6 October 2017 APFF Roundtable Q. 9, 2017-0709071C6 F - Corporate Attribution Rules

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74.4(2), 74.5(5)

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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: Opco is a CCPC, a TCC but is not a SBC. Mr. A holds all of the issued and outstanding preferred shares and voting shares of the capital stock of Opco, all of which were issued many years ago as part of an estate freeze in favour of Initial Trust. Initial Trust holds all of the issued and outstanding common non-voting shares of the capital-stock of Opco. Initial Trust is a personal trust. The trustees of Initial Trust are M. A, Mr. B and Mr. C. Mr. B is the brother of Mr. A. Mr. C is dealing at arm’s length with both Mr. A and Mr. B. The beneficiaries of Initial Trust are Mr. A, Mr. A’s adult children and Mr. A’s spouse. As part of the implementation of a new estate freeze, Initial Trust exchanges its common non-voting shares of the capital stock of Opco for preferred shares of the capital-stock of Opco. New Trust subscribes for new common non-voting shares of the capital stock of Opco. The trustees of New Trust are Mr. A, Mr. B and Mr. D. Mr. D is dealing at arm’s length with both Mr. A and Mr. B. The beneficiaries of New Trust are, Mr. A, Mr. A’s adult children, Mr. A’s unborn grandchildren, Mr. A’s spouse and any corporation controlled by any of those beneficiaries other than a corporation in which New Trust has a direct or indirect interest. New Trust is a personal trust. The conditions set out in subsection 74.4(4) are not met in the particular situation. Whether Mr. A’s spouse is a designated person in respect of Initial Trust pursuant to subsection 74.5(5).

Position: No. However, Mr. A’s spouse is a designated person in respect of Mr. A. As such, subsection 74.4(2) could apply to the transfer of property on the freeze or Mr. A’s interest in Opco if one of the main purposes of the transfer may reasonably be considered to be to reduce the income of M. A, and to benefit his spouse (the “Main Purpose Test”). Subsection 74.4(2) could also apply to the transfer of property on the freeze of Initial Trust’s interest in Opco if it is established the transfer was indirectly done by Mr. A by means of Initial Trust and if the Main Purpose Test is met. Subsection 74.4(2) could also potentially apply with respect to Initial Trust’s freeze as a Mr. A’s minor grandchild could be a designated person in respect of Initial Trust.

Reasons: According to the law and previous positions.

2017 APFF CONFERENCE

Question 9

Designated person and section 74.4

Opco is a CCPC, as that term is defined in subsection 125(7), a taxable Canadian corporation ("TCC"), as that term is defined in subsection 89(1), but is not a small business corporation ("SBC"), as that expression is defined in subsection 248(1).

Mr. A holds all of the voting preferred freeze shares of the capital stock of Opco, which shares were issued pursuant to an estate freeze made by Mr. A many years ago in favor of Initial Trust. Initial Trust holds all of the non-voting common shares of the capital stock of Opco. Initial Trust is a personal trust, as that expression is defined in subsection 248(1).

Mr. A, Mr. B and Mr. C are the only trustees of Initial Trust. Mr. B is Mr. A's brother and Mr. C is at arm's length from Mr. A and Mr. B. The Initial Trust beneficiaries are Mr. A, Mr. A's adult children and Mr. A's spouse.

A new estate freeze is put in place for Opco and, for this purpose, the Initial Trust switches all of the common shares it holds in Opco into preferred freeze shares with a cash surrender value equal to the FMV of the common shares exchanged, all pursuant to section 51.

New Trust then subscribes for new non-voting common shares of the capital stock of Opco for a price equal to their FMV. Mr. A, Mr. B and Mr. D are the only trustees of New Trust. Mr. D deals at arm's length with Mr. A and Mr. B. The New Trust beneficiaries are Mr. A, Mr. A's adult children, Mr. A's unborn grandchildren, Mr. A's spouse and any corporation controlled by any of those beneficiaries except any corporation in which New Trust holds an interest directly or indirectly. New Trust is a personal trust, as that expression is defined in subsection 248(1).

For the purpose of this example, the conditions of subsection 74.4(4) would not be satisfied.

Question to the CRA

Is Mr. A’s spouse a designated person with respect to Initial Trust by virtue of subsection 74.4(5)?

CRA Response

First, for the purposes of this question, we have assumed that Mr. A and Initial Trust reside in Canada at all relevant times. We have also assumed that Initial Trust and New Trust are discretionary trusts.

Subsection 74.4(2) is a very broad corporate attribution rule. Briefly, subsection 74.4(2) can apply to a transfer or loan of property by an individual to a corporation where one of the main purposes of the transfer or loan may reasonably be considered to be to reduce the income of the individual and to benefit, either directly or indirectly, by means of a trust or by any other means whatever, a person who is a designated person in respect of the individual.

The transfer or loan of property is also very broad in application as it can be done either directly or indirectly, by means of a trust or by any other means whatever.

According to the wording of this question, section 51 is applicable in respect of the exchange by Initial Trust of the common shares of the capital stock of Opco for preferred shares to freeze the capital stock of Opco. This exchange is deemed, by virtue of paragraph 51(1)(c), to be a transfer of the common shares of the capital stock of Opco by Initial Trust to Opco for the application of

Opco is a Canadian-controlled private corporation (“CCPC”), as defined in subsection 125(7), a taxable Canadian corporation ("TCC"), as defined in subsection 89(1), but is not a small business corporation ("SBC"), as defined in subsection 248(1).

Mr. A holds all of the freeze preferred shares and voting shares of the capital stock of Opco, which shares were issued pursuant to an estate freeze effected by Mr. A a number of years ago in favour of Initial Trust. Initial Trust holds all of the non-voting common shares of the capital stock of Opco. Initial Trust is a personal trust, as defined in subsection 248(1).

Mr. A, Mr. B and Mr. C are the only trustees of Initial Trust. Mr. B is Mr. A's brother and Mr. C deals at arm's length with Mr. A and Mr. B. The Initial Trust beneficiaries are Mr. A, Mr. A's adult children and Mr. A's spouse.

A new estate freeze respecting Opco is effected pursuant to section 51 and, to this end, the Initial Trust exchanges all of the common shares it holds in Opco for freeze preferred shares with a redemption value corresponding to the fair market value (“FMV”) of the exchanged common shares.

New Trust then subscribes for new non-voting common shares of the capital stock of Opco for a price equal to their FMV. Mr. A, Mr. B and Mr. D are the only trustees of New Trust. Mr. D deals at arm's length with Mr. A and Mr. B. The New Trust beneficiaries are Mr. A, Mr. A's adult children, Mr. A's unborn grandchildren, Mr. A's spouse and any corporation controlled by any of those beneficiaries except any corporation in which New Trust directly or indirectly holds an interest. Initial Trust is a personal trust, as defined in subsection 248(1).

For the purpose of this example, the conditions of subsection 74.4(4) would not be satisfied.

Question to the CRA

Is Mr. A’s spouse a designated person with respect to Initial Trust by virtue of subsection 74.4(5)?

CRA Response

The concept of a transfer or loan of property is also very broad in application as it can be effected directly or indirectly, by means of a trust or by any other means whatever.

According to the wording of this question, section 51 is applicable in respect of the exchange by Initial Trust of the common shares of the capital stock of Opco for freeze preferred shares of the capital stock of Opco. This exchange is deemed, by virtue of paragraph 51(1)(c), to be a transfer of the common shares of the capital stock of Opco by Initial Trust to Opco for purposes of the application of section 74.4.

However, whether it is reasonable to consider that one of the main purposes of a transfer of property is to reduce the income of the individual and to benefit, either directly or indirectly, a designated person (the "Purpose Test”) is a question of fact which must be resolved in light of all the circumstances and particulars of each case.

The term "designated person" is defined in subsection 74.5(5) and this definition also applies for the purposes of section 74.4.

A designated person, in respect of an individual, means a person who is the spouse or common-law partner of the individual, or who is under 18 years of age and does not deal with the individual at arm’s length, or is the niece or nephew of the individual.

In view of the fact that subsection 104(2) provides that a trust is deemed to be an individual in respect of the trust property, subsection 74.4(2) could apply to a trust, assuming that all of the conditions for the application of subsection 74.4 are satisfied.

However, only a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.

In light of the foregoing, the Mr. A’s spouse cannot not be a designated person in respect of Initial Trust.

On the other hand, Mr. A's spouse is still a designated person in respect of Mr. A.

Thus, while it is not possible to make a definitive determination in the context of this question, we note that subsection 74.4(2) could apply to the transfer of property made by Mr. A, in connection with the estate freeze carried out by Mr. A. in favour of Initial Trust, if the Purpose Test were satisfied.

In addition, we are of the view that the question of the application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property effected by this estate freeze was made indirectly by Mr. A through Initial Trust.

Consequently, if it were possible to establish that the Purpose Test was satisfied, subsection 74.4 (2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.

In a different vein, it was stated in this question that the unborn children of Mr. A will be beneficiaries of New Trust.

In this regard, the CRA is of the view that an unborn child is not a person for the purposes of section 74.4 and subsection 74.5(5) and cannot constitute a designated person under paragraph 74.5(5)(b). In contrast, from birth, a grandchild may be a designated person in respect of an individual.

In addition, a grandchild of Mr. A will be connected to him by blood relationship under subsection 251(6). A grandchild, and Mr. A, will therefore be persons related to each other under subsection 251(2) and, therefore, will be deemed not to deal at arm's length with each other under paragraph 251(1)(a).

In light of the foregoing, a grandchild of Mr. A, and Initial Trust, can be deemed not to deal at arm's length with each other by virtue of paragraph 251(1)(b) assuming that Mr. A's right under the Initial Trust constituted a beneficial interest, if subsection 248(25) applied without taking into consideration subdivisions (b)(iii)(A)(II) to (IV) thereof.

If the latter assumption proved to be correct, a minor grandchild of Mr. A would be a designated person in respect of Initial Trust.

Thus, subsection 74.4(2) could apply to the transfer of property made by Initial Trust, in connection with the estate freeze made by it in favour of New Trust, if the Purpose Test was satisfied.

Jean Lafrenière

(613) 670-9013
October 6, 2017
2017-070907

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Text of Severed Letter

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.

Reasons: According to the law and previous positions.

APFF - CONGRÈS 2017

Question 9

Personne désignée et article 74.4 L.I.R.

Opco est une société privée sous contrôle canadien (« SPCC »), telle que cette expression est définie au paragraphe 125(7) L.I.R., une société canadienne imposable (« SCI »), telle que cette expression est définie au paragraphe 89(1) L.I.R., mais n’est pas une société exploitant une petite entreprise (« SEPE »), telle que cette expression est définie au paragraphe 248(1) L.I.R.

M. A détient la totalité des actions privilégiées de gel et des actions avec droit de vote du capital-actions d’Opco, lesquelles actions ont été émises dans le cadre d’un gel successoral effectué il y a plusieurs années par M. A en faveur de Fiducie Initiale. Fiducie Initiale détient la totalité des actions ordinaires, sans droit de vote, du capital-actions d’Opco. Fiducie Initiale est une fiducie personnelle, telle que cette expression est définie au paragraphe 248(1) L.I.R.

M. A, M. B et M. C sont les seuls fiduciaires de Fiducie Initiale. M. B est le frère de M. A et M. C n’a aucun lien de dépendance avec M. A et M. B. Les bénéficiaires de Fiducie Initiale sont M. A, les enfants majeurs de M. A ainsi que la conjointe de M. A.

Un nouveau gel successoral d’Opco est mis en place et, à cette fin, Fiducie Initiale échange la totalité des actions ordinaires qu’elle détient dans le capital d’Opco en actions privilégiées de gel ayant une valeur de rachat correspondant à la juste valeur marchande (« JVM ») des actions ordinaires échangées, le tout en vertu de l’article 51 L.I.R.

Nouvelle Fiducie souscrit ensuite à de nouvelles actions ordinaires, sans droit de vote, du capital-actions d’Opco pour un prix correspondant à leur JVM. M. A, M. B et M. D sont les seuls fiduciaires de Nouvelle Fiducie. M. D n’a aucun lien de dépendance avec M. A et M. B. Les bénéficiaires de Nouvelle Fiducie sont M. A, les enfants majeurs de M. A, les petits-enfants à naître de M. A, la conjointe de M. A et toute société contrôlée par l’un ou l’autre de ces bénéficiaires à l’exception de toute société dans laquelle Nouvelle Fiducie détiendrait un intérêt directement ou indirectement. Nouvelle Fiducie est une fiducie personnelle, telle que cette expression est définie au paragraphe 248(1) L.I.R.

Aux fins du présent exemple, les conditions du paragraphe 74.4(4) L.I.R. ne seraient pas respectées.

Question à l’ARC

Est-ce que la conjointe de M. A est une personne désignée en ce qui concerne Fiducie Initiale en vertu du paragraphe 74.4(5) L.I.R.?

Réponse de l’ARC

Tout d’abord, pour les fins de la présente question, nous posons comme hypothèse que M. A et Fiducie Initiale résident au Canada à tout moment pertinent. Nous posons également comme hypothèse que Fiducie Initiale et Nouvelle Fiducie sont des fiducies discrétionnaires.

Le paragraphe 74.4(2) L.I.R. est une règle d’attribution corporative d’application très large. De façon sommaire, le paragraphe 74.4(2) L.I.R. peut s’appliquer à un transfert ou un prêt d’un bien par un particulier à une société, lorsqu’il est raisonnable de considérer que l’un des principaux objets du transfert ou du prêt consiste à réduire le revenu du particulier et à avantager directement ou indirectement, au moyen d’une fiducie ou autrement, une personne désignée en ce qui concerne ce particulier.

Le transfert ou le prêt d’un bien est également d’application très large étant donné qu’il peut être effectué directement ou indirectement, au moyen d’une fiducie ou autrement.

Selon l’énoncé de la présente question, l’article 51 L.I.R. est applicable à l’égard de l’échange par Fiducie Initiale des actions ordinaires du capital-actions d’Opco pour des actions privilégiées de gel du capital-actions de cette dernière. Cet échange est réputé, en vertu de l’alinéa 51(1)c) L.I.R., être un transfert des actions ordinaires du capital-actions d’Opco par Fiducie Initiale à Opco, pour l’application de l’article 74.4 L.I.R.

Par ailleurs, la question de savoir s’il est raisonnable de considérer que l’un des principaux objets du transfert d’un bien consiste à réduire le revenu du particulier et à avantager directement ou indirectement une personne désignée (ci-après le « Test d’objet ») est une question de fait qui doit être résolue à la lumière de toutes les circonstances et particularités de chaque cas.

L’expression « personne désignée » est définie au paragraphe 74.5(5) L.I.R. et cette définition s’applique également aux fins de l’article 74.4 L.I.R.

Une personne désignée, en ce qui concerne un particulier, s’entend de son époux ou son conjoint de fait et d’une personne de moins de 18 ans qui a un lien de dépendance avec le particulier ou qui est le neveu ou la nièce du particulier.

Compte tenu du fait que le paragraphe 104(2) L.I.R. édicte qu’une fiducie est réputée être un particulier relativement aux biens de celle-ci, le paragraphe 74.4(2) L.I.R. pourrait s’appliquer à une fiducie, en supposant que toutes les conditions d’application du paragraphe 74.4(2) L.I.R. soient respectées.

Cependant, seule une personne de moins de 18 ans ayant un lien de dépendance avec une fiducie pourrait logiquement être une personne désignée en ce qui concerne une fiducie.

Compte tenu de ce qui précède, la conjointe de M. A ne peut être une personne désignée en ce qui concerne Fiducie Initiale.

Par contre, la conjointe de M. A est tout de même une personne désignée en ce qui concerne M. A.

Ainsi, bien qu’il ne soit pas possible de se prononcer de façon définitive dans le cadre de la présente question, nous remarquons que le paragraphe 74.4(2) L.I.R. pourrait s’appliquer au transfert de biens effectué par M. A, dans le cadre du gel successoral effectué par celui-ci en faveur de Fiducie Initiale, si le Test d’objet était respecté.

De plus, nous sommes d’avis que la question de l’application du paragraphe 74.4(2) L.I.R. pourrait se poser à l’égard du gel successoral effectué par Fiducie Initiale s’il était établi que le transfert de biens effectué lors de ce gel successoral a été effectué indirectement par M. A, par le biais de Fiducie Initiale.

Par conséquent, s’il était possible d’établir que le Test d’objet est satisfait, le paragraphe 74.4(2) L.I.R. pourrait également s’appliquer à M. A à l’égard du gel successoral effectué par Fiducie Initiale.

Dans un autre ordre d’idées, il est précisé dans l’énoncé de la présente question que les petits-enfants à naître de M. A seront bénéficiaires de Nouvelle Fiducie.

À cet égard, l’ARC est d’avis qu’un enfant à naître n’est pas une personne pour les fins de l’article 74.4 L.I.R. et du paragraphe 74.5(5) L.I.R. et ne peut constituer une personne désignée en vertu de l’alinéa 74.5(5)b) L.I.R. Par contre, dès sa naissance, un petit-enfant pourra être une personne désignée en ce qui concerne un particulier.

Par ailleurs, un petit-enfant de M. A sera uni à ce dernier par les liens du sang en vertu du paragraphe 251(6) L.I.R. Un petit-enfant et M. A seront donc des personnes liées entre elles en vertu du paragraphe 251(2) L.I.R. et, par conséquent, réputées avoir un lien de dépendance entre eux en vertu de l’alinéa 251(1)a) L.I.R.

Compte tenu de ce qui précède, un petit-enfant de M. A et Fiducie Initiale pourraient être réputés avoir un lien de dépendance entre eux en vertu de l’alinéa 251(1)(b) L.I.R. dans l’hypothèse où le droit de M. A dans Fiducie Initiale constituait un droit de bénéficiaire, si le paragraphe 248(25) L.I.R. s’appliquait compte non tenu de ses subdivisions b)(iii)(A)(II) à (IV).

Si cette dernière hypothèse s’avérait juste, un petit-enfant mineur de M. A serait une personne désignée en ce qui concerne Fiducie Initiale.

Ainsi, le paragraphe 74.4(2) L.I.R. pourrait s’appliquer au transfert de biens effectué par Fiducie Initiale, dans le cadre du gel successoral effectué par celle-ci en faveur de Nouvelle Fiducie, si le Test d’objet était respecté.

Jean Lafrenière
(613) 670-9013
Le 6 octobre 2017
2017-070907

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 74.4 - Subsection 74.4(2)

a second freeze transaction by a family trust could be viewed as an indirect transfer by the original freezor

As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (the “Initial Trust”) holds the non-voting common shares. The Initial Trust’s beneficiaries are A, his adult children and his wife and its trustees are A, his brother (B) and an arm’s length individual. Now a further estate freeze is effected under which Initial Trust exchanges its shares for preferred shares under s. 51 and a newly-formed discretionary family trust (“New Trust” – also having grandchildren and family corporations as beneficiaries and with a different unrelated individual as the third trustee) subscribes for new non-voting common shares. Is A’s spouse a designated person in relation to the Initial Trust? CRA responded:

[W]whether it is reasonable to consider that one of the main purposes of a transfer of property is to reduce the income of the individual and to benefit, either directly or indirectly, a designated person (the "Purpose Test”) is a question of fact ... .

In view of the fact that subsection 104(2) provides that a trust is deemed to be an individual in respect of the trust property, subsection 74.4(2) could apply to a trust, assuming that all of the conditions for the application of subsection 74.4 are satisfied.

However, only a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.

In light of the foregoing, the Mr. A’s spouse cannot not be a designated person in respect of Initial Trust.

On the other hand, Mr. A's spouse is still a designated person in respect of Mr. A.

Thus ... subsection 74.4(2) could apply to the transfer of property made by Mr. A, in connection with the estate freeze carried out by Mr. A. in favour of Initial Trust, if the Purpose Test were satisfied.

In addition, we are of the view that the question of the application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property effected by this estate freeze was made indirectly by Mr. A through Initial Trust.

Consequently, if it were possible to establish that the Purpose Test was satisfied, subsection 74.4 (2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.

Summary Under

Tax Topics - Income Tax Act - Section 74.5 - Subsection 74.5(5)

unborn children and spouse not designated persons re freezer trust

As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (“Initial Trust”), with spouse and children as beneficiaries, holds the non-voting common shares. Now a further freeze is implemented under which Initial Trust exchanges its shares for preferred shares, and New Trust, with spouse children, grandchildren and family corporations as beneficiaries, subscribes for new non-voting common shares. CRA stated:

[O]nly a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.

In light of the foregoing, Mr. A’s spouse cannot be a designated person in respect of Initial Trust.

After indicating that s. 74.4(2) nonetheless potentially might apply respecting A’s spouse viewed as a designated person in respect of A, on the basis “that the transfer of property made during this [2^nd] estate freeze was made indirectly by Mr. A by means of Initial Trust,” CRA also noted:

[A]n unborn child is not a person for the purposes of section 74.4 and subsection 74.5(5) and cannot constitute a designated person under paragraph 74.5(5)(b). In contrast, from birth, a grandchild may be a designated person in respect of an individual.

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6 October 2017 APFF Roundtable Q. 9, 2017-0709071C6 F - Corporate Attribution Rules

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