28 July 1993 External T.I. 9307165 F - Acquisition of Control by Trustees

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.

XXXXXXXXXX

Attention:  XXXXXXXXXX

Dear Sirs:

RE:  Subsection 249(4) of the Income Tax Act (the "Act') Acquisition of Control by Trustees

We are writing in response to your letter of March 2, 1993 wherein you requested our view as to whether an acquisition of control for the purposes of subsection 249(4) of the Act has resulted in the following situations outlined in your letter. The situations outlined in your letter are summarized as follows:

Situation #1

Mr. X is the settlor and one of the three trustees of a discretionary family trust (the "Trust") which owns controlling shares of several private corporations, all of which have Mr. X as the sole director. The trust agreement requires majority approval from the trustees for the conduct of the Trust affairs. Mr. X does not have the right under the terms of the Trust to demand that the other trustees resign nor does he have the right to unilaterally appoint additional trustees. The trustees deal with one another at arm's length and no one trustee was given the power to control the Trust. The other trustees choose to resign for personal liability reasons. Mr. X immediately replaces them with two other individuals who are not related to Mr. X.

Do the two new trustees, together with Mr. X, constitute a group of persons who has acquired control of the private corporations owned by the Trust?

Situation #2

Assume the same facts as in Situation #1, except that the two trustees who resign are not replaced by Mr. X. Has Mr. X acquired control of the private corporations owned by the Trust?

Situation #3

Assume the same facts as in Situation #1, except that it takes a month for Mr. X to replace the two trustees that have resigned. During that month, Mr. X, as sole trustee of the Trust, conducts the business of the Trust. Is there an acquisition of control of the private corporations owned by the Trust when Mr. X becomes the sole trustee of the Trust and then a further acquisition of control by a group of persons when Mr. X appoints two new trustees?

Our Comments:

The situations described in your letter appear to involve seriously contemplated transactions and identifiable taxpayers. Consequently, we would like to bring your attention to paragraph 21 of Information Circular 70-6R2, dated September 28, 1990, issued by Revenue Canada, Customs, Excise and Taxation wherein it is stated that when a requested interpretation relates to a contemplated transaction, a taxpayer should request an advance income tax ruling rather than an opinion. The procedures for requesting an advance income tax ruling are set out in paragraph 15 of the said circular. We are, however, able to provide you with the following general comments.

The Department's position as to whether a change in trustees of a trust results in a change in control of a corporation controlled or deemed to be controlled by the trustees can be found in paragraph 5 of Interpretation Bulletin IT-302R2, dated May 23, 1986. (Although that paragraph refers to an executor, administrator or trustee of an estate, its principle also applies to a trustee of an inter vivo trust.) While it is a question of fact as to whether there is a change in control of the corporation when there is a change of the trustees, it is the Department's position that, for the purposes of paragraph 256(7)(a) of the Act, where a trustee is replaced as a result of his death or his inability to fulfil his functions, the control of the corporation will be regarded as remaining unchanged. However, a change in trustee together with a substantial change in the ownership of the beneficial interest in the trust will be considered a change in control of the corporation.

In Situation #1 above, since the reason that the trustees are being replaced is beyond the control of the settlor and there is no change to the beneficiaries of the Trust, it is our view that the position described in paragraph 5 of IT-302R2 will apply and control of the private corporations, the shares of which are held by the trustees of the Trust, will be regarded as being unchanged.

It is our understanding that the Trustee Act of certain provinces, such as Ontario and British Columbia, provides that, except where only one trustee was originally appointed or a contrary intention is expressed in any instrument creating the trust, a trustee shall not be discharged unless there will be at least two trustees to perform the trust. Therefore, in Situations #2 and #3 above, it may be that Mr. X cannot be the sole trustee of the Trust unless this eventuality is provided for in the trust deed. In such case, since the two trustees are not discharged there should not be an acquisition of control of the private corporations by Mr. X.

If the trust deed of the Trust provides that a sole trustee can perform the Trust, it is our view that, in Situations #2 and #3 above, control of the private corporations has been acquired as a result of Mr. X being the sole trustee of the Trust. In that regard, control of the private corporations may be considered to have been acquired again as a result of the appointment of the two new trustees if Mr. X and the two new trustees act as a group of persons to control the voting rights of the private corporations.

We trust the above comments will be of assistance.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch