Vefghi – FCA confirms that whether a s. 104(19) dividend was received by a corporate beneficiary from a connected corporation is tested at the trust year end

Partway through its calendar taxation year, a family trust received a dividend from a family corporation, paid that dividend to a corporate beneficiary (also with a calendar year end) and in its return for that taxation year, made a s. 104(19) designation. CRA applied its published position (e.g., in 2020-0845821C6 F) that since (due to a sale of the dividend payor to a third party) the two corporations had ceased to be connected between the time of the dividend and the effective time of the s. 104(19) designation (the December 31 trust year end), the dividend was subject to Part IV tax.

A second situation was similar, except that a new taxation year of the corporate beneficiary started after the date of the payment of the dividend (on June 30, shortly preceding the dividend payer and beneficiary ceasing to be connected) and before the (December 31) effective date of the s. 104(19) designation by the trust, so that on no day in that taxation year of the corporate beneficiary was the dividend payer connected to it.

Webb JA confirmed that the determination of whether the corporate payor was connected with the corporate beneficiary was to be made at the end of the particular taxation year of the trust in which it received the dividend. Thus, since such connected status did not exist at the trust year-end, Part IV tax was payable in both cases.

In reaching this conclusion, Webb JA noted:

• Since the s. 104(19) designation “cannot be made before the end of the trust's taxation year, the last day of the trust's taxation year is the earliest date on which this designation could be made” and, indeed, “[i]t is only once the designation is made, and the corporate beneficiary is deemed to receive a dividend, that the determination of whether the beneficiary corporation is connected to the corporation that paid the dividend to the trust can be made”.
• Conversely, finding that the date the trust made the designation was the relevant date could lead to a conflict with the wording of s. 104(19), for example, if a trust with a December 31 year-end made a designation when it filed its tax return after December 31, that “would be after the taxation year of the corporate beneficiary in which the trust's taxation year ends”.

Thus, in light of these and other considerations, the only date for applying the connected test that seemed to “work” was the December 31 trust year end.

Neal Armstrong. Summary of Canada v. Vefghi Holding Corp, 2025 FCA 143 under s. 104(19).