10 June 2025 Internal T.I. 2023-0970361I7 - Interpretation of “controlling persons” definition

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: (1) Would CRA consider any contributor to a trust as a “settlor” for the purposes of the definition “controlling persons” in subsection 270(1)? (2) In a hypothetical scenario where an underlying discretionary trust made distributions to the top discretionary trust in a particular calendar year, would CRA consider the discretionary beneficiaries of the top discretionary trust to be controlling persons of the underlying discretionary trust in that year? (3) In the same hypothetical scenario, if the underlying discretionary trust made a distribution to the top discretionary trust in a particular calendar year and the top discretionary trust made distributions to its discretionary beneficiaries in that same year, would the answer be the same?

Position: (1) It is a question of law to be determined in light of the relevant facts and circumstances; (2) A distribution from the underlying discretionary trust to the top discretionary trust would not result in the discretionary beneficiaries of the top discretionary trust becoming controlling persons in respect of any of the discretionary trusts; (3) A distribution to the top discretionary trust and a distribution from the top discretionary trust to its discretionary beneficiaries in the same year would result in the discretionary beneficiaries of the top discretionary trust becoming controlling persons in respect of both trusts in that calendar year.

Reasons: (1) Prior position; (2) Interpretation of law; (3) Interpretation of law and the Common Reporting Standard.

Isabelle Brulotte								HEADQUARTERS
XXXXXXXXXX									Income Tax Rulings Directorate
Compliance Programs Branch						Michael Chan

										2023-097036

June 10, 2025

Re: Application of Part XIX - Common Reporting Standard

This is in reply to Lata Agarwal’s email of April 11, 2023 regarding the application of Part XIX – Common Reporting Standard, of the Income Tax Act (the “Act”), in particular, the “controlling persons” definition in subsection 270(1) to trusts.

Unless otherwise stated, every statutory reference herein is a reference to the relevant provision of the Act and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

FACTS

The hypothetical facts are summarized as follows:

• Trust A is a Canadian resident discretionary trust.
• Trust B is a Canadian resident discretionary trust.
• Trust A and Trust B are discretionary trusts in the sense that distributions to the beneficiaries are discretionary. While the constating documents of Trust A and Trust B do not provide for any mandatory distributions, each trust has made distributions in the past.
• Trust A holds “financial accounts” at a “reporting financial institution” (“RFI”) as defined in subsection 270(1).
• Trust A and Trusts B both qualify as a “passive NFE” as this term is defined in subsection 270(1).
• Trust B is Trust A’s only beneficiary.
• Trust B has beneficiaries, all of whom are natural persons who qualify as “reportable persons” as this term is defined in subsection 270(1).
• Trust A and Trust B have the same trustee. This trustee is a natural person resident in Canada.
• Trust A and Trust B were settled through a conveyance of property by the same individual.
• No natural person other than the trustee exercises ultimate effective control over Trust A or Trust B.

INTERPRETATIONS REQUESTED

You have referred to paragraph 9.54 of the CRA Guidance on Part XIX -Common Reporting Standard (“CRA Guidance”) (footnote 1) and asked the following questions with respect to the definition of “controlling persons” in subsection 270(1) and the financial accounts of Trust A:

1. The term “settlor” is not defined in the Act, and the CRA Guidance is also silent on this point. Would the CRA consider any contributor to a trust as a “settlor” for the purpose of the definition of “controlling persons” in subsection 270(1)?

2. In the described hypothetical situation, would you consider the beneficiaries of Trust B to be “controlling persons” of Trust A, if in the calendar year a distribution is made by Trust A to Trust B, without a distribution from Trust B to its beneficiaries in that same year (the “Particular Year”), such that the beneficiaries of Trust B must be disclosed under Part XIX?

3. Would the answer be the same if Trust A made distributions to Trust B in the Particular Year and in that same year Trust B made distributions to its beneficiaries?

OUR COMMENTS

Subsection 271(1) sets out general reporting requirements under Part XIX imposed on an RFI with respect to each of its reportable accounts. Subsection 270(1) defines terms used in Part XIX. In the described hypothetical scenario, with respect to the financial accounts held by Trust A, the RFI must report, inter alia, certain information about “controlling persons” of Trust A that are “reportable persons”, if any.

“Controlling persons” are defined in subsection 270(1) as the natural persons who exercise control over the entity, and include in the case of a trust, (i) its settlors, (ii) its trustees, (iii) its protectors (if any), (iv) its beneficiaries and discretionary beneficiaries (to the extent a distribution has been paid or made payable to the discretionary beneficiary), and (v) any other natural persons exercising ultimate effective control over the trust.

Subsection 270(2) provides that unless the context otherwise requires, the provisions in Part XIX are to be interpreted consistently with the Common Reporting Standard (“CRS”), approved by the Council of the Organisation for Economic Co-operation and Development (“OECD”), as amended from time to time.

The CRS consists of the following key parts (footnote 2) , all of which can be used as guidance to interpret the provisions in Part XIX:

• the Standard for Automatic Exchange of Financial Account Information in Tax Matters (footnote 3) (“Standard”);
• a Model Competent Authority Agreement (footnote 4) (“MCAA”) providing the international legal framework for the automatic exchange of CRS information;
• the Commentaries on the Standard and the MCAA; (footnote 5) and
• the CRS XML Schema User Guide. (footnote 6)

In addition to the CRS, the OECD has published the second edition of the Standard for Automatic Exchange of Financial Account Information in Tax Matters: Implementation Handbook (the “Implementation Handbook”) (footnote 7) , which, although not part of the CRS, provides a practical guide to implementing the CRS to both government officials and financial institutions.

Question 1: The term “settlor” is not defined in the Act and the CRA Guidance is also silent on this point. Would the CRA consider any contributor to a trust as a “settlor” for these purposes?

The same question was addressed in the CRA Roundtable at the 74th Annual Tax Conference in 2022 hosted by the Canadian Tax Foundation. We refer you to CRA Document 2022-0950581C6 for additional context to the interpretation of subparagraph (a)(i) in the definition “controlling persons” in subsection 270(1) when determining who “settlors” of a trust under Part XIX of the Act are in a given set of circumstances.

In our response we stated that under Canadian law, the term “settlor” generally refers to the person who set up a trust by contributing property to the trust. On that basis, the question of who the settlor of a particular trust is for the purposes of the definition “controlling persons” in subsection 270(1) is generally a question of law to be determined in light of the relevant facts and circumstances.

In addition, where a contributor exercises “ultimate effective control over the trust”, the contributor is a “controlling person” within the meaning of that definition in subsection 270(1) regardless of whether or not the contributor qualifies as a settlor of the trust.

Question 2: In the described hypothetical situation, would you consider the beneficiaries of Trust B to be “controlling persons” of Trust A, if in the Particular Year, a distribution is made by Trust A to Trust B, without a distribution from Trust B to its beneficiaries in that same year, such that the beneficiaries of Trust B must be disclosed under Part XIX?

In the case of a trust, the definition “controlling persons” in subsection 270(1) includes natural persons who are beneficiaries of that trust. The term “beneficiary” used in Part XIX is not defined under the Act and will generally have the same meaning as under Canadian trust law (the additional requirement imposed on a discretionary beneficiary of a trust is discussed below). The determination of who is a beneficiary of a particular trust is to be made based on all the relevant information, including the terms of the trust and the settlor’s intent in establishing the trust. In essence, under the Canadian trust law, a beneficiary of a trust is a person (other than a protector) who has a right to compel the trustee to properly enforce the terms of the trust, regardless of whether that person’s right to any of the income or capital is immediate, future, contingent, absolute or conditional on the exercise of discretion by any person.

We understand and assume for purposes of this letter that Trust B is the only beneficiary of Trust A, and the beneficiaries of Trust B would not be beneficiaries of Trust A for the purposes of Part XIX.

Subparagraph (a)(iv) of the definition “controlling persons” in subsection 270(1) further provides that a natural person who would otherwise be viewed as a discretionary beneficiary of a trust will only be considered a beneficiary (and thus a “controlling person”) of the trust in a calendar year if a distribution has been paid or made payable to the discretionary beneficiary in the calendar year.

Although Trust A made a distribution in the Particular Year, Trust B would not have been a controlling person of Trust A in that year since the definition “controlling persons” is limited to a natural person.

Based on the interpretation of the relevant provision with guidance from the publications referred to above, when determining the controlling persons of a particular entity (in this case, Trust A), it may be necessary to look through the chain in order to identify the natural persons who “exercise control” over the entity (referred herein as the “look-though approach”). In the hypothetical example, because Trust B is not a natural person, the “controlling persons” of Trust B will be the “controlling persons” of Trust A based on this look-through approach. (footnote 8)

For the discretionary beneficiaries of Trust B to be controlling persons of either trust in the Particular Year, Trust B must have paid or made payable to them, directly or indirectly, a distribution in the Particular Year, or the discretionary beneficiaries must exercise “ultimate effective control” over the trusts.

Consistent with the OECD’s guidance, (footnote 9) even if Trust B does not directly distribute any property in the Particular Year, to the extent that Trust B confers a benefit onto its discretionary beneficiaries in the Particular Year, such benefit might be an indirect distribution from Trust B such that the discretionary beneficiaries of Trust B would be considered “controlling persons” of Trust A and Trust B for that year.

Question 3: Would the answer to Question 2 be the same if Trust A made distributions to Trust B in the Particular Year and in that same year Trust B made distributions to its beneficiaries?

In this hypothetical scenario, the beneficiaries of Trust B are “controlling persons” of Trust B pursuant to that definition in subsection 270(1) in the Particular Year. Furthermore, based on the look-through approach, the beneficiaries of Trust B are also controlling persons of Trust A in that year.

If the distributions by Trust A and Trust B are made in different years, consideration should be given to whether the timing of the distributions was influenced by the discretionary beneficiaries of Trust B in which case they may be viewed as having ultimate effective control over the trusts for purposes of subparagraph (a)(v) of the definition “controlling persons” in subsection 270(1). If so, they would be controlling persons of both trusts regardless of distributions.

We note that pursuant to section 280, if a person enters into an arrangement or engages in a practice, the primary purpose of which can reasonably be considered to be to avoid Part XIX obligations, the person is still subject to those obligations as if the person had not entered into the arrangement or engaged in the practice.

As indicated in paragraph 9.55 of the CRA Guidance, the RFI must have appropriate procedures in place to be notified when a distribution is made to a discretionary beneficiary of Trust B in a given year to enable the trusts or the trustee to disclose such beneficiary as a controlling person.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust that these comments will be of assistance.

Yours truly,

Ina Eroff
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 https://www.canada.ca/en/revenue-agency/services/tax/international-non-residents/enhanced-financial-account-information-reporting/reporting-sharing-financial-account-information-other-jurisdictions/gu...

2 https://web-archive.oecd.org/tax/automatic-exchange/common-reporting-standard/index.htm

3 OECD (2017), Standard for Automatic Exchange of Financial Account Information in Tax Matters, Second Edition, OECD Publishing, Paris, https://doi.org/10.1787/9789264267992-en.

4 Ibid.

5 Ibid.

6 https://web-archive.oecd.org/tax/automatic-exchange/common-reporting-standard/schema-and-user-guide/index.htm

7 OECD (2018), Standard for Automatic Exchange of Financial Information in Tax Matters: Implementation Handbook, Second Edition, OECD Publishing, Paris, https://doi.org/10.1787/841e9512-en.

8 See paragraphs 9.56-9.57 of the CRA Guidance on Part XIX of the Act and paragraphs 270-277 of the Implementation Handbook.

9 See Section VIII: Definitions, C. Financial Account, Question 11. Indirect distributions by a trust, CRS-related Frequently Asked Questions, OECD (May 2024), https://web-archive.oecd.org/tax/automatic-exchange/common-reporting-standard/CRS-related-FAQs.pdf