Translation disclaimer
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: 1. When would a taxable dividend designated in respect of a beneficiary of a trust pursuant to subsection 104(19) be considered to have been received by the beneficiary? 2. Would the corporate beneficiary of the trust and the dividend payer be connected with respect to the dividend designated under subsection 104(19)?
Position: 1. At the time that is the end of the taxation year of the trust in which the dividend was received by the trust. 2. At the end of the taxation year of the trust, the corporate beneficiary and the dividend payer would not be connected corporations.
Reasons: 1. The conditions of subsection 104(19). 2. Paragraph 8 of IT-269R4.
XXXXXXXXXX 2016-064762
Sylvie Labarre, CPA, CA
June 3, 2016
Dear Sir,
Subject: Part IV tax
This is in response to your email of May 12, 2016 in which you requested our views respecting the application of Part IV tax in the hypothetical situation described below.
Unless otherwise stated, all statutory references herein are references to the provisions of the Income Tax Act (hereinafter the "Act").
Hypothetical Situation
1. Opco and Holdco are Canadian-controlled private corporations (CCPCs).
2. Opco is 100% owned by a family trust of which Holdco is a beneficiary. Holdco is held by X.
3. The taxation year of Opco ends on May 31 and that of Holdco ends on December 31. The taxation year of the trust ends on December 31.
4. On May 31, 20X1, Opco pays a dividend of $10,000 to the trust. The trust pays the dividend on the same day to Holdco. The trust designates the dividend in respect of Holdco in accordance with subsection 104(19).
5. Opco does not receive any dividend refund for its taxation year ending on May 31, 20X1.
6. On May 31, 20X1, Opco and Holdco are connected under paragraph 186(4)(a).
On June 1, 20X1, the family trust sell all the shares held by it in the capital of Opco to a third party.
Questions
You wish to know if Holdco would be subject to Part IV tax under the facts of the hypothetical situation.
You also requested our views respecting Part IV tax if the assumptions were changed as follows: the trust pays the dividend to Holdco on June 30, 20X1 and the trust then designates the dividend in respect of Holdco under subsection 104(19).
Our Comments
This technical interpretation provides general comments about the provisions of the Act and related legislation, as the case may be. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
In a situation like the hypothetical one, subsection 104(13) provides for the inclusion in computing the income for a particular taxation year of a beneficiary under a trust of such part of the amount that, but for subsections 104(6) and 104(12), would be the trust’s income for the trust’s taxation year that ended in the particular year as became payable in the trust’s year to the beneficiary.
Thus, the amount of $10,000 is the trust’s income for its taxation year ending December 31, 20X1 were it not subsection 104(6). That taxation year fall within Holdco’s taxation year ending December 31, 20X1. If the amount of $10,000 became payable to Holdco during the year ending December 31, 20X1, the amount is included in the calculation of Holdco's income for the taxation year ending December 31, 20X1.
Furthermore, for subsection 104(19) to apply, the following conditions must be met:
- an amount is designated by the trust, in respect of the taxpayer, in the trust’s return of income under Part I of the Act for the particular taxation year;
- the amount may reasonably be considered to be part of the amount that, because of paragraph 104(13)(a), subsection 104(14) or section 105, was included in computing the income for that taxation year of the taxpayer;
- the taxpayer is in the particular taxation year a beneficiary under the trust;
- the trust is, throughout the particular taxation year, resident in Canada; and
- the total of all amounts each of which is an amount designated, under subsection 104(19), by the trust in respect of a beneficiary under the trust in the trust’s return of income under subsection 104(19) for the particular taxation year is not greater than the total of all amounts each of which is the amount of a taxable dividend, received by the trust in the particular taxation year, on a share of the capital stock of a taxable Canadian corporation.
Where subsection 104(19) applies, the portion of a taxable dividend received by a trust, in a particular taxation year of the trust, on a share of the capital stock of a taxable Canadian corporation is, for the purposes of the Act other than Part XIII, deemed to be a taxable dividend on the share received by a taxpayer, in the taxpayer’s taxation year in which the particular taxation year ends, and is deemed not to have been received by the trust.
In this regard, it is our position that the amount designated in respect of the beneficiary (taxpayer) in accordance with subsection 104(19) should be considered to be deemed to be received as a dividend by the beneficiary of the trust at the end of the trust’s taxation year in which the trust received the dividend. This position is based on the fact that the trust cannot make the designation before the end of its taxation year and that the requirement that the trust is resident in Canada throughout the year cannot be satisfied until the end of the taxation year of the trust.
Furthermore, paragraph 8 of archived Interpretation Bulletin IT-269R4 (archived) indicates that the determination of whether a dividend was received from a “connected” corporation must be made at the time that the dividend was received by the recipient corporation. It also indicates that if the dividend was received by the payer corporation at a time when that corporation was not connected to the recipient corporation, then the dividend is subject to Part IV tax notwithstanding that the payer corporation may have been connected to the recipient corporation at some other time during the taxation year.
Thus, in this hypothetical situation, Holdco is deemed to have received the dividend on the shares in the capital of Opco on December 31, 20X1. At that time, Opco and Holdco were not connected corporations given the sale (on June 1, 20X1) by the family trust of the shares in the capital of Opco to a third party with which it dealt at arm's length. Therefore, Holdco is subject to Part IV tax on the dividend which, in the hypothetical situation, has been designated in respect of it under subsection 104(19).
Our answer to the second question is identical to the first question, even taking into account the changed assumptions provided in your second question.
We trust our comments will be of assistance.
Stéphane Charette, CPA, CMA, MBA
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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