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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Various issues relating to subsection 6205(2) of the Income Tax Regulations:
1. The introduction of subparagraph 6205(2)(a)(ii) refers to “the time of the issue of the particular share or at the end of the arrangement”. Are either of these two times acceptable for purposes of determining if the “other shares” are held by the appropriate persons or in other words, is the word “or” to be interpreted to mean “either/or” and not to mean “and”?
2. Subclause 6205(2)(a)(ii)(A)(III) refers to “a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder...”. In examining who the beneficiaries are of the trust that acquired the other shares, should we only consider those beneficiaries that are alive or in existence at either of the two times mentioned above (i.e., the time of the issue of the particular share or at the end of the arrangement) or alternatively, should we examine who or what might be a beneficiary of that trust at a future time but who or which is not then in existence?
3. Subclause 6205(2)(a)(ii)(A)(III) refers to “a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder...”. If one of the beneficiaries of the trust which holds the “other shares” were itself a trust, how do we determine whether that 2nd tier trust was dealing at arm’s length with the original holder?
Position TAKEN:
1. Either of the two times mentioned in the preamble of 6205(2)(a)(ii) are acceptable for purposes of determining if the other shares are held by the appropriate persons.
2. We would only consider those beneficiaries of a trust that are alive or in existence at either of the two times mentioned in the preamble in subparagraph 6205(2)(a)(ii).
3. It is a question of fact whether or not the sub-trust and the original holder are dealing with each other at arm’s length at a particular time.
Reasons FOR POSITION TAKEN:
1. Based on the wording in the preamble of subparagraph 6205(2)(a)(ii) of the Regulations.
2. Based on the wording in the preamble of subparagraph 6205(2)(a)(ii) of the Regulations.
3. According to subsection 104(2) of the Income Tax Act (the “Act”), a trust is deemed to be an individual in respect of trust property and pursuant to the definition in subsection 248(1) of the Act, an “individual” is a person. Therefore, in section 251, a reference to the word person includes a trust. It is our view that unless the facts indicate otherwise, a trust is not considered to be dealing at arm’s length with its beneficiaries. It is a question of fact whether or not the 2nd tier trust and the original holder were dealing with each other at arm’s length at a particular time.
XXXXXXXXXX 5-990175
G. Moore
May 17, 1999
Dear XXXXXXXXXX:
Re: Subsection 6205(2) of the Income Tax Regulations
We are writing in response to your letter of January 22, 1999, regarding subsection 6205(2) of the Income Tax Regulations (the “Regulations”).
You have asked the following questions about subsection 6205(2) of the Regulations:
1. The introduction of subparagraph 6205(2)(a)(ii) refers to “the time of the issue of the particular share or at the end of the arrangement”. You are asking if either of these two times is acceptable for purposes of determining if the other shares are held by the appropriate persons or in other words, if the word “or” is interpreted to mean “either/or” and not to mean “and”.
2. Subclause 6205(2)(a)(ii)(A)(III) refers to “a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder...”. You have asked if, in examining who the beneficiaries are of the trust that acquired the other shares, one only considers those beneficiaries that are alive or in existence at either of the two times mentioned above (i.e. the time of the issue of the particular share or at the end of the arrangement) or alternatively, is one required to examine who or what might be a beneficiary of that trust at a future time but who or which is not then in existence. If at either of the two times (i.e., “at the time of the issue of the particular share or at the end of the arrangement), the only beneficiaries who exist are persons who do not deal at arm’s length with the original holder, it is your view that the requirements in subclause 6205(2)(a)(ii)(A)(III) are satisfied and the particular share will be a prescribed share, assuming that all the other requirements are met.
3. Subclause 6205(2)(a)(ii)(A)(III) refers to “a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder...”. If one of the beneficiaries of the trust which holds the “other shares” were itself a trust, you have asked how one would determine whether that 2nd tier trust was dealing at arm’s length with the original holder.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R3. Where the particular transactions are completed, the enquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following comments which are of a general nature only and are not binding on the Department.
We have replied to your questions in the order in which they were posed:
1. The preamble in subparagraph 6205(2)(a)(ii) of the Regulations states “at the time of the issue of the particular share or at the end of the arrangement”. You have asked if either of these two times is acceptable for purposes of determining if the other shares are held by the appropriate persons or in other words, if the word “or” is interpreted to mean “either/or” and not to mean “and”. In our view, either of these two times is acceptable for purposes of determining whether the “other shares” are owned by the persons described in clauses 6205(2)(a)(ii)(A), (B) or (C), provided the “other shares” were in fact issued prior to the issuance of the particular share. For example, if at some time after the issuance of the “particular share” but prior to the end of the arrangement, growth shares (i.e., “other shares”) were issued, the “at the time of the issue” test would not be relevant since the “other shares” were not owned at that time. We would expect that this will be the more common situation since, in most estate freezes, the growth shares are issued after the freeze shares have been issued.
2. Subclause 6205(2)(a)(ii)(A)(III) refers to “a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder...”. It is our view that, given the wording in the preamble in subparagraph 6205(2)(a)(ii) (i.e., at the time of the issue of the particular share or at the end of the arrangement) of the Regulations, in examining who the beneficiaries are of the trust that acquired the other shares, one only considers those beneficiaries of a trust that are alive or in existence at either of the two times mentioned above. Again, however, if the trust acquired the growth shares after the issuance of the particular share, the “at the time of the issue” test would not be relevant.
3. Subclause 6205(2)(a)(ii)(A)(III) refers to “a trust none of the beneficiaries of which were persons other than the original holder or a person who did not deal at arm’s length with the original holder...”. If one of the beneficiaries of the trust which holds the “other shares” were itself a trust, you have asked how one would determine whether that 2nd tier trust was dealing at arm’s length with the original holder. According to subsection 104(2) of the Income Tax Act (the “Act”), a trust is deemed to be an individual in respect of trust property and pursuant to the definition in subsection 248(1) of the Act, an “individual” is a person. Therefore, in section 251, a reference to the word person includes a trust. It is our view that unless the facts indicate otherwise, a trust is not considered to be dealing at arm’s length with its beneficiaries. It is a question of fact whether or not the 2nd tier trust and the original holder were dealing with each other at arm’s length at a particular time.
Finally, it should be noted that it is a question of fact as to when “the end of the arrangement” is as that phrase is used in subparagraph 6205(2)(a)(ii) of the Regulations. Where it is contemplated that “other shares” (i.e., prescribed shares) will be issued at various times subsequent to the issuance of the freeze shares, or that certain persons may become beneficiaries of a trust subsequent to the acquisition of the “other shares” by the trust, these transactions or events may, or may not, form part of the arrangement. We have not been provided with sufficient information to comment further on this matter.
It should also be noted, however, that the fact that the shares of a corporation do not qualify as prescribed shares does not, in and by itself, cause subsection 110.6(8) of the Act to apply to deny the capital gains deduction in respect of a gain realized on those shares. As indicated above, all the circumstances of a particular situation must be considered in determining whether a significant part of a capital gain is attributable to insufficient dividends, and we have not been provided with sufficient information to make such a determination. As explained above, if such a determination involves proposed transactions, it is generally done in the context of an advance income tax ruling, and if the transactions are completed, through a review by officials of the relevant tax services office.
We trust our reply will be of assistance to you.
Yours truly,
J. Wilson
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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