CRA rules on the para. (f) exclusion from disposition re a transfer for no consideration to new trust for the same special-needs minor beneficiary

A special-needs minor child (CC4), who was the sole beneficiary of an inter vivos trust for the child’s exclusive benefit, held non-voting Class A common shares of a holding company (Fco), with CC4’s three siblings holding the other Class A shares directly.

It was proposed that:

  • the trust for CC4 exchange its Class A shares of Fco under s. 86 reorganization for newly-created non-voting, non-cumulative redeemable and retractable Class Z shares of Fco.
  • Fco increases the PUC of its Class Z shares held by the trust, with the trust including the resulting taxable dividend in its income without taking a s. 104(6) deduction.
  • Fco makes a PUC distribution to the trust by distributing a note of a subsidiary in an amount sufficient for the trust to pay the tax on the above taxable dividend.
  • the father of CC4 settles a new trust for the exclusive benefit of CC4, with the old trust transferring its Class Z shares of Fco to the new trust for no consideration, and with the new trust not electing out of the application of para. (f) of the definition of "disposition" in s. 248(1).
  • the old trust is wound up after paying its taxes, on the deemed dividend received by it, with the proceeds of the note.

Rulings included that the para. (f) exclusion from "disposition" would apply to the trust-to-trust transfer and that s. 104(4) would not apply to the new trust because of the exclusion in para. (g) of the s. 108(1) definition of "trust." Thus, regarding the second ruling, the interests in the new trust were accepted as being vested indefeasibly in the beneficiary even though the latter was presumably lacking in legal capacity.

Neal Armstrong. Summary of 2022 Ruling 2021-0904611R3 F under s. 248(1) – deposition – (f).