Including in-laws or aunts or nephews as beneficiaries of a family trust might jeopardize access to the capital gains deduction
S. 110.6(14)(c) may assist in satisfying the test, in the qualified small business corporation (QSBC) definition in s. 110.6(1), that the mooted QSBC shares have been held by the disposing taxpayer or a related person or partnership for at least 24 months.
Suppose, for example, that on January 31, 2021, Mr. X settled a family trust for himself and related family members, and thereupon transferred his shares of Opco (which he had incorporated in 2015 and which otherwise met the QSBC definition) to the trust, with the trust selling the shares to a third party on June 30, 2021.
In this situation, resort may be had to s. 110.6(14)(c)(ii), which indicates that a trust is deemed to be related to a person from whom it acquired the shares, provided that all beneficiaries are related to the person at the time that the shares are sold to the third party. Here, because the trust acquired the shares from Mr. X and there are no non-related beneficiaries, (c)(ii) deems the trust to be related to Mr. X, so that the 24-month test is met, i.e., the shares were owned by the vendor (the trust) or by Mr. X (deemed by (c)(ii) to be related to the trust) for the 24-month period.
The beneficiaries of a trust may include a second trust – which will be deemed by s. 110.6(14)(c)(i) to be related to the first trust during the period that the second trust is a beneficiary thereof. For s. 110.6(14)(c)(ii) to apply, in addition to being related to all beneficiaries, the person from whom the first trust acquired the shares must also be a beneficiary of the second trust, and thus deemed by s. 110.6(14)(c)(i) to be related to the second trust at the time that the first trust disposes of the shares.
Where there is a corporate beneficiary, s. 110.6(14)(c)(i) deems that corporation to be related to the trust while it was a beneficiary thereof. For s. 110.6(14)(c)(ii) to apply, the person from whom the trust acquired the shares must also be related to the corporate beneficiary at the time that the trust disposes of the shares.
Note that to access s. 110.6(14)(c)(i), all beneficiaries of the trust must be related to the person selling the shares. Thus, no aunts, uncles, or cousins can be beneficiaries. Furthermore, if in-laws are included as beneficiaries, a divorce may result in an in-law no longer being related to the original owner of the shares at the time of the third-party sale.
Neal Armstrong. Summary of David Carolin, Manu Kakkar and Stan Shadrin, “Capital Gains Exemption Planning, Trusts, and the 24-Month Holding Period Rule,” Tax for the Owner-Manager, Vol. 21, No. 3, July 2021, pp. 2-3 under s. 110.6(14)(c).