Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether a trust is related to a corporation in three different situations and whether the sale of the shares of the corporation by its sole shareholder to a trust would result in an acquisition of control.
Position: Question of fact.
Reasons: Wording of the Act and case law.
XXXXXXXXXX File No 2000-001952
Éric Allard-Pouliot
December 13, 2001
Dear XXXXXXXXXX:
Re: Technical Interpretation Request : Shares transferred to a personal trust
This is in reply to your letter of April 3, 2000, requesting our opinion as to whether there would be an acquisition of control and whether a trust and a corporation would be related in the following three hypothetical situations where the sole shareholder of a corporation sells his shares of the corporation to a personal trust. We apologize for the delay in responding.
Facts
Situation 1
Mr. A is the sole trustee of a trust (the "Trust") of which he and his family are the beneficiaries. Mr. A is also the sole shareholder of a corporation ("Opco"). The Trust does not have any right to acquire shares in Opco.
Situation 2
The facts are the same as in Situation 1, except that the sole trustee of the Trust is Mr. A's spouse.
Situation 2
The facts are the same as in Situation 1, except that the sole trustee of the Trust is an unrelated third party.
Your request appears to relate to either a proposed or completed transaction. As explained in Information Circular 70-6R4, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate tax services office for their views. However, we are prepared to offer the following general comments which may be of assistance to you.
Situation 1
Pursuant to the decision of the Supreme Court of Canada in M.N.R. v. Consolidated Holding Company Limited, 72 DTC 6007, the control of shares held by a trust rests with the trustees of the trust. Thus, in the first situation, Mr. A would retain control of Opco after the sale of his shares in Opco to the Trust, provided that he remains the sole trustee of the Trust, but subject to any limitations that might be provided in the trust indenture. Therefore, the sale of the Opco shares to the Trust would not result in an acquisition of control of Opco. Pursuant to paragraph 251(1)(b) of the Income Tax Act (the "Act"), Mr. A being beneficially interested in the Trust within the meaning of subsection 248(25) of the Act, he would be deemed not to deal at arm's length with the Trust. As a result, subsection 69(1) of the Act would apply should the shares not be sold at fair market value.
In this situation, the Trust and Opco would be related to each other before and after the sale of the shares of Opco. Pursuant to paragraph 104(1) of the Act, a reference to a trust shall, unless the context otherwise requires, be read to include a reference to the trustee, i.e. Mr. A in the first situation submitted. In accordance with the decisions of the Supreme Court of Canada in Consolidated Holding Company Limited, aforementioned, and the Federal Court of Appeal in H. A. Fawcett & Son, Limited v. The Queen, 80 DTC 6195, no difference should be drawn between Mr. A acting in his personal capacity and Mr. A acting in his capacity as trustee of the Trust. Therefore, in accordance with these decisions and subsection 104(1) of the Act, the Trust (which includes a reference to Mr. A) would be considered as controlling Opco before and after the sale of the shares of Mr. A and, as a result, the Trust and Opco would be related to each other pursuant to subparagraph 251(2)(b)(i) of the Act.
Situation 2
In the second situation, the sale of the shares of Opco to the Trust would not result in an acquisition of control of Opco. Pursuant to clause 256(7)(a)(i)(A) of the Act, the sale of the shares of a corporation which occurs between related persons is deemed not to result in an acquisition of control of the corporation. As previously mentioned, pursuant to subsection 104(1) of the Act, a reference to a trust shall be read to include a reference to the trustee, i.e. the spouse of Mr. A in this situation. Mr. A's spouse being related to Mr. A pursuant to paragraph 251(2)(a) of the Act, clause 256(7)(a)(i)(A) of the Act would apply with respect to the sale of the shares of Opco to the Trust and, therefore, the control of Opco would be deemed not to have been acquired by the Trust. However, just like in situation 1, subsection 69(1) of the Act would apply should the shares not be sold at fair market value.
As in the first situation, Opco and the Trust would, pursuant to paragraph 251(2)(b) of the Act, be related to each other before and after the sale of the Opco shares. Prior to the sale of the shares, the Trust would be related to Opco in accordance with subparagraph 251(2)(b)(iii) of the Act since Mr. A's spouse, the sole trustee of the Trust, would be related to a person who controls Opco, i.e. Mr. A. After the sale of the shares, Opco and the Trust would be related to each other pursuant to subparagraph 251(2)(b)(i) of the Act since the Trust would then control Opco.
Situation 3
In the third situation submitted, since the trustee of the Trust would not be related to Mr. A, clause 256(7)(a)(i)(A) of the Act would not apply. Therefore, the sale of the shares of Opco to the Trust would result in an acquisition of control of Opco in this situation. However, as in the two previous situations, Mr. A and the Trust would be deemed not to deal with each other at arm's length and, therefore, subsection 69(1) of the Act would apply should the shares not be sold at fair market value.
Prior to the sale of the shares of Opco, the Trust and Opco would not be related to each other in this situation. However, pursuant to subparagraph 251(2)(b)(i) of the Act, the Trust and Opco would be related to each other after the sale of the shares since the Trust would then control Opco.
The above comments are an expression of opinion only and are not binding on the Canada Customs and Revenue Agency, as explained in paragraph 22 of Information Circular 70-6R4. We trust that the foregoing will be of assistance to you.
Yours truly,
Alain Godin, Manager
International and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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