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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Whether a discretionary trust's assets are beneficially owned by the trustees for the purposes of the definition of "Canadian newspaper" in subsection 19(5) of the Act?
Position:
No.
Reasons:
The trustees cannot be described as being the beneficial owners of the trust's property since they do not have the right to the enjoyment of the property and the right to personally benefit from the property. This position is consistent with our understanding of cultural policy and related provisions in paragraph 19(5.1)(d) of the Act and subsection 19(6) of the Act.
XXXXXXXXXX
2002-013804
XXXXXXXXXX Allan Nelson, CMA
(613) 443-7253
June 27, 2002
Dear XXXXXXXXXX:
Re:Technical Opinion Request
We are writing in response to your May 1, 2002, request for our written comments concerning the ownership of a trust's assets in the context of section 19 of the Income Tax Act (the "Act").
For the purposes of this discussion, we have assumed the following hypothetical facts:
? "Pubco" owns the exclusive right to produce and publish issues of a newspaper (the "Newspaper") in Canada.
? Holdco (a private corporation) owns 15% of the shares of Pubco. The shares of Holdco are owned 50% by a discretionary trust (the "Trust") and 25% by each of two non-resident corporations ("ForeignCo1" and "ForeignCo2"). The trustees of the Trust are individuals who are Canadian citizens. ForeignCo1 and ForeignCo2 are the sole beneficiaries of the Trust.
? "Other Shareholders", which are all either Canadian citizens or public corporations as contemplated in clause 19(5)(e)(iii)(B) of the Act, own 85% of the Pubco shares.
? The Newspaper is a "Canadian newspaper", as defined in clause 19(5)(e)(iii)(B) of the Act, because of the Other Shareholders' ownership interest in the Pubco shares.
Issue
You have asked if the Newspaper would continue to be a Canadian newspaper, for the purposes of section 19 of the Act, if Holdco purchased sufficient Pubco shares from the Other Shareholders so that, after the purchase, Holdco owned 50% of the Pubco shares and the Other Shareholders (in aggregate) owned 50% of the Pubco shares.
As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. However, we are prepared to offer the following general comments in accordance with paragraph 22 of the Circular, which may be of some assistance to you.
One of the conditions that must be met in order for the Newspaper to be a Canadian newspaper [see clause 19(5)(e)(iii)(B) of the Act], is that at least 3/4 of the voting shares of Pubco and the shares of Pubco having a fair market value of at least 3/4 of the fair market value of all of its issued shares, must be beneficially owned by Canadian citizens or by public corporations.
Since Holdco (a corporation other than a public corporation) owns shares of Pubco, the look-through rule, immediately following clause (B) in the Canadian newspaper definition, applies. Generally, each shareholder of Holdco is deemed to own shares in Pubco in proportion to the value of their holdings in Holdco. Consequently, if Holdco purchased the Pubco shares referred to above, the Trust would be deemed to own a proportionate number of the Pubco shares (i.e., 25%), the ForeignCos would, in total, be deemed to own 25% of the Pubco shares and the Other Shareholders would own the remaining 50% of the Pubco shares.
After the purchase, the key question to be answered would be whether the Trust's 25% of the Pubco shares would be beneficially owned by the trustees of the Trust. If so, since the trustees are Canadian citizens, the requirements of clause 19(5)(e)(iii)(B) of the Act would be met and the Newspaper would continue to be a Canadian newspaper [i.e., the required 75% of the relevant Pubco shares would be beneficially owned in aggregate by the trustees and by the Other Shareholders (the trustees are Canadian citizens which would beneficially own 25% of the shares and the Other Shareholders are Canadian citizens and public corporations which would beneficially own 50% of the shares)].
Generally, beneficial ownership of property involves the concept of the right to the enjoyment of the property and the right to personally benefit from the property. Accordingly, the trustees of the Trust would not be considered to be the beneficial owners of the Trust's assets because they are holding the rights for someone else (i.e., ForeignCo1 and ForeignCo2 as the beneficiaries of the Trust).
Reference is made to paragraph 19(5.1)(d) of the Act, in which the term Canadian citizen is defined to include "a trust, each beneficiary of which is a person...described in any of paragraphs (a) to (e) of the definition "Canadian newspaper" in subsection (5)" and reference is also made to the "Canadian" beneficiary requirements in subsection 19(6) of the Act (although subsection 19(6) does not apply in this case, its principles are illustrative of our understanding of tax policy). It is our view that both of these provisions indicate that Parliament did not intend to have the requirements of the definition of Canadian newspaper met when the trust's beneficiaries are foreign residents, such as in the present hypothetical situation.
Conclusion
Our position is that the trustees of the Trust would not be the beneficial owners of the Trust's assets and consequently, the Newspaper would not continue to be a Canadian newspaper, for the purposes of section 19 of the Act, if Holdco purchased Pubco shares, as described above.
We believe this interpretation is consistent with cultural policy and also with the rule of statutory interpretation often quoted by the Courts (refer to E.A. Driedger in Construction of Statutes (2nd edition, 1983 at page 87) that
...the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.
We hope the above will be of assistance to you.
Yours truly,
Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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