appointment of beneficiaries.
Potentially redundant effect of s. 248(25)(b)(ii) (pp. 28:9-10)
Paragraph 248(25)(b) substantively extends the concept of being beneficially interested in a trust to a person or partnership that might be added as a beneficiary of the trust if the person or partnership had a sufficient level of financial dealings with the trust at or before the time that the person or partnership was added as a beneficiary. …
Subparagraph 248(25)(b)(ii) contemplates that a person or partnership exercises discretion to make the other person or partnership beneficially interested in the particular trust, under either the terms or conditions of the particular trust or an arrangement in respect of a particular trust. It is difficult to see how such an exercise of discretion under the terms or conditions of the particular trust is not already covered by paragraph 248(25)(a). Similarly, it is difficult to see how there can be an “arrangement” in respect of the trust in addition to the terms or conditions of the particular trust, which provides for the ability to exercise discretion over who can be beneficially interested in the particular trust when these powers of appointment are binding on the trustee and do not involve a failure to comply with the requirement for the three certainties under trust law.
Proprep contrary to presumption of consistent expression (pp. 28:11-12, 13)
Pursuant to the presumption of consistent expression, the expanded meaning of “beneficially interested” should apply only when the Act expressly states that it does, as is the case in subsections 70(3), 94(1), 108(1), 122(3), and 251.1(3), and paragraph 251(1)(b). This suggests that the expanded meaning of “beneficially interested” should not apply when the Act does not incorporate it—for example, in determining whether two or more corporations are associated pursuant to subsection 256(1) and in applying the deemed ownership provisions in paragraph 256(1.2)(f)…. If…obiter comments in Propep are correct, the definition of “beneficially interested” may also apply wherever the term “beneficiary” is used.
Commentators have suggested that these obiter comments would render meaningless the definitions of “beneficiary” in other provisions of the Act, such as subsections 94(1) and 108(1), since these definitions’ sole substantive aspect is to provide that a beneficiary of a trust includes a person beneficially interested therein. Also … Lyrtech RD…held that subsection 248(25) did not apply to paragraph 251(5)(b).
Example of 2 trusts sharing a majority-interest beneficiary who are not affiliated (p. 28:18)
… Canco, a corporation, is a majority interest beneficiary of both trust D and trust E and therefore should be affiliated with both trust D and trust E pursuant to subparagraph 251.1(1)(g)(i). However, trust D and trust E should not be affiliated pursuant to paragraph 251.1(1)(g) because neither trust would be affiliated with a majority-interest beneficiary of the other trust (Canco) if subsection 251.1(1) were read without reference to paragraph 251.1(1)(g).
Inclusion in “majority-interest beneficiary” of affiliated persons who are not beneficiaries (p. 28:20)
[T]he definition does not appear to require that a person be a beneficiary of a trust to be a majority-interest beneficiary of a trust, provided that the person is affiliated with a person who is a majority-interest beneficiary of the trust. This was clearly intended by the Department of Finance … . The CRA also takes this position. [fn 58: … 2014-0534841C6]
Two alternatives for computing the FMV of income (or capital) interests (pp. 28:25-26)
In calculating the fair market values of all income interests or all capital interests, paragraphs (a) and (b) of the definition of “majority-interest beneficiary” could be interpreted to suggest two alternative approaches:
1) Is the fair market value of the income interest equal to the particular trust’s future income stream subject to an appropriate discount rate, and is the fair market value of the capital interest equal to the total fair market value at a particular time of all trust assets (less the fair market value, if any, of the income interests)?
2) Alternatively, must the fair market value of each interest of a beneficiary in the income of the trust be calculated and aggregated, and the fair market value of each interest of a beneficiary in the capital of the trust be calculated and aggregated? …
[T]he first approach…is most consistent with the reference to “fair market value” in paragraphs (a) and (b) of the definition of “majority-interest beneficiary.” A knowledgeable, informed, and prudent purchaser acting at arm’s length in purchasing all of the income interests in a trust would be willing to pay only for the total fair market value of the trust’s income (its income stream subject to an appropriate discount rate). …
The second approach is supported by paragraph (a) of the definition of majority-interest beneficiary, specifically requiring the calculation of the “fair market value of all the interests as a beneficiary in the income of the trust,” not the calculation of the fair market value of the trust’s income. Paragraph (b) requires the calculation of the “fair market value of all the interests as a beneficiary in the capital of the trust,” not the calculation of the fair market value of the trust’s capital.
CRA views RESP subscriber as majority-interest beneficiary (p. 28:36)
Whether the trust is affiliated with its subscriber should turn on whether the subscriber, under the terms of the trust, is a majority-interest beneficiary; however, the CRA takes the administrative position that it normally expects the subscriber to be a majority-interest beneficiary as a result of the rights to receive refunds of contributions and accumulated income payments. [fn. 87 … 2009-0348901E5 and 2010-0352921E5.]
Two alternative interpretations of s. 251.1(4)(d)(i) (pp. 28:22-23)
[I]f under the terms of the trust the income that a beneficiary may receive …[may] depend…on whether the trustee(s) of the particular trust have discretion over the amount of income that each income beneficiary receives … subparagraph 251.1(4)(d)(i) applies to deem the power to be fully exercised (or not exercised). … An effect of this rule is that multiple persons may be majority-interest beneficiaries of the same trust; for example, if a trust has five beneficiaries, each of whom could receive up to 100 percent of the income or capital of the trust if a discretionary power is fully exercised in the person’s favour, each of the five beneficiaries is a majority-interest beneficiary. …
[If so] subparagraph 251.1(4)(d)(i) could apply to deem the trustee(s) of the trust to have exercised their discretion to distribute the trust’s income in one of two ways:
1) They could be deemed to have distributed the trust’s income to the person whose status as a majority-interest beneficiary is at issue (if that person has an interest as a beneficiary in the income of the trust) and to each other person who has an interest as a beneficiary in the income of the trust and who is affiliated with the subject person.
2) Alternatively, they could be deemed to have distributed all such income to the group composed of the particular person whose status as a majority interest beneficiary is at issue and each other person who has an interest as a beneficiary in the income of the trust and who is affiliated with the subject person.
For example, suppose a trust has $100 of income in a year, there are five discretionary income beneficiaries, one of the income beneficiaries is the person whose status as a majority-interest beneficiary is at issue, and that person is affiliated with two of the other income beneficiaries. Under the first alternative, the deemed amount of income received by the person whose status as a majority interest beneficiary is at issue and each other affiliated person is $300 ($100 × 3). Under the second alternative, the deemed amount of income received by the person whose status as a majority-interest beneficiary is at issue and each other affiliated person is collectively $100. …
The former approach is supported by the reference in subparagraph 251.1(4)(d)(i) to the amount of income or capital of the trust that “a” person may receive as “a” beneficiary and does not refer to the amount of income or capital that “a person and all persons with whom the person is affiliated” may receive as beneficiaries. This approach is also consistent with the stated purpose of subparagraph 251.1(4)(d)(i) … .
Determination of whether beneficiaries constitute a “group” (pp. 28:33-34)
We suggest that the above case-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.
Quaere whether clients of an investment manager are a majority-interest group of beneficiaries of an MFT (pp. 28:37-38)
Consider an example involving the unitholders of a mutual fund trust. When the unitholders' aggregate interests in the fund increase from being less than 50 percent to being more than 50 percent of the fair market value of the fund, could the unitholders constitute a group, making them a majority-interest group of beneficiaries and causing the trust to experience a loss restriction event? Assume that the trust does not qualify for the "investment fund" exception—for example, by breaching the clause (b)(vii)(D) exception as a result of investments in a foreign exchange-traded fund (ETF). …
…The unitholders' investments are managed on a discretionary basis. Although the decision to invest is made by each unitholder's portfolio manager or investment counsellor, the investment decisions are made on the basis of each unitholder's investment policy, its individual circumstances, and how the particular fund fits into its portfolio. The unitholders presumably do not know and are not able to identify or communicate with each other.
Example of issue of whether s. 104(1) embodies a trust in its trustee for related person purposes (pp. 28:40-41)
The interpretive issue is whether subsection 104(1) embodies a trust in its trustee for the purposes of the definition of related persons. …
[A] bank has two subsidiaries: a fund manager, and a trust company. The fund manager is both the manager and the trustee of a mutual fund trust whose units are widely held. The trust company acts as trustee of a trust governed by an RRSP whose annuitant has no other connection to the bank group. Both the mutual fund and the RRSP trust purchase units of an ETF that is an "exempt foreign trust" … .
For the purpose of testing whether the mutual fund trust holds at least 10 percent of the units of the ETF under subparagraph 94.2(1)(b)(i), should the units of the ETF held by the RRSP trust be included on the basis that both the RRSP trust and the mutual fund trust are embodied in their trustees, are related pursuant to subparagraph 251(2)(c)(i), and are deemed not to deal at arm's length pursuant to paragraph 251(1)(a)? We believe that the correct answer is no.
Jurisprudence and CRA position re use of trustee for related person purposes (pp. 28:41-44)
The sole case that directly addresses whether a trust is related to another person is Wright Estate … [where] the court found that the taxpayer [a trust] was related to no one.
The courts did not consider or apply subsection 104(1) in Hickman, H.A. Fawcett & Son, Limited or Consolidated Holding Company Limited. We believe that this is sensible because a trust does not have a legal personality; therefore, the trustee is the person, subject to the terms of the trust, who has the capacity to bring every proprietary and possessory action available in law with respect to the trust property, and the trustees must be the ones to vote shares held by the trust (or they may delegate this power to others). However, we also believe that these cases are not relevant to the question whether subsection 104(1) embodies a trust in its trustee for the purpose of determining relatedness. …
The CRA is of the view that subsection 104(1) applies, and therefore a trust is related to each person related to the trustee of the trust [fn 103: … S1-F5-C1 … 1.49]. In one administrative position, the CRA provided three examples of its interpretation of this issue [fn. 104: … 2001-0019525].
In another administrative position, the CRA seems to suggest that subsection 104(2) is relevant to applying the definition of "related persons" to a trust because it, in combination with subsection 104(1), deems the trust in respect of the trust property to be an individual [fn. 105: … 2009-0311891I7]. We suggest that this position is incorrect. If the trustee is a corporation, merely deeming the trust to be an individual does not go far enough … . Additionally, if the trustee is an individual and subsection 104(1) embodies the trust in the trustee, subsection 104(2) should not be necessary to apply paragraph 251(2)(a) to the trustee and another individual.
Arguments respecting embodiment of trustee (pp. 28:44-47)
The strongest argument for applying subsection 104(1) to embody a trust in its trustee for the purpose of applying the definition of "related persons" is that the Department of Finance expressly amended the affiliated persons rules in the 2004 amendments to exclude this possibility … [in] paragraph 251.1(4)(c). …
Aside from Wright Estate, the strongest argument against applying subsection 104(1) to embody a trust in its trustee when applying the definition of "related persons" is that the purpose of subsection 104(1) is to ensure that trusts' tax affairs are properly administered, not to substantively affect the trusts' (or other taxpayers') tax liabilities. …
A second argument … is that the reasoning seems to break down when a trust has more than one trustee, and it is unclear how it applies when a person is the trustee of multiple trusts (as in the case of a corporate trustee). The CRA appears to have addressed the former point in only one administrative position, and stated that the relevant person "may" have to be related to all of the trustees to be related to the trust [fn. 112: … 2009-0311891I7]. …
The related persons provisions do not include a concept similar to paragraph 251.1(4)(a) or subparagraph 55(5)(e)(ii) to provide that persons are related to themselves. Thus, even if subsection 104(1) embodies a trust in its trustee, it is not clear whether two trusts that share the same trustee should be related to each other.
Whether s. 251(5)(b)(i) deems a beneficiary to own shares held by the trust (pp. 28:48-49)
An interpretive issue in the trust context is whether the reference to a right "in equity" captures a beneficiary's interest in a trust, especially a discretionary trust, so as to deem the beneficiary to own the shares owned by the trust. The CRA had taken the position that this paragraph 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 [fn. 116: … 2007-0246721E5]. …
Lyrtech RD Inc. … concluded, in obiter dicta, that a beneficiary's interest in a discretionary trust does not lie within the scope of paragraph 251(5)(b).
Uncertainties re scope of ss. 256(1.2)(f)(ii), (iii) and (iv) (pp. 28:62-63)
Subparagraph 256(1.2)(f)(iii) applies when a beneficiary's share of accumulating income and capital is fixed by the terms of the trust and is not dependent on a person exercising (or failing to exercise) a discretionary power. In these situations, the beneficiary is deemed to own the shares comprising the trust's property in proportion to the fair market value of the beneficiary's "beneficial interest" to the fair market value of all beneficial interests in the trust. It is not clear how subparagraphs 256(1.2)(f)(ii) and (iii) apply to a hybrid situation in which a beneficiary's share of accumulating income and capital is discretionary, but the amount that any one beneficiary may receive is capped at a certain amount. …
When subparagraph 256(1.2)(f)(ii), (iii), or (iv) applies to deem a person to own shares owned (or deemed to be owned) by the trust, two uncertainties arise. First, it is unclear whether this deemed ownership is limited in application to the 25 percent cross-ownership provisions in paragraphs 256(1)(c) , (d), and (e) or whether this deemed ownership also provides for deemed control of the voting rights attached to the shares subject to deemed ownership. Second, if the beneficiaries with the deemed ownership of shares also have control over the voting rights attached to the shares, it is unclear whether the trustee no longer controls the shares for the purpose of applying subsection 256(1).
CRA application of s. 251(1)(b) (p. 28:52)
The CRA considered the application of paragraph 251(1)(b) to a situation in which a person was a beneficiary of two different personal trusts and factually dealt at arm's length with each trust [fn. 120: … 2003-0038605]. The CRA took the position that paragraph 251(1)(b) deems the person and each trust, as well as the two trusts, not to deal at arm's length. The latter position results from applying paragraph 251(1)(b) to a situation in which one trust is the "taxpayer" and the person (who is deemed to deal at arm's length with that trust) is beneficially interested in the other trust.
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