4 July 2006 External T.I. 2005-0111731E5 - ownership of shares held in a trust

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.

Principal Issues: When shares are held by multiple trustees for the benefit of the beneficiaries of a trust that is not a bare trust or a nominee arrangement, who "owns" the shares for the purpose of section 256, and if it is the trustees, what portion of the shares does each trustee own?

Position: As the registered owners of the shares, each of the trustees own all of the shares held by the trust jointly. In addition, section 256(1.2)(f)(ii) may apply to deem the beneficiaries to own the shares as well.

Reasons: Except in the case of a nominee or bare trust arrangement, ownership includes legal ownership. In addition, paragraph 256(1.2)(f) provides additional rules for determining the ownership of shares held in a trust. We were asked to take the view that each trustee owns a pro rata share of the trust property. Such a position is not viable as it is the ownership of the property by the trustee(s) that is a characteristic of a common law trust. If one out of three named trustees, in the situation described, did not have ownership of the assets, that person named as a trustee would presumably not be a trustee (by reason of not having ownership of the trust property); rather, that person might be a protector or an advisor to the trustees, etc. While there is significant research on the topic of beneficial ownership, it is generally recognized that the trustees do not have beneficial ownership of the trust property for most purposes since they cannot use the property for their own benefit (whether the trust is a bare trust or not). The comments in paragraph 15 of IT-64R4 which state that it is beneficial ownership, not legal ownership that is relevant for the purpose of section 256 in the case of a nominee or bare trust arrangement do not apply to trusts that are recognized for tax purposes. In the situation presented in this file, either paragraph 256(1)(d) or (e) could apply to deem the corporation to be associated with another corporation based on the cross-ownership of the shares, if the group of trustees of the trust holding voting control of the corporation is a related group.

XXXXXXXXXX 	2005-011173
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

July 4, 2006

Dear XXXXXXXXXX:

Re: Ownership of Shares Held in a Trust

This is in reply to your letter of January 7, 2005, concerning the application of subsection 256(1) to two corporations where the shares of one of the corporations are held in a trust that has multiple trustees. We apologize for the delay in our response.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You have asked for our comments on how the cross-ownership test in subsection 256(1) is to be applied in the situation where a trust has multiple trustees.

For this purpose you describe three corporations, one of which is controlled by the mother of a particular family, one of which is controlled by the father of that family and the third of which is controlled by the two adult children of that family. In addition, a discretionary trust for the benefit of the children and grandchildren of the mother and father owns 100% of the common shares in the corporation in which the voting control is held by the two adult children. The mother and father are the trustees of that discretionary trust. You recognize that paragraph 256(1)(d) will apply to associate each of the first two corporations with the third corporation if either the mother or the father is considered to own more than 25% of the issued shares of any class of shares, other than a specified class as defined in subsection 256(1.1), of the third corporation which is controlled by the two adult children.

The circumstances outlined in your letter relate to a specific fact situation. As explained in Information Circular 70-6R5, dated May 17, 2002, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. However, we are prepared to provide you with the following general comments. It is trite law that the trustees of a trust own the property of the trust. In the case of a trust with multiple trustees, the trustees have joint ownership of all the property of the trust. As stated in paragraph 15 of IT-64R4, Corporations: Association and Control, the Canada Revenue Agency recognizes that it is beneficial ownership and not legal ownership that is relevant in the case of a bare trust or a nominee relationship. However, in the case of any other trust, the trustees are considered to be the owners of the trust property for the purpose of section 256. In addition, although not relevant to your question, in circumstances set out in paragraph 256(1.2)(f), the beneficiaries of the trust are deemed to own the shares held by the trust for the purpose of the association rules. That, however, does not negate the fact that the trustees own the shares. While the facts of a particular situation may indicate that none of the trustees of a trust has de jure control of the corporation in his or her own right solely by reason of his or her joint ownership of the shares of that corporation, the fact that the shares are held jointly does not detract from the fact that each of the trustees is, in fact, the legal owner of the shares that are registered in his or her name.

Thus, in the situation you describe, it is our view that both the mother and the father would be considered to own 100% of the common shares of the third corporation with the result that each of the corporations controlled by either the mother or father would be considered to be associated with the third corporation. In addition, subparagraph 256(1.2)(f)(ii) would apply to deem each of the beneficiaries of the trust to have ownership of all the shares of the third corporation held by the trust. Thus, the third corporation may be associated with any corporation that is controlled by any of those beneficiaries.

Nothing in this letter should be construed as confirmation, express or implied, that the CRA has considered, examined, agreed to or determined who would have control over any particular corporation. In particular, nothing in this letter should be construed as suggesting that the trustees, as the legal owners of the shares, would not have de jure control or de facto of the corporation either individually or as a group if the facts so determine.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch