8 December 2015 External T.I. 2015-0608781E5 F - Associated corporations - discretionary trust

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: 1.Whether an individual is a beneficiary of a discretionary trust after having signed documents to surrender its rights as a beneficiary.

2. Whether the deeming provision in subsection 256(1.3) can apply when the deeming rule in subparagraph 256(1.2)(f)(ii) has applied.

3. When there is more than one child under 18 years of age that are beneficiaries of a discretionary trust, whether the parent is deemed to own the aggregate number of the shares deemed to be owned by every child.

Position: 1. None.

2. Yes.

3. No. If subparagraph 256(1.2)(f)(ii) applied to deem children under 18 years of age to own shares of the capital stock of a corporation held by a discretionary trust, the parent would be deemed to own the number of shares held by the discretionary trust.

2. Subsection 256(1.3) applies with respect to shares deemed to be owned pursuant to paragraph 256(1.2)(f).

3. Our position is that the application of the provisions of subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) would be considered from the point of view of each of the beneficiaries, on a person by person basis, with the result that the shares of the corporation would not be "double-counted" in any particular situation.

XXXXXXXXXX 2015-060878

Sylvie Labarre, CPA, CA

On December 8, 2015

Sir,

Subject: Associated Companies

This is in response to your email of 14 September 2015 in which you requested our opinion on the application of paragraph 256(1.2)( f) and subsection 256(1.3) in certain circumstances.

Unless otherwise indicated, all statutory references herein are references to the provisions of the Income Tax Act.

Situation 1

X is beneficiary of a discretionary trust. The discretionary trust holds all the shares in the capital of Opco. X holds all the shares in the capital of Newco.

You indicated that subparagraph 256(1.2(f)(ii) deems X to be the owner of all shares in the capital of Opco held by the trust.

Thus, Opco and Newco are associated with each other under paragraph 256(1)(b).

You asked if we would arrive at a different conclusion if X executed written renunciations of all current and future rights as a beneficiary of the trust.

Situation 2

Mother controls Opco by virtue of holding preferred shares in the capital of Opco.

A trust hold all of the common shares in the capital of Opco.

This trust is discretionary. Mother and a minor child are beneficiaries of the trust. Under the deed, the trust cannot distribute income or capital to the minor child before the age of 18.

Father holds all the shares of Newco.

You wished to know whether, in Situation 2, subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) would apply so that Opco and Newco would be associated. If not, would the answer be different if the trust deed contained no restriction on the distribution of income and capital of the trust to the child or only a restriction on the distribution of income.

Situation 3

A trust (Trust 1) holds 20% of the shares in the capital of Opco. Mother holds 80% of the shares in the capital of Opco.

Mother and her three minor children are discretionary beneficiaries of Trust 1.

A trust (Trust 2) holds 20% of the shares in the capital of Newco. Father holds 80% of the shares in the capital of Newco.

Father and his three minor children are discretionary beneficiaries of Trust 2.

Each of the trusts has separate trustees.

The children do not manage the affairs of the corporations.

You asked how the CRA would apply subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) (given that there are three minor children beneficiaries of the discretionary trust) for the purposes of determining whether Opco and Newco are associated.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings and Technical Interpretations.

In the situations mentioned above, subparagraph 256(1.2)(f)(i) does not apply. In such a case and when subparagraph 256(1.2)(f)(ii) applies, the shares in the capital of a corporation of which a trust is deemed at a particular time to be the owner (or is deemed to be owner under subsection 256(1.2)), and are deemed to be the property of each beneficiary whose share of the accumulating income or capital of the trust depends on the exercise by any person of, or the failure of any person to exercise a discretionary power.

Situation 1

In situation 1, it should be determined whether X is the beneficiary of the discretionary trust. To this end, account should be taken of the rules of subsection 248(25) to determine whether X is beneficiary of the discretionary trust. Under the assumptions for situation 1, X would be beneficiary of the discretionary trust.

To prevent the association of Opco and Newco, you indicated that X would renounce X’s interest in the income and capital of the discretionary trust.

The issue of whether the documents X signs would ensure that X would not be considered a beneficiary of the discretionary trust, taking into account paragraph 248(25), is a question of law. In the context of an advance ruling or a tax audit, it would be necessary to confirm, with our Legal Services group, that the documents signed by X were sufficient to no longer consider X as a beneficiary at any time in a taxation year of Opco and Newco (taking into account paragraph 248(25)).

If legally and in accordance with subsection 248(25) X was not the beneficiary of the discretionary trust at any particular time in a taxation year of Opco and Newco, subparagraph 256(1.2)(f)(ii) would not apply to it during the taxation year.

Situation 2

The fact that a minor child is not entitled to income or capital until reaching the age of 18 does not ensure that the child is not considered as beneficiary of the discretionary trust.

Moreover, our position is that, even if the minor child is not entitled to income or capital until reaching the age of 18, the share of accumulated capital is conditional on the fact that a person exercises or fails to exercise discretionary power.

Therefore, under subparagraph 256(1.2)(f)(ii) the minor child would be deemed to own the shares in the capital of Opco held by the discretionary trust.

Under subsection 256(1.3), the deemed shares held by a minor are deemed to be the property of the father or the mother for purposes of determining whether the corporation is associated at a particular time with another corporation that the father or mother or a group of people of which the father or mother is a member has control, directly or indirectly, in any manner whatsoever, unless it can reasonably be considered under the circumstances that the child manages the business and affairs of the corporation and does so without a significant degree of influence by the parent.

For this purpose, we assume that the minor child does not manage the affairs of the corporation. To determine if Newco is associated with Opco, Father would be deemed under subsection 256(1.3) to hold the shares held by the discretionary trust in Opco (because of the presumption in subparagraph 256(1.2)(f)(ii ) applying in respect of the minor child). Thus, Newco and Opco would be associated at a given time during the taxation year under paragraph 256(1)(c).

Our answer would be the same if the trust deed contained no restriction on the allocation of income and capital of the trust in favour of the child or only a restriction on the distribution of income.

Situation 3

Subsection 256(1.3) would apply in this situation to deem that Father holds 20% of the shares in the capital of Opco being all of the shares in the capital of Opco held by Trust 1. Furthermore, Mother would be deemed to own 20% of the shares in the capital of Newco pursuant to subsection 256(1.3) being all of the shares in the capital of Newco held by Trust 2. Subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) will apply to each beneficiary individually so that the capital shares of Opco or Newco would not be counted two or more times.

Therefore, in situation 3, Newco would not be associated with Opco since Father does not hold and is not deemed to hold at least 25% of the shares in the capital of Opco and Mother does not hold and is not be deemed to hold at least 25% of the shares in the capital of Newco.

We hope that our comments are of assistance.

Stéphane Charette, CPA, CMA, MBA
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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Text of Severed Letter

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.Whether an individual is a beneficiary of a discretionary trust after having signed documents to surrender its rights as a beneficiary.
2. Whether the deeming provision in subsection 256(1.3) can apply when the deeming rule in subparagraph 256(1.2)(f)(ii) has applied.
3. When there is more than one child under 18 years of age that are beneficiaries of a discretionary trust, whether the parent is deemed to own the aggregate number of the shares deemed to be owned by every child.

Position: 1. None.
2. Yes.
3. No. If subparagraph 256(1.2)(f)(ii) applied to deem children under 18 years of age to own shares of the capital stock of a corporation held by a discretionary trust, the parent would be deemed to own the number of shares held by the discretionary trust.

Reasons: 1. Whether or not an individual is a beneficiary of a discretionary trust (taking into account subsection 248(25) after having signed some documents to surrender his rights is a legal question. In the context of a technical interpretation, we do not provide any legal opinion.
2. Subsection 256(1.3) applies with respect to shares deemed to be owned pursuant to paragraph 256(1.2)(f).
3. Our position is that the application of the provisions of subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) would be considered from the point of view of each of the beneficiaries, on a person by person basis, with the result that the shares of the corporation would not be "double-counted" in any particular situation.

XXXXXXXXXX 2015-060878
Sylvie Labarre, CPA, CA

Le 8 décembre 2015

Monsieur,

Objet : Sociétés associées

La présente est en réponse à votre courrier électronique du 14 septembre 2015 dans lequel vous nous demandiez notre opinion sur l’application de l’alinéa 256(1.2)f) et du paragraphe 256(1.3) dans certaines circonstances.

À moins d’indication contraire, tous les renvois législatifs dans la présente sont des renvois aux dispositions de la Loi de l’impôt sur le revenu.

Situation 1

X serait bénéficiaire d’une fiducie discrétionnaire. La fiducie discrétionnaire détiendrait des actions du capital-actions d’Opco. X détiendrait la totalité du capital-actions de Newco.

Selon vous, le sous-alinéa 256(1.2)f)(ii) réputerait que X est le propriétaire de toutes les actions du capital-actions d’Opco détenues par la fiducie.

Ainsi Opco et Newco seraient associées l’une à l’autre en vertu de l’alinéa 256(1)(b).

Vous désirez savoir si nous arriverions à une conclusion différente si X signait des documents de renonciation à tout droit courant et futur en tant que bénéficiaire de la fiducie.

Situation 2

Mère contrôlerait Opco en détenant des actions privilégiées du capital-actions d’Opco.

Une fiducie détiendrait la totalité des actions ordinaires du capital-actions d’Opco.

Cette fiducie serait discrétionnaire. Mère et un enfant mineur seraient bénéficiaires de la fiducie. Selon l’acte de fiducie, la fiducie n’attribuerait aucun revenu ni capital à l’enfant mineur avant l’âge de 18 ans.

Père détiendrait la totalité des actions du capital-actions de Newco.

Vous désirez savoir si, dans la situation 2, le sous-alinéa 256(1.2)f)(ii) et le paragraphe 256(1.3) s’appliquerait de sorte qu’Opco et Newco seraient associées. Si non, la réponse serait-elle différente si l’acte de fiducie ne prévoyait aucune restriction sur l’attribution du revenu et du capital de la fiducie en faveur de l’enfant ou seulement une restriction quant à l’attribution du revenu.

Situation 3

Une fiducie (Fiducie 1) détiendrait 20 % des actions du capital-actions d’Opco. Mère détiendrait 80 % des actions du capital-actions d’Opco.

Mère et ses trois enfants mineurs seraient les bénéficiaires de Fiducie 1 qui serait discrétionnaire.

Une fiducie (Fiducie 2) détiendrait 20 % des actions du capital-actions de Newco. Père détiendrait 80 % des actions du capital-actions de Newco.

Père et ses trois enfants mineurs seraient les bénéficiaires de Fiducie 2 qui serait discrétionnaire.

Chacune des fiducies aurait des fiduciaires différents.

Les enfants ne gèreraient pas les affaires des sociétés.

Vous désirez savoir comment l’ARC appliquerait le sous-alinéa 256(1.2)f)(ii) et le paragraphe 256(1.3) (étant donné qu’il y trois enfants mineurs bénéficiaires de la fiducie discrétionnaire) aux fins de déterminer si Opco et Newco seraient associées.

Nos commentaires

La présente interprétation technique offre des commentaires généraux sur des dispositions contenues dans la loi et d’autres lois connexes, le cas échéant. Elle n’a pas comme but de confirmer le traitement fiscal relativement à une situation donnée mettant en cause un contribuable en particulier, mais plutôt de vous aider à le déterminer. Notre Direction ne confirme le traitement fiscal relatif aux opérations données d’un contribuable en particulier que dans le cadre d’une demande de décision anticipée en matière d’impôt sur le revenu présentée de la façon décrite dans la circulaire d’information IC 70-6R6, Décisions anticipées et interprétations techniques en matière d’impôt.

Dans les situations mentionnées ci-dessus, le sous-alinéa 256(1.2)f)(i) ne s’appliquerait pas. Dans un tel cas et lorsque le sous-alinéa 256(1.2)f)(ii) s’applique, les actions du capital-actions d’une société dont une fiducie est à un moment donné propriétaire ou réputée propriétaire en application du paragraphe 256(1.2), sont réputées être la propriété de chaque bénéficiaire dont la part sur le revenu ou le capital accumulés de la fiducie est conditionnelle au fait qu’une personne exerce ou n’exerce pas un pouvoir discrétionnaire.

Situation 1

Dans la situation 1, il faudrait déterminer si X est bénéficiaire de la fiducie discrétionnaire. À cette fin, il faudrait tenir compte des règles du paragraphe 248(25) pour déterminer si X est bénéficiaire de la fiducie discrétionnaire. Selon les hypothèses mentionnées à la situation 1, X serait bénéficiaire de la fiducie discrétionnaire.

Pour empêcher l’association d’Opco et de Newco, vous indiquez que X renoncerait à sa participation au revenu et au capital de la fiducie discrétionnaire.

La question de savoir si les documents que X signerait feraient en sorte qu’il ne serait plus considéré comme étant un bénéficiaire de la fiducie discrétionnaire en tenant compte du paragraphe 248(25) est une question légale. Dans le cadre d’une demande de décision anticipée ou dans le cadre d’une vérification fiscale, il faudrait d’abord s’assurer, auprès de nos Services juridiques, que les documents signés par X sont suffisants pour ne plus considérer X comme étant bénéficiaire à tout moment donné d’une année d’imposition des sociétés Opco et Newco (en tenant compte du paragraphe 248(25)).

Si, légalement et selon le paragraphe 248(25), X n’était pas bénéficiaire de la fiducie discrétionnaire à aucun moment donné d’une année d’imposition des sociétés Opco et Newco, le sous-alinéa 256(1.2)f)(ii) ne s’appliquerait pas à son égard au cours de cette année d’imposition.

Situation 2

Le fait qu’un enfant mineur n’ait pas droit au revenu ni au capital tant qu’il n’a pas atteint l’âge de 18 ans ne ferait pas en sorte qu’il ne soit pas considéré comme étant bénéficiaire de la fiducie discrétionnaire.

Par ailleurs, notre position est que, même si l’enfant mineur n’a pas droit au revenu ni au capital tant qu’il n’a pas atteint l’âge de 18 ans, la part de capital accumulé est conditionnelle au fait qu’une personne exerce ou n’exerce pas un pouvoir discrétionnaire.

Par conséquent, le sous-alinéa 256(1.2)f)(ii) s’appliquerait de façon à réputer que l’enfant mineur est propriétaire des actions du capital-actions d’Opco détenues par la fiducie discrétionnaire.

En vertu du paragraphe 256(1.3), les actions réputées détenues par un enfant mineur sont réputées être la propriété du père ou de la mère pour ce qui est de déterminer si la société est associée à ce moment à une autre société dont le père ou la mère ou un groupe de personnes dont le père ou la mère est membre a le contrôle, directement ou indirectement, de quelque manière que ce soit sauf si, compte tenu des circonstances, il est raisonnable de considérer que l’enfant gère les affaires de la société sans subir, dans une large mesure, l’influence de son père ou de sa mère.

Aux fins de la présente, nous supposons que l’enfant mineur ne gèrerait pas les affaires de la société. Pour déterminer si Newco est associée à Opco, Père serait réputé, en vertu du paragraphe 256(1.3), détenir les actions détenues par la fiducie discrétionnaire dans Opco (en raison de la présomption au sous-alinéa 256(1.2)f)(ii) appliquée à l’égard de l’enfant mineur). Ainsi, Newco et Opco seraient associées à un moment donné au cours de l’année d’imposition en vertu de l’alinéa 256(1)c).

Notre réponse serait la même si l’acte de fiducie ne prévoyait aucune restriction sur l’attribution du revenu et du capital de la fiducie en faveur de l’enfant ou seulement une restriction quant à l’attribution du revenu.

Situation 3

Le paragraphe 256(1.3) s’appliquerait dans la présente situation pour réputer que Père détiendrait 20 % des actions du capital-actions d’Opco, soit la totalité des actions du capital-actions d’Opco détenues par Fiducie 1. Par ailleurs, Mère serait réputée détenir 20 % des actions du capital-actions de Newco en vertu du paragraphe 256(1.3), soit la totalité des actions du capital-actions de Newco détenues par Fiducie 2. Le sous-alinéa 256(1.2)f)(ii) et le paragraphe 256(1.3) s’appliqueraient en fonction de chaque bénéficiaire, de façon individuelle de sorte que les actions du capital-actions d’Opco ou de Newco, selon le cas, ne seraient pas comptées deux ou plusieurs fois.

Ainsi, dans la situation 3, Newco ne serait pas associée à Opco puisque Père ne détiendrait pas ou ne serait pas réputé détenir au moins 25 % des actions du capital-actions d’Opco et que Mère ne détiendrait pas ou ne serait pas réputée détenir au moins 25 % des actions du capital-actions de Newco.

Nous espérons que nos commentaires vous seront utiles.

Stéphane Charette, CPA, CMA, MBA
pour le directeur
Division des réorganisations
Direction des décisions en impôt
Direction générale de la politique législative et
des affaires réglementaires

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.2) - Paragraph 256(1.2)(f) - Subparagraph 256(1.2)(f)(ii)

beneficiary includes beneficially entitled/combined application of 256(1.2)(f)(ii) and 256(1.3), but shares attributed only once]

1st Situation: X, who holds all the shares of Newco, and is a beneficiary of a discretionary trust holding all the shares of Opco (so that X is deemed by s. 256(1.2)(f)(ii) to own such shares), renounces all rights as beneficiary. Does this cause Newco and Opco to not be associated? CRA responded (TI translation):

It would be necessary to take into account the rules in subsection 248(25) to determine if X was a beneficiary of the discretionary trust…[and] to determine from our legal Service that the documents signed by X were sufficient to consider that X was not a beneficiary at any particular time in the taxation year of Opco and Newco (taking into account subsection 248(25).

If [so]…subparagraph 256(1.2)(f)(ii) would not apply… .

2nd Situation: Mother controls Opco through holding the preferred shares and a discretionary trust of which Mother and a minor child are the beneficiaries holds all the common shares. The trust deed provides that the trust cannot distribute income or capital to the child before the age of 18. Father holds all the shares of Newco.

Would Opco and Newco be associated under ss. 256(1.2)(f)(ii) and 256(1.3) – and would it make any difference if the trust deed precluded only the distribution of income before 18? CRA responded:

[E]ven if the minor child has no right to income or capital while not having attained the age of 18, part of the accumulated capital is conditional on the fact that a person does or does not exercise a discretionary power.

Consequently, subparagraph 256(1.2)(f)(ii) would apply to deem the minor child to be the owner of the shares in the capital of Opco held by the discretionary trust.

…[W]e assume that the minor child does not manage the affairs of the corporation. In determining whether Newco is associated with Opco, Father would be deemed, by virtue of subsection 256(1.3), to hold the shares held by the discretionary trust in Opco (by reason of the resumption in subparagraph 256(1.2)(f)(ii)…). Thus, Newco and Opco would be associated… .

The answer would not change with the indicated trust deed variations.

3^rd Situation: 80% and 20% of the shares of Opco are held, respectively, by: Mother; and a trust (“Trust 1”) of which she and her three minor children are discretionary beneficiaries. 80% and 20% of the shares of Newco are held, respectively, by: Father; and a trust (“Trust 2”) of which he and his three minor children are discretionary beneficiaries. Trusts 1 and 2 have separate trustees. The children do not manage the affairs of the corporations. Would Opco and Newco be associated under ss. 256(1.2)(f)(ii) and 256(1.3)? CRA responded:

[S]ubsection 256(1.3) would apply…to deem Father to hold 20% of the shares in the capital of Opco, being all the shares…held by Trust 1. Furthermore, Mother would be deemed to hold 20% of the shares…of Newco by virtue of subsection 256(1.3), being all the shares…of Newco held by Trust 2. Subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) would apply individually in relation to each beneficiary so that the shares…of Opco or Newco, as the case may be, would not be counted two or more times.

Thus…Newco would not be associated with Opco because Father would not hold or be deemed to hold at least 25% of the shares…of Opco and because Mother would not hold or be deemed to hold at least 25% of the shares…of Newco.

Summary Under

Tax Topics - Income Tax Act - Section 256 - Subsection 256(1.3)

no double-counting of shares in applying s. 256(1.3) to shares deemed to be owned by minor trust beneficiaries

Father and Mother each hold 80 shares of Newco and Opco, respectively, and two discretionary trusts, with their three minor children as beneficiaries, hold 20 shares, respectively, of Newco and Opco. S. 256(1.2)(f)(ii) would deem, say, the eldest child to own the 20 share bloc in each corporation and that bloc of shares would then be re-attributed to a parent under s. 256(1.3), so that Newco would be deemed to be owned as to 80 and 20 shares by Father and Mother, respectively, and Opco would be deemed to be owned as to 80 and 20 shares by Mother and Father, respectively.

If the same process were repeated for the other two children, the deemed cross-shareholdings would be increased to 60 shares for each corporation. However, CRA will not do this, stating that the shares “would not be counted two or more times.”

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8 December 2015 External T.I. 2015-0608781E5 F - Associated corporations - discretionary trust

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