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: Can CRA provide its views of structures using trusts to purposely attribute dividend income by virtue of subsection 75(2)?
Position: Views provided.
Reasons: See below.
STEP CRA Roundtable June 2014
QUESTION 5. "Evil Trusts"
The term "evil trust" has become used within the tax community to denote a trust which is structured to deliberately cause the application of subsection 75(2). Sometimes the purpose of the arrangement is to cause the attribution of dividend income to a connected corporation, where the income will not be taxable, while at the same time distributing proceeds in the form of cash by way of either a capital distribution or a loan to the intended recipient (usually a shareholder of the corporate group or someone closely related to that person).
In addressing the case of Sommerer, CRA took the position that subsection 75(2) did apply to a fair market value sale to a trust by a person who was also a beneficiary of the trust. However, the Tax Court and Federal Court of Appeal disagreed, and held that subsection 75(2) did not apply in this circumstance.
The case of Brent Kern Family Trust was recently decided by the Tax Court on the basis that the principle in Sommerer applied, and subsection 75(2) did not apply. CRA successfully argued that an anti-avoidance rule did not apply to a trust arrangement which was deliberately structured to cause subsection 75(2) to apply.
In light of these circumstances, and the evolving case law and positions adopted, can CRA outline its position with respect to subsection 75(2), and these types of arrangements?
Given that the Brent Kern Family Trust decision (endnote 1) is currently under appeal, it would be inappropriate to comment at this time as to the specifics of that case. However, CRA is pleased to provide general commentary in regard to the use of certain trust structures designed to purposely invoke attribution pursuant to subsection 75(2), with a view to avoiding the payment of tax on extracted corporate dividends.
We have reviewed a variety of tax structures of this type in recent years. As was noted in our discussion of these arrangements at the 2011 STEP Conference, the common elements that they share are that a trust is used to invoke subsection 75(2) in an attempt to have neither the trust nor its beneficiaries liable for tax on the corporate dividends declared.
The structure typically involves two Canadian corporations and a trust that acquires shares in one of the corporations ("Corp A"). In some cases, the acquisition is by subscription for the Corp A shares using cash contributed to the trust by the other corporation ("Corp B"), or the arrangement may involve having Corp B contribute shares of Corp A that it holds directly to the trust. In either case, when Corp A subsequently declares a dividend on the shares held by the trust, the scheme is intended to attribute the dividend income to Corp B, which then claims an offsetting deduction under section 112 of the Act.
In some of these arrangements, the facts have led to a conclusion that the trust acquired the shares for fair market value consideration (perhaps by transferring cash to Corp B on the acquisition of the Corp A shares from it). As was noted in our 2013 STEP Conference comments regarding the Federal Court of Appeal decision in Sommerer (endnote 2) , CRA agrees with the general proposition that where property is transferred to a trust by a beneficiary for fair market value consideration, subsection 75(2) will not apply to attribute income in respect of that property to the beneficiary.
In the alternative, if the facts are such that it may be concluded that the trust did not acquire the shares for fair market value consideration, CRA will typically challenge the arrangement on other grounds. Depending on the particular facts, assessments may be pursued to include the dividend income pursuant to paragraph 12(1)(j) or subsection 104(13), in calculating the income of the trust and/or its beneficiaries. Furthermore, CRA would typically hold the view that a strong GAAR argument would exist in support of an assessing position in such cases.
1 The Brent Kern Family Trust v The Queen (2013 TCC 327)
2 The Queen v Sommerer (2012 FCA 207)
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