Principales Questions: In a particular situation, a trust (hereinafter "Trust") was established under the Civil Code of Quebec. Trust is a discretionary trust. An individual (hereinafter "Mr. X") and a corporation (hereinafter "Gesco") all the shares of which are held by Mr. X are both income and capital beneficiaries of Trust. Trust holds all of the issued and outstanding shares of the capital stock of a corporation (hereinafter "Opco") which is a TCC and a CCPC. In the same series of transactions Opco would: 1) increase the stated capital of its shares by an amount of $100,000. Opco would be deemed to have paid and Trust would be deemed to have received a taxable dividend pursuant to subsection 84(1). Trust would make a designation under subsection 104(19) in respect of the deemed dividend such that it would be deemed to have been received by Gesco; 2) Opco would reduce the stated capital of its shares by an amount of $100,000 paid cash; and 3) Trust would distribute the amount of $100,000 to Mr. X as a non-taxable capital distribution. Comments requested with respect to this series of transactions.
Position Adoptée: General comments provided. Based on our Directorate’s long-standing position, where the terms of a trust specifically provides the trustees with the discretion to pay or make payable an amount that is deemed to be income under the Act, the trustees are required to notify to the beneficiaries the apportionment of the trust’s income before the end of the trust’s taxation year. The trustees’ exercise of such discretion and its notification given to the beneficiaries should be in writing (e.g. resolutions signed by the trustees, minutes of the trustees’ meeting). Where the trustees exercise such discretion without paying out assets in kind or distributing cash before year-end, then an amount would be considered to have become payable under subsection 104(24) if a promissory note payable on demand without restriction is issued to the beneficiaries. Also, the particular situation appears to be a scheme to strip Opco’s surpluses by converting a dividend to a non-taxable capital distribution to an individual. In our view, this type of tax planning defeats the integration principle. We would recommend to the GAAR Committee that subsection 245(2) be applied if a similar series of transactions was brought to our attention in the context of a ruling request.
Raisons: Previous positions and jurisprudence.
