Ménard – Court of Quebec applies the kiddie tax to a trust’s distribution of a capital gain, realized on a crystallization transaction, to a minor beneficiary

In 2012, a discretionary family trust engaged in a capital gains crystallization transaction in which it disposed of shares, having a modest ACB, of a small business corporation wholly-owned by the trust in consideration for shares of a new class of the same corporation, and then allocated and distributed the capital gain to its beneficiaries, one of whom was a minor. The ARQ applied the equivalent of ITA s. 120.4(5) to include twice the amount of the taxable capital gain in the minor’s income as a dividend, subject to a high rate of tax.

The statutory language relevantly required that an “amount can reasonably be considered to be attributable to a taxable capital gain … of a trust from a disposition of shares … that are transferred, either directly or indirectly … to a person with whom the specified individual does not deal at arm's length… .”

Taxpayer’s counsel argued that this language required that there be two distinct transactions – first, a disposition, and second, a transfer – whereas here the disposition and the transfer instead were one and the same transaction. In rejecting this argument and dismissing the appeal, Bourgeois. J.C.Q. stated that “a disposition transaction necessarily includes the notion of transfer.”

He also noted that comments in Gwartz indicated that had the similar transactions in that case occurred after the implementation of s. 120.4(5), they would have been caught, and that the Finance Explanatory Notes were “also eloquent” that the purpose was “to restrict income splitting opportunities in respect of capital gains realized (through a trust) for the benefit of a minor.”

Neal Armstrong. Summary of Ménard v. Agence du revenu du Québec, 2021 QCCQ 3891 under s. 120.4(5).