CRA indicates that a dividend on shares that were distributed by an inter vivos trust, as directed in a will 15 years previously, can be excluded from TOSI by s. 120.4(1.1)(b)(ii)

The will of an individual (Mr. X), who had for many years been actively involved in the business of an Opco, provided for a portion of his Opco shares to go to a testamentary trust for his 20-year old child. CRA indicated that the child would be deemed by s. 120.4(1.1)(b)(ii) to have been also actively engaged in the Opco business, so that the Opco dividends received by the child through the trust were deemed to be “excluded amounts.” Also, a deemed dividend received by the child over 15 years later when a distribution of the Opco shares occurs on the distribution date established in the testamentary trust was to be followed by a redemption in the child’s hands of those shares.

An alternate scenario involved an inter vivos trust holding Opco shares at the time of Mr. X’s death which were directed under the trust deed to be applied as directed in Mr. X’s will – which provided the same terms as described above. Here, since the shares held in the trust were not acquired by it as a consequence of Mr. X’s death (they had been settled on it before his death), the s. 120.4(1.1)(b)(ii) rule could not be applied to render the dividends distributed by the trust to the child as excluded amounts. However, this issue was cured once the shares were distributed by the inter vivos trust to the child on the distribution-date 15 years later, since such distribution occurred as directed in Mr. X’s will and, therefore, as a consequence of his death. Consequently, the deemed dividend received on the ensuing redemption of those shares would be deemed to be an excluded amount.

Neal Armstrong. Summary of 8 October 2021 APFF Roundtable, Q.18 under s. 120.4(1.1)(b)(ii).