CRA applies its policy that a s. 104(19) designation is effective on December 31 to Pt. IV tax and terminal return inclusions

A Canadian resident personal trust receives a dividend from ACo, and distributes the dividend to B Co (a beneficiary) to which A Co is connected – but they cease to be connected corporations by December 31 of that year. CRA indicated that the connected-corporation Pt. IV tax exemption did not apply to the dividend received by B Co since the s. 104(19) designation is considered to be effective only at the end of the trust’s taxation year – at which time they were no longer connected.

A follow-up point: if a beneficiary receives an amount that is designated as a taxable dividend, but that individual dies during the year, that dividend nonetheless is included in the individual’s terminal return (even though the death occurred before the December 31 effective date of the dividend designation) given that the taxation year of an individual (even of a deceased individual) is the calendar year and there “is no provision in the Act that shortens a taxpayer’s taxation year in his or her year of death so as to cause it to end as at the taxpayer’s date of death.” Thus, the requirement in s. 104(13) - that the dividend be income from a trust whose taxation year did not end before that of the individual - is satisfied.

Neal Armstrong. Summaries of 26 November 2020 STEP Roundtable, Q.11 under s. 186(1)(a) and s. 104(13).