This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] 1. According to the facts submitted, in a context of return of amounts between beneficiaries, do the following legislation or concepts apply: (a) Subsection 75(2) of the Income Tax Act; (b) the concept of sham; (c) paragraph 104(6)(b) and subsection 104(13) of the Act; (d) subsection 105(1) of the Act; (e) subsection 110.6(6); (f) the General Anti-Avoidance Rule.
2. Was there a creditor-debtor relationship between the beneficiaries with respect to the return of amounts? If not, did there exist between them a donor-donee relationship?
Position: 1.(a) No (b) Trust cannot be described as a sham, but possibly the allocation of amounts of $XXXXXXXXXX to Son B and two daughters-in-law as well as the return of the same sums on the same day to Father and / or Mother. (c) Principal-agent relationship between Father and Mother on the one hand and the sons and two daughters-in-law on the other. The sums allocated to Son B and the two daughters-in-law and then returned simultaneously by them to Father and Mother would be sums allocated to Father and / or Mother indirectly by Trust. (d) Yes, with respect to daughter-in-law B. (e). Question of fact. (f) we refer to the Aggressive Tax Planning Division. 2. Questions of fact and law. No, as to the loan if the evidence shows that Son B and the two daughter-in-laws did not know the existence of presumed loans and that there was no obligation of repayment from Father and / or Mother. No, as to the gift if the evidence proves that it was not a question of voluntary payments by Son B and the two daughters-in-law. According to the Facts, Father dictated to the daughters-in-law to pay him and Mother a large portion of the money paid by Trust.
Reasons: 1. (a) Under Québec corporate law, a corporation that issues shares does not own its shares and may issue shares of its unpaid capital stock. The evidence does not demonstrate that the Holdco shares held by Trust came directly or indirectly from Father. (b) Question of fact. Review of relevant jurisprudence. (c) The income allocated to Son B and the two daughters-in-law as agents must be added to the income of Father and Mother as principals. (d) Trust has conferred a benefit on Step-daughter B who is not designated as a beneficiary in the trust indenture. (e) If the CRA is able to prove that Mother wanted to avoid some tax liability in circumstances that amounted to gross negligence or if she intended to mislead the CRA by not filing the capital gain, the provisions of subsection 110.6(6) could apply in respect of the capital gains, which were returned by Sons B and the two daughters-in-law to Mother. Review of relevant case law. 2. Conditions of the concepts of loan and gift according to the Civil Code of Québec.
July 5, 2012
|XXXXXXXXXX Tax Services Office
To the attention of XXXXXXXXXX D. Fisc.
Income Tax Rulings Directorate
Business and Trusts Division
Lucie Allaire, LL. B, CGA.
Return of amounts between beneficiaries of a trust in a context of multiplication of the capital gains deduction.
This letter is in response to your letter of November 23, 2010 in which you asked for our comments regarding the application of various provisions of the Income Tax Act (the "Act") in the context of a return of amounts by the beneficiaries of a trust.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act, as well as any relevant legislative amendments.
1. Trust is an inter vivos trust created by contract dated XXXXXXXXXX for the benefit of Father and his family in the context of an estate freeze carried out in XXXXXXXXXX. On XXXXXXXXXX, the Settlor, XXXXXXXXXX, transferred $XXXXXXXXXX to the patrimony of Trust. In addition to the XXXXXXXXXX, there were no further transfers of property by the Settlor, after the creation of Trust.
2. Father paid the professional fees associated with the creation of Trust.
3. Under paragraph XXXXXXXXXX of the trust agreement, Trust was formed under the laws in force in Quebec and is subject to the rules set out in the Civil Code of Québec ("C.C.Q."). The provisions of the trust agreement have never been amended.
4. Father, Mother and XXXXXXXXXX ("Trustees") are the trustees of Trust. All beneficiaries and Trustees are residents of Quebec.
5. All beneficiaries designated in the Trust agreement may be both beneficiaries of the income and/or capital of Trust in the discretion of the Trustees.
6. Under paragraph XXXXXXXXXX of the trust agreement, the beneficiaries are:
• Father and Mother, who is Father's spouse,
• the four children of Father and/or Mother, namely the two major sons, Son A (XXXXXXXXXX) and Son B, and two daughters-in-law named specifically, Daughter-in-law A (spouse of Son A), and XXXXXXXXXX (spouse of Son B at the time of the creation of Trust but who would no longer be so when Trust made distributions in XXXXXXXXXX);
• XXXXXXXXXX specifically-named grandchildren,
• second-degree children to be born,
• XXXXXXXXXX expressly named, and
• any trust or other corporation to be created of which, on the one hand, the beneficiaries (except XXXXXXXXXX) or, on the other hand, the shareholders, are among the previously named individuals.
7. Under paragraph XXXXXXXXXX of the trust agreement, Father may, at any time, unilaterally and without having to justify his decision, terminate the duties of the other trustees and appoint other persons to replace them.
8. Paragraph XXXXXXXXXX of the trust agreement specifies that a trustee who is the sole trustee does not exceed his powers, unless the act done is to his sole advantage. It is specified that as long as Father acts as trustee, all decisions will be made by majority, Father always having to be part of that majority.
9. Paragraph XXXXXXXXXX of the Trust Agreement states that as long as Father is one of the Trustees, the Trustees may use the net income and capital of the Trust, in their sole discretion, to distribute to one or other of the beneficiaries.
10. Holdco is a corporation incorporated on XXXXXXXXXX pursuant to Part IA of the Quebec Companies Act, the articles of incorporation of which were amended in XXXXXXXXXX and of which Father was the majority shareholder. Holdco qualified as a "small business corporation" within the meaning of subsection 248(1) and its shares qualified as "qualified small business corporation shares" within the meaning of subsection 110.6(1).
11. In XXXXXXXXXX, following an estate freeze, Holdco issued preferred shares to Father and Class A common shares to Trust. Specifically, on XXXXXXXXXX, Trust subscribed for XXXXXXXXXX Class A common shares of capital stock of Holdco with a par value of $XXXXXXXXXX and was the sole shareholder of its shares until XXXXXXXXXX. Although Trust’s letter of purchase of Holdco shares refers to a cheque, Trust never paid for these shares. You have not questioned the share values at the time of the freeze.
12. The balance sheets of the Trust's XXXXXXXXXX and XXXXXXXXXX indicate the investment in the Holdco Shares has a cost of $XXXXXXXXXX.
13. According to the Trust Representative, Trust borrowed a sum of XXXXXXXXXX from Holdco to enable it to have the funds required to pay for its class A shares. The alleged loan was not recorded in writing, does not bear interest and has not been repaid.
14. The Trust recorded a liability in its financial statements in an amount of $XXXXXXXXXX as a loan owing to Holdco and Holdco recorded in its books an amount receivable from the Trust of $XXXXXXXXXX. With respect to the difference between the initial amount of $XXXXXXXXXX and the amount of $XXXXXXXXXX presented as a loan in the financial statements of Trust, it appears that the total amount of $XXXXXXXXXX includes the purported initial loan of $XXXXXXXXXX and the amount of $XXXXXXXXXX not paid by Trust in connection with the subscription for Class A shares in the capital stock of Holdco.
15. On XXXXXXXXXX, Holdco exchanged the XXXXXXXXXX Class A Shares held by the Trust for XXXXXXXXXX Class A-1 Shares having a fair market value ("FMV") of more than XXXXXXXXXX.
16. In the course of the year XXXXXXXXXX, Holdco made XXXXXXXXXX repurchases of Class A-1 shares of its capital stock held by Trust. A dividend of $XXXXXXXXXX, as a consequence of these XXXXXXXXXX redemptions, was the subject of an election by Holdco under subsection 83(2) and was deemed to be a capital dividend.
17. On XXXXXXXXXX, Trust sold XXXXXXXXXX shares of the capital stock of Holdco to Buyer, a XXXXXXXXXX corporation that is not related to Holdco which generated a capital gain of $XXXXXXXXXX to Trust. A capital gains reserve of $XXXXXXXXXX was claimed.
18. The details of dividends and capital gains arising from the redemption of XXXXXXXXXX and the sale of the remaining shares held by Trust are as follows:
Capital Dividend $XXXXXXXXXX
Taxable dividend $XXXXXXXXXX
Capital gain .... $XXXXXXXXXX
Total ... $XXXXXXXXXX
19. Upon the sale of the remainder of the Class A-1 shares of the capital stock of Holdco by Trust to Buyer, the latter required that only long-term investments remain in Holdco. Father retained Holdco's other assets and committed to paying the liabilities. He received an amount of $XXXXXXXXXX from Holdco representing the difference between the excess assets and the liabilities. Consequently, Father acquired Trust's debt to Holdco.
During the XXXXXXXXXX year and the XXXXXXXXXX year, Trust received amounts totaling $XXXXXXXXXX and made an income allocation and a distribution of capital to four beneficiaries (Father, Mother, Son B and Daughter-in-law A) and to Daughter-in-law B (who is not a Trust beneficiary under the trust agreement). Daughter-in-law B, who was the spouse of Son B at the time of the Trust's allocations in XXXXXXXXXX and who XXXXXXXXXX in XXXXXXXXXX, was not designated as beneficiary in the Trust agreement.
20. Trust allocated to Mother taxable dividends in the amount of $XXXXXXXXXX and a taxable capital gain of $XXXXXXXXXX. She received on XXXXXXXXXX a cheque for $XXXXXXXXXX and a $XXXXXXXXXX demand note signed on XXXXXXXXXX. Trust allocated Father taxable dividends in the amount of $XXXXXXXXXX. The latter received a $XXXXXXXXXX demand note from Trust signed on XXXXXXXXXX.
21. On XXXXXXXXXX, Trust distributed to each of Son B and Daughter-in-law B $XXXXXXXXXX by cheque (or by bank transfer to their personal account). This amount included inter alia a taxable capital gain of $XXXXXXXXXX. Son B and Daughter-in-law B each reported this amount of $XXXXXXXXXX and claimed a capital gain deduction in their income tax returns.
22. Daughter-in-law A received a demand promissory note dated XXXXXXXXXX from Trust (representing the allocated income) and cashed a cheque for $XXXXXXXXXX on XXXXXXXXXX. Daughter-in-law A reported a taxable capital gain of $XXXXXXXXXX and claimed a capital gains deduction in her income tax return.
23. We have assumed that the taxable capital gains described in paragraphs 21 to 23 were allocated in accordance with the provisions of subsections 104(21) and (21.2).
24. On the same day that Trust paid the sum of $XXXXXXXXXX by cheque (or wire transfer into their respective personal bank accounts) to Son B, Daughter-in-law B and Daughter-in-law A, they returned by chque an amount of $XXXXXXXXXX to Father and/or Mother. Specifically, Son B and Daughter-in-law B each returned a sum of $XXXXXXXXXX to Mother, issuing her a cheque, which Mother deposited into her personal bank account. In XXXXXXXXXX, Daughter-in-law A paid an amount of $XXXXXXXXXX, including $XXXXXXXXXX by cheque payable to Mother and a second amount of XXXXXXXXXX by cheque payable to Father. These last two cheques were deposited in the joint bank account of Father and Mother.
25. You indicated that the two daughters-in-law have stated in writing that they do not have the right to recover the amount of $XXXXXXXXXX each gave to Father and/or Mother since it was agreed that they would receive only an amount of $XXXXXXXXXX. Both stated in writing that they had no intention of recovering these amounts. Son B was not interrogated on this subject.
26. According to our understanding, Father and Mother stated that each amount of $XXXXXXXXXX ($XXXXXXXXXX) constituted a $XXXXXXXXXX loan from the beneficiaries Son B and A Daughter-in-law A as well as Daughter-in-law B owing to them. Father submitted three documents entitled "Acknowledgements of Debt" dated XXXXXXXXXX.
27. However, according to what you submitted, Father initially stated that the two beneficiaries, Son B and Daughter-in-law A, as well as Daughter-in-law B, were not aware of the existence of these so-called "Acknowledgements of Debt". During the audit, Father specifically requested that the existence of these documents not be mentioned to them.
28. Father and Mother received and invested $XXXXXXXXXX, representing amounts returned by Son B, Daughter-in-law A and Daughter-in-law B. Investment income from these amounts was reported in Father's and/or Mother's tax return.
29. Father paid the minimum tax resulting from the taxation of the capital gains of Son B and the two daughters-in-law.
30. Other than the proceeds of disposition of the Holdco shares, there was no other amount allocated or designated to a beneficiary between the time of the creation of Trust and the sale of the shares of Holdco to Buyer.
On April 5, 2011, you submitted taxation proposal letters to Father, Mother and Trust. You considered the amounts returned to Father and/or Mother that were initially allocated to Son B and the two daughters-in-law as being capital gains allocated to Father and/or Mother. In this respect, you submitted that there is no creditor-debtor relationship between the parties. Finally, you refused to deduct an amount of $XXXXXXXXXX in computing the income of Trust for the XXXXXXXXXX year, which is half of the amount allocated to Daughter-in-law B, on the basis that she is not a beneficiary of Trust.
On the basis of the document entitled "Acknowledgements of Debt" signed by Father and Mother, the Representative submits that the sums paid by Trust to Daughter-in-law A and which were subsequently transferred by her to Father and Mother, to be subsequently deposited in the joint bank account of Father and Mother, were a loan made to them by Daughter-in-law A.
He also submitted that there is a similar creditor-debtor relationship with respect to the amounts returned to Mother by Son B and Daughter-in-law B. Moreover, he argues that if the CRA does not recognize that genuine loans were made between parties, the Canada Revenue Agency ("CRA") will have no choice but to consider that Son B and the two daughters-in-law made a gift of the sums to Father and Mother. Finally, the representative adds that the CRA cannot consider the portion of the sums of capital gains returned to Father and Mother to be capital gains to them because it is not income payable to them by virtue of subsection 104(24).
With respect to Trust, the representative submitted that it is entitled to the deduction of the amounts allocated to Daughter-in-law B because she was a beneficiary of Trust since she was the spouse of Sons B at the time of the allocation of the amounts.
Taking into account the Facts, you asked us to comment on the possibility that there was a loan made by the beneficiaries to Father and/or Mother. In the alternative, you asked for our comments regarding the possibility that the amounts paid by the beneficiaries to Father and Mother could have been gifts.
In addition, you asked whether the following legislative provisions or concepts could be invoked in this case:
a) subsection 75(2);
b) the concept of sham;
c) paragraph 104(6)b) and subsection 104(13);
d) subsection 105(1);
e) subsection 110.6(6);
f) the general anti-avoidance rule.
The question of whether the transfer of each amount of XXXXXXXXXX between the parties constitutes a loan of money is a mixed question of law and fact. Although the purported loans were not recorded in writing and do not bear interest, we cannot affirm that they are not genuine loans based solely on one criterion.
Under article 2312 of the CCQ, a simple loan is a contract by which the lender hands over a certain quantity of money or other property that is consumed by the use made of it, to the borrower, who binds himself to return a like quantity of the same kind and quality to the lender after a certain time. In addition, article 2329 of the CCQ provides that the borrower is bound to return the same quantity and quality of property as he received and nothing more, notwithstanding any increase or reduction of its price. If the loan relates to a sum of money, the borrower is only required to return the nominal amount received, despite any change in the value of the currency.
One of the important features of a loan is that the creditor must in all circumstances have the right to claim the full amount of the principal. In this case, the two daughters-in-law do not even know of the existence of the purported loans and therefore do not recognize themselves as creditor for the sums paid to Father and/or Mother.
Furthermore, Father and Mother do not seem to be required to repay. In this regard, the taxpayer representative did not provide any evidence that Father and Mother have already reimbursed Son B and the two daughters-in-law. In XXXXXXXXXX, the two daughters-in-law made written statements to the CRA that Father and Mother did not pay or refund any money to them. In addition, the two daughters-in-law stated that Father paid the minimum tax on their tax obligations to compensate for their loss of family benefits. Other than the payment of the minimum tax, nothing leads us to believe that Father and Mother paid sums to the two daughters-in-law and to Son B. It should be noted that the latter remitted tax refunds to Father.
Father and Mother argue that the so-called acknowledgements of debt support a creditor/debtor relationship. These documents, which are similar in wording to demand notes, were not delivered to Son B and the two Daughter-in-laws. Pursuant to section 178 of the Bills of Exchange Act (RSC 1985, c. B-4), a note is inchoate and incomplete until delivery thereof to the payee or bearer, that is to say, that it is incomplete until it has been given to the beneficiary. The two daughters-in-law told the auditor that they were not aware of the existence of the documents. Finally, Father and Mother admitted that Son B and the two daughters-in-law had no knowledge of the existence of these documents and even suggested to the auditor not to mention these documents to Son B and the two daughters-in-law.
In this case, if the statements of the two daughters-in-law are upheld, it can be argued that the relationship between the parties as to the return of sums is not a creditor/debtor relationship. Indeed, on the one hand, the two daughters-in-law were not aware of the existence of the purported loans and on the other hand, Father and/or Mother were not obliged to repay the principal of the purported loans.
Under another approach, under Article 1806 of the CCQ, gift is a contract by which a person, the donor, transfers ownership of property by gratuitous title to another person. This article must take into account Article 1381 of the CCQ which provides that when one party obligates himself to the other for the benefit of the latter without obtaining any advantage in return, the contract is gratuitous.
A gift involves an intentional element, called the liberal intent, that the transfer of value without consideration must have been desired by the settlor. The liberal intent is that it cannot be done because of an obligation. If the fact that Son B and the two daughters-in-law were each obliged to give a sum of $XXXXXXXXXX is proven, it appears to us that the return of the sums of $XXXXXXXXXX would not constitute gifts on behalf of Son B and two daughters-in-law. There is every reason to believe that Son B and the two daughters-in-law had restrictions on the free use or enjoyment of the amount of $XXXXXXXXXX. Nevertheless, one must be able to prove that they were required to execute the return of the sums.
Application of Subsections 104(13) and 105(1) and Paragraph 104(6)b)
If the facts referred to in paragraph 26 of the Facts are proven and Son B, Daughter-in-law A and Daughter-in-law B refute Father's position stated in paragraph 27 of the Facts, it may be argued that Son B and the two daughters-in-law acted as accommodation parties, either as proxies or nominees of Father and/or Mother. Thus, the portion of the amounts returned by Son B and Daughter-in-law A that were subject to taxation in their hands (i.e. the TCG and, if applicable, the taxable dividends) should be taxed in computing Father's and/or Mother’s income, as principals.
In this regard, we consider that Father, as Trustee and controlling party, exercised his discretion to allocate income to Son B and the two daughters-in-law who acted as agents or nominees of Father and of Mother for the income to be treated as if it were payable to them for the purposes of subsections 104(13) and 104(24). Son B and the two daughters-in-law were therefore entitled to claim the sums payable as agents or nominees of Father and Mother, ensuring that they gave Father and Mother a large part of the sums paid by Trust (except the amount paid to thank them for acting as an accommodation party).
Trust could benefit from the deduction under paragraph 104(6)(b) in respect of the portion of the income allocated (referred to in paragraph 22 of the Facts) to Father and/or Mother through Son B and Daughter-in-law A .
Furthermore, under the provisions of the trust agreement, in particular paragraph XXXXXXXXXX, which provides that the income of Trust may only be allocated and distributed to the beneficiaries named in paragraph XXXXXXXXXX of the agreement, we are of the view that Daughter-in-law B was not a XXXXXXXXXX beneficiary of Trust and did not have a beneficiary interest in Trust under subsection 248(25). The definition of "child" in subsection 252(1), which includes "the spouse or common-law partner of a child of the taxpayer", does not apply to the interpretation or extension of the terms used in the trust agreement governed by the civil law of Québec. Paragraph XXXXXXXXXX of the trust agreement that contains the definitions does not refer to the Act in this regard. Considering that the trust agreement specifically named XXXXXXXXXX (spouse of Son B at the time of its creation) and that it has not been modified since XXXXXXXXXX, we are of the view that the terms of the agreement cannot be interpreted to consider Daughter-in-law B as a beneficiary.
Nevertheless, subsection 105(1) could apply to Daughter-in-law B, and it would be possible to assess on that basis. However, it should be taken into consideration that she has already been taxed on the income allocated to her by Trust.
Nonetheless, taking the foregoing into account, Trust could not benefit from the deduction under paragraph 104(6)(b) respecting the income allocated (namely, the TCG) to Daughter-in-law B.
Because of the comments of the Supreme Court of Canada, notably in Shell Canada Ltd. v. The Queen, 99 DTC 5682 where the court pronounced that the economic realities of a situation could not justify a new characterization of the legal relationships established by taxpayers, we are of the view, subject to the application of the general anti-avoidance rule and in the absence of a sham, that a recharacterization of legal relationships is possible only where the designation of the transaction by a taxpayer does not adequately reflect its actual legal effects or an express provision of the Act provides that the legal relationships are not to be respected.
In this regard, we are entitled to question whether the settlor, XXXXXXXXXX, followed Father's instructions when setting up Trust. Given his decision-making power as trustee, Father had control of Trust and the other trustees (Mother and XXXXXXXXXX), people related to Father, who might have acted as accommodation parties to Father. In addition, Father paid the legal fees for the creation of Trust.
However, having considered the jurisprudence in this regard, it may be difficult to argue that Trust was not validly formed. Indeed, the evidence must be able to demonstrate, among other things, that the settlor validly created Trust in XXXXXXXXXX and that the Class A shares of Holdco were indeed issued to Trust. In addition, you do not question the fact that the appreciation on Class A-1 shares between XXXXXXXXXX and XXXXXXXXXX (and on which certain beneficiaries were taxed in XXXXXXXXXX upon the disposition of the shares) would have increased for the benefit, among others, of Son B and Daughter-in-law A.
The fact that everything happened as if Son B and the two daughters-in-law were the true beneficiaries of the $XXXXXXXXXX sums, although this is not the case, could be considered a sham transaction. The element of deception arose out of the fact that the beneficiaries Son B, Daughter-in-law A and Daughter-in-law B were all required to repay a significant portion of the amounts paid to them by Trust at the same time they were received, despite the fact that they were taxed on the income that had been allocated to them. It goes without saying that if all proceeds from the disposition of the Class A-1 shares had been allocated to Father and Mother, those revenues would have been taxed at higher marginal tax rates.
Application of Subsection 75(2)
In Quebec corporate law, a corporation, such as Holdco, does not own the shares it issues. In addition, Quebec corporate law does not prohibit issuing shares that are not fully paid. Accordingly, we consider that at the time of the freeze, Trust subscribed for XXXXXXXXXX Class A Common Shares of Holdco and that the shares were validly issued to Trust.
As a corporation is not the owner of its own shares before their issuance, it follows that such issuance by the corporation to a trust for consideration equal to their FMV does not generally constitute a transfer of property to which subsection 75(2) can apply. Following the case of The Queen v. Kieboom, 92 DTC 6382 (FCA), subsection 75(2) nonetheless could apply when the subscription for the shares is not for consideration equal to their FMV.
Consequently, according to the Facts submitted, subsection 75(2) would not apply in this case, irrespective of whether there is a creditor/debtor relationship as to the amount of XXXXXXXXXX between Holdco and Trust (the elements of which are found in paragraphs 13 and 14 of the Facts). In fact, Holdco did not own the shares subscribed by Trust at the time of the freeze. Moreover, there is nothing in the Facts to suggest that Father transferred any additional economic interest or additional value of Holdco to Trust at the time of the freeze. Finally, you do not question the fact that the shares of Holdco held by Trust (and those exchanged thereafter) increased by XXXXXXXXXX during the period from XXXXXXXXXX to XXXXXXXXXX.
Application of 110.6(6)
Subsection 110.6(6) requires the Minister of National Revenue to establish the facts justifying the denial of a capital gains deduction. In Foisy v. The Queen, 2000 DTC 2225, Justice Lamarre-Proulx of the Tax Court of Canada ("TCC") made the following comments on the scope of the phrase "knowingly or under circumstances amounting to gross negligence" where an individual has not declared in his return a capital gain described in subsection 110.6(6):
“…In my view, in the context of section 110.6, it is necessary that the words "knowingly or under circumstances amounting to gross negligence" mean more than an intention not to report the capital gain. If the exemption provided for in subsection 110.6(2) of the Act did not exist, proving such an intention would be sufficient for a finding of gross negligence, since the purpose of not reporting would be to evade taxes. However, in the specific case where an exemption is granted for a capital gain, the failure to report the gain must occur in circumstances in which there is an intention to evade taxes, a malicious intent not to comply with the Act's requirements or an intention to deceive the Minister.”
If the CRA is able to prove that Mother wanted to evade some obligation with respect to the tax payable in circumstances amounting to gross negligence or if she intended to deceive the CRA by not declaring the capital gain, the provisions of subsection 110.6 (6) could apply in respect of capital gains, which were returned by Sons B and the two daughters-in-law to Mother. In this regard, we refer you to the examples given by the TCC in paragraph 31 of the aforementioned decision.
Application of the General Anti-Avoidance Rule
With respect to the specific application of the general anti-avoidance provision, we invite you to submit your request to the Aggressive Tax Planning Branch to determine if it can be used as a secondary position in this case.
As you know, the CRA agrees that an estate freeze can be made through a family trust even though the deduction for capital gains is multiplied among different major beneficiaries. Trust is a discretionary trust and Father and Mother are beneficiaries of the trust. Moreover, in XXXXXXXXXX, Son B, Daughter-in-law A and Daughter-in-law B were adults. Given the powers given to the Trustees, including those to Father, and not having had access to the capital gains deduction from other beneficiaries, Father could have been allocated and paid all the proceeds from the sale of the shares. It goes without saying that all the income that would have been allocated to him (including the TCG not reduced by the capital gain deduction) would have been taxed at the highest marginal rate. The surrender, by Son B, Daughter-in-law A and Daughter-in-law B, of $XXXXXXXXXX each, therefore allowed Father (as well as Mother) to receive a portion of the proceeds of disposition of the shares free of tax, which had been taxed at lower marginal rates in the hands of adult children. The so-called Acknowledgements of Debt seem to be presented to support the conclusion that Father and Mother will return the sums previously given to them by Son B, Daughter-in-law A and Daughter-in-law B. However, Father and Mother have full enjoyment of the sums returned by their relatives: they earned interest on these returned sums and included these sums in their income for tax purposes.
We hope that our comments will be of assistance.
François Bordeleau, LL.B.
Business and Trusts Division
Income Tax Rulings Directorate
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2012
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2012