2 June 2026 STEP Roundtable Q. 4, 2026-1089201C6 - Vefghi Case and Timing of Dividend Payments

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. At what time a corporate beneficiary (Benco) would include a capital dividend distributed by the trust? 2. At what time a corporate beneficiary (Benco) would include the non-taxable portion of capital gains distributed by the trust in its capital dividend account? 3. In what taxation year a corporate beneficiary (Benco) would report the taxable dividend income or taxable capital gains distributed by the trust?

Position: Provided that the trust made the relevant designation under the Act: 1. The amount thus determined under paragraph (g) of the definition of capital dividend account will be added to Benco's capital dividend account at the end of the trust's Particular Taxation Year. 2. In determining its capital dividend account, Benco will include the lesser of the amounts determined under clauses (A) and (B) so referred to in subparagraph (a)(i.1) of the definition of capital dividend account at the end of the trust's Particular Taxation Year. 3. Taxable dividend: Benco will include the amount thus designated in its taxation year end in which the trust's Particular Taxation Year ends. / Capital gains: Benco will include the amount thus designated in its taxation year end in which the trust's Particular Taxation Year ends.

Reasons: Wording of the Act and previous CRA's positions.

2026 STEP CRA Roundtable – June 2, 2026

QUESTION 4. Vefghi Case and Timing of Dividend Payments

The Federal Court of Appeal in Canada v. Vefghi Holding Corporation (footnote 1) held that the relevant time for determining whether a payer corporation (“Opco”) is “connected” with a corporate beneficiary (“Benco”) receiving the dividend income as a distribution from a shareholder trust is the last day of the trust’s taxation year (the trust’s “Particular Taxation Year”); that is the day the corporate beneficiary is deemed to have received a taxable dividend by interpreting subsection 104(19) of the Income Tax Act (the “Act”) (footnote 2). As a result, the Federal Court of Appeal concluded in the Vefghi decision that the connected test for the purposes of Part IV tax must be conducted at the end of the trust’s Particular Taxation Year.

1. Can the CRA confirm whether the same rationale would apply to capital dividends, having the meaning assigned in subsection 83(2), received by Benco by way of distributions from the trust? Specifically, when would Benco include the capital dividend received in its capital dividend account as defined in subsection 89(1) (“Capital Dividend Account”)?

2. Assume the trust realized a capital gain on the disposition of a capital property in a Particular Taxation Year and distributes the whole of the capital gain (the taxable and non-taxable portions) to Benco before the end of that Particular Taxation Year. Can the CRA confirm when Benco would include the non-taxable portion of the capital gain in its Capital Dividend Account?

3. Assume the trust is a graduated rate estate (“GRE”), as defined in subsection 248(1), with an off-calendar year end of, say, February 28 and Benco has a December 31 calendar year end. If the GRE earns a taxable dividend or realizes a capital gain in the period from March 1 to December 31 in a particular year, and distributes those amounts to Benco before the end of December 31 of that year, in what year does Benco report the income or taxable capital gains?

CRA Response

For Part 1 and Part 2, it is assumed that Benco is a private corporation, as defined in subsection 89(1), and is entitled to maintain, and make additions to, a Capital Dividend Account at all relevant times.

Part 1.

It is the CRA’s view that the position outlined in document 2010-0363191C6 and at paragraph 1.75 of the Folio S3-F2-C1 (footnote 3) remains applicable following the Vefghi decision.

Provided that the trust makes the designation under subsection 104(20) in respect of the distributions made in the trust’s Particular Taxation Year in favour of Benco, Benco will add to its Capital Dividend Account the lesser of the amounts described in subparagraphs (g)(i) and (ii) of the definition of Capital Dividend Account.

Benco’s Capital Dividend Account cannot be increased before the end of the trust’s Particular Taxation Year because the condition for the designation under subsection 104(20) cannot be satisfied before that time. Therefore, the amount thus determined under paragraph (g) of the definition of Capital Dividend Account will be added to Benco’s Capital Dividend Account at the end of the trust’s Particular Taxation Year.

Part 2.

It is understood that the trust has distributed the entire amount of the capital gains realized in its Particular Taxation Year in favour of Benco. We assume that one half of the amount distributed, that is, the amount of the trust’s net taxable capital gains, as determined under subsection 104(21.3), is designated as a taxable capital gain of Benco under subsection 104(21).

It is the CRA’s view that the position outlined in document 2023-0959591C6 and at paragraph 1.43.1 of the Folio S3-F2-C1 remains applicable following the Vefghi decision.

Pursuant to subsection 104(21), provided that all requirements under that subsection in respect of the distributions of the trust’s net taxable capital gains realized by the trust in a Particular Taxation Year in favour of Benco are satisfied, the amount so designated by the trust under subsection 104(21) for that Particular Taxation Year will be deemed, for the purposes set out in that subsection, to be a taxable capital gain, for the taxation year of Benco in which the trust’s Particular Taxation Year ends, from the disposition by Benco of capital property. The remainder of the amount distributed, that is, the amount distributed out of the non-taxable portion of capital gains of the trust, is referred to in subparagraph (a)(i.1) of the definition of Capital Dividend Account.

Benco cannot include an amount referred to in subparagraph (a)(i.1) of the definition of Capital Dividend Account in the calculation of its Capital Dividend Account before the end of the trust’s Particular Taxation Year because the condition for the designation under subsection 104(21) cannot be satisfied before that time. Therefore, in determining its Capital Dividend Account, Benco will include the lesser of the amounts determined under clauses (A) and (B) so referred to in subparagraph (a)(i.1) of the definition of Capital Dividend Account at the end of the trust’s Particular Taxation Year.

Part 3.

Taxable dividend

As provided in subsection 104(19), for the purposes set out in that subsection, a taxable dividend received by a trust, in the trust’s Particular Taxation Year, on a share of the capital stock of a taxable Canadian corporation, is deemed to be a taxable dividend on the share received by the beneficiary, in the beneficiary’s taxation year in which the trust’s Particular Taxation Year ends.

Therefore, provided that the trust makes the designation under subsection 104(19) and all of the requirements set out in that provision are satisfied, Benco will include the amount thus designated in its December 31 taxation year end in which the trust’s Particular Taxation Year ends.

It is the CRA’s view that the Vefghi decision does not raise any uncertainty in this regard. Moreover, Wyman W. Webb J.A. reiterates in the Vefghi decision at paragraph 63 that “[t]he deeming rule in subsection 104(19) of the Act is clear that the dividend is deemed to be received by the beneficiary (including a corporate beneficiary) in the taxation year of that beneficiary in which the trust’s taxation year ends.”

Capital gain

It is understood that the trust has distributed the entire amount of the capital gains realized in its Particular Taxation Year in favour of Benco. We assume that one half of the amount distributed, that is, the amount of the trust’s net taxable capital gains, as determined under subsection 104(21.3), is designated as a taxable capital gain of Benco under subsection 104(21).

Subsection 104(21) provides, for the purposes set out in that subsection, that an amount in respect of a trust’s net taxable capital gains for its Particular Taxation Year is deemed to be a taxable capital gain, for the taxation year of a taxpayer in which the trust’s Particular Taxation Year ends, from the disposition by the taxpayer of capital property.

Therefore, provided that all of the requirements set out in subsection 104(21) are satisfied, Benco will include the amount thus designated in its December 31 taxation year end in which the trust’s Particular Taxation Year ends.

It is the CRA’s view that the Vefghi decision does not raise any uncertainty in this regard.

Nathalie Aubin
2026-108920

FOOTNOTES

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

1. 2025 FCA 14 (the “Vefghi decision”). An application for leave to appeal to the Supreme Court of Canada (“SCC”) was filed. As of this date, the SCC has not yet ruled on the application for leave to appeal.

2. Unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

3. Income Tax Folio S3-F2-C1 – Capital dividends, January 13, 2025 (“Folio S3-F2-C1”).