2 May 2006 External T.I. 2005-0112511E5 - Association: shares held in disc trust for minors

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: Does 256(1.2)(f)(ii) apply to beneficiaries with a future conditional right under a discretionary trust as well as to beneficiaries with an immediate conditional right under a discretionary trust?

Position: Yes

Reasons: For the purpose of 256(1.2)(f), a beneficiary is a person who has a right as a beneficiary under common law (and not simply beneficially interested as defined in 248(25)). However the fact that the income is not immediately payable to a particular beneficiary does not preclude that beneficiary from being considered a beneficiary at law under the terms of the trust.

XXXXXXXXXX 							2005-011251
								Annemarie Humenuk
Attention:  XXXXXXXXXX 

May 2, 2006

Dear XXXXXXXXXX:

Re: Section 256(1.2)(f)(ii) - Shares held by a Discretionary Trust

This is in reply to a letter from XXXXXXXXXX, formerly of your firm, dated January 21, 2005 concerning the application of subparagraph 256(1.2)(f)(ii) to a discretionary trust under which some of the beneficiaries are not entitled to receive any distribution until after they have reached the age of majority. We apologize for the delay in our response.

Section 256 of the Act establishes certain rules for determining whether corporations are to be considered associated for purposes of the Act. For the purpose of section 256, when a beneficiary's share of the accumulating income or capital of a trust depends on the exercise, or failure to exercise, a discretionary power by any person, subparagraph 256(1.2)(f)(ii) applies to deem that beneficiary to own the shares held by that trust. In the situation where the terms of a discretionary family trust provide that the beneficiaries include the spouse and the children of the family "upon attaining the age of majority", you ask whether subparagraph 256(1.2)(f)(ii) would apply to deem the children who have not yet reached the age of majority (and by operation of subsection 256(1.3), their parents) to be the owners of the shares during the period of time before they attain the age of majority and become entitled to receive distributions from the trust.

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").

As stated at the 2004 Association de Planification Fiscale et Financière (APFF) Round Table, the definition of "beneficiary" provided in subsection 108(1) only applies for the purposes of subdivision k of Division B of Part I of the Act (sections 104 to 108). Although subsection 248(25) provides rules for determining who is "beneficially interested" in a particular trust for the purposes of the Act, it is only those persons who are beneficiaries at law who are considered beneficiaries for the purpose of paragraph 256(1.2)(f). Thus, while persons described in paragraph 248(25)(a) who have rights as a beneficiary under the terms of the trust would be considered beneficiaries for the purpose of paragraph 256(1.2)(f), persons described in paragraph 248(25)(b) who are not beneficiaries of the trust would not be considered beneficiaries for the purpose of section 256.

The fact that a beneficiary's right to receive income or capital from a trust is subject to a future condition would not affect that person's status as a beneficiary of the trust. Much has been written about the nature of a beneficiary's interest in a trust; however, the determination of who is a beneficiary of a particular trust requires a finding of fact based on all the relevant information, including the terms of the trust and the settlor's intent in establishing the trust. In essence, a beneficiary of a trust is a person (other than a protector) who has a right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person's right to any of the income or capital is immediate, future, contingent, absolute or conditional on the exercise of discretion by any person. In the case of Koons v. Quibell, (1998) 21 ETR (2d) 66, the court determined that a valid trust was created where money was deposited to an "in-trust account." It is clear that the child referred to in that case was a beneficiary of the trust even though she was not entitled to any distribution before she reached the age of 18. Similarly, in the scenario described in your letter, it is our view that subparagraph 256(1.2)(f)(ii) would apply to deem the children named as beneficiaries under the terms of the trust as owners of the shares during the period of time before they attain the age of majority, even though their right to receive income or capital from the trust was conditional on their attaining the age of majority. Our view would be the same regardless of whether they were actually named as beneficiaries of the trust or were, subject to the condition that they attain the age of majority, members of a class of beneficiaries named in the terms of the trust.

Paragraph 256(1.2)(f) is applied at a particular point in time to determine if two corporations are associated. You asked whether it would be possible, in applying the provision at a moment in time when the beneficiaries are under the age of majority and precluded from receiving any distribution of income or capital at that time, to apply subparagraph 256(1.2)(f)(iii), rather than subparagraph 256(1.2)(f)(ii), on the basis that those beneficiaries' share of the income of the trust at that moment in time would be nil. While such a beneficiary may not be entitled to receive any income or capital at that time, it would be incorrect to say that such a beneficiary's share of the accumulating income and capital of the trust at that time was not dependant on the exercise or failure to exercise discretion with respect to distributions from the trust. To the extent that the trustee chooses to retain the income earned by the trust in a particular year, the amount of capital available for distribution in the future, including the time when those beneficiaries reach the appropriate age to be considered for possible distributions, would be greater. Thus, the amount of their share of the accumulating income and capital of the trust does depend on the decisions made by the trustee with respect to the discretionary powers granted to that trustee.

In our conversation of March 9, 2006 (Humenuk\XXXXXXXXXX), we discussed the application of paragraph 256(1.2)(f) to a person who was not named as a beneficiary under the terms of the trust and was not a member of a class of beneficiaries named under the terms of the trust, but who was a member of the class of persons who could later be appointed as a beneficiary under the terms of a power of appointment. In our view, the determination of whether such a person would be considered a beneficiary of the trust might well depend on:

• whether the power of appointment was fiduciary in nature or whether the donee of the power was free to exercise the power or not,
• whether the power is a general, specific or hybrid power of appointment, and
• whether there are gift-overs in default of appointment.

As stated in Oosterhoff on Trusts: Text Commentary and Materials (6th Edition), "the dividing line between the two categories in the centre of the spectrum [discretionary trusts and a power of appointment held by a trustee] is often unclear." The concepts and distinctions in this area are made even more difficult by the use of imprecise terminology. A determination of whether a particular person has a right as a beneficiary in such cases will depend in large part on the settlor's intention at the time the trust was created. As a result, we are unable to comment on whether a particular person would be considered a beneficiary in such a scenario without a review of all the relevant facts and circumstances.

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