CRA finds that an interest in a corporation includes an interest held through another corporation

Although s. 74.4(2) may cause the income attribution rules to apply to an estate freeze effected on a corporation (other than a small business corporation) in favour of a trust with designated beneficiaries (e.g., minor children of the freezor), there is a safe harbour in s. 74.4(4) where inter alia "the only interest that the designated person has in the corporation is a beneficial interest in shares of the corporation held by a trust" and designated person(s) are prohibited from receiving any trust distributions.

CRA interprets "holding" as referring to direct holding (see also 2012-0451411E5 F) whereas it appears to consider that an interest in a corporation includes an interest held through another corporation. For example, if a trust with designated person beneficiaries holds common shares of Opco 1 and 2 directly, the safe harbour can be satisfied – except that if Opco 1 then subscribes for preferred shares of Opco 2, the safe harbour will no longer be available for the trust’s interest in Opco 2 because that interest will be held partly "through" Opco 1.

Neal Armstrong. Summary of 7 November 2014 T.I. 2014-0549571E5 F under s. 74.4(4).