Vefghi Holding – Tax Court of Canada disagrees with the CRA position that connected-corp. status must be tested at the (trust year-end) effective date of a s. 104(19) designation
Partway through its calendar taxation year, a family trust received a dividend from a family corporation (Consultant Inc.), paid that dividend to a corporate beneficiary (Vefghi Corp., also with a calendar year end) and in its return for that taxation year, made a s. 104(19) designation. CRA applied its published position (e.g., in 2020-0845821C6 F) that, since the two corporations had ceased to be connected between the time of the dividend and the effective time of the s. 104(19) designation (the December 31 trust year end), the dividend was subject to Part IV tax. However, D’Arcy J stated:
I agree with the Respondent that the determination of the application of subsection 104(19) can only be made at the trust’s year-end. However, I do not agree that this results in the relevant point in time for determining whether corporations are connected being the trust’s year-end.
Instead, he found that, since s. 104(19) was silent as to when in Vefghi Corp.’s taxation year it received the dividend, it should be treated as having received the dividend on the same day as it in fact was received by the trust. Although the case was in the form of a Rule 58 query, this effectively signified that the dividend received by Vefghi Corp. was exempt from Part IV tax because Consultant Inc. was connected with it on that day.
A second situation presented to him was similar, except that a new taxation year of the corporate beneficiary started after the date of the payment of the dividend (on June 30, shortly preceding the dividend payer and beneficiary ceasing to be connected) and before the (December 31) effective date of the s. 104(19) designation by the trust, so that on no day in that taxation year of the corporate beneficiary was the dividend payer connected to it. It followed from the wording of s. 104(19) that the connected-corporation exemption from Part IV tax was not available.
Neal Armstrong. Summary of Vefghi Holding Corp. v. The King, 2023 TCC 135 under s. 104(19).