A horizontal amalgamation may cause a dividend paid to another family corporation through a trust to be subject to Part IV tax

CRA considers that a dividend received a trust in a trust taxation year and pushed out to a beneficiary under s. 104(19) is not received by the beneficiary as a dividend until the end of that year.

Suppose that on November 30, 2020, pays a dividend to its wholly-owning trust shareholder, which immediately distributes the funds to Benco (a corporate beneficiary). The next day Opco 1 amalgamates with its sister corporation (also owned by the trust).

Whether the dividend deemed under s. 104(19) to be received by Benco on December 31 is subject to Part IV tax, turns on whether, pursuant to s. 186(2), Opco 1 was controlled by Benco (and they thus were connected) on December 31. However, Opco 1 no longer existed on that date, so that Benco and Opco 1 would appear to not be connected on December 31.

Under s. 87(2.11), a new corporation arising on a vertical amalgamation is deemed to be a continuation of the predecessor parent for the purposes of applying Part IV “in respect of” that particular corporation. This may suggest that the corporate beneficiary receiving the dividend from the predecessor receives Part IV tax relief. However, be that as it may, s. 87(2.11) provides no assistance where, as here, there was a horizontal amalgamation.

Accordingly, it is suggested that the dividend paid by Opco 1 to the trust prior to amalgamation and then allocated by the trust to Benco is subject to Part IV tax.

Neal Armstrong. Summary of Stan Shadrin, Manu Kakkar and David Carolin, “Application of Part IV Tax to Amalgamations of Companies Owned by Trusts with Corporate Beneficiaries,” Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 1 under s. 87(2.11).