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: Acquisition of control in the event of a change of trustees
Position: See responses below.
Reasons: Wording of the Act and previous positions.
ACQUISITION OF CONTROL RULES AND TRUSTEES
Where control of a corporation is acquired by an unrelated person, certain rules apply which deem a year-end to occur, create certain write-downs for tax purposes, and limit loss carry forwards and loss carry backs. These acquisition of control rules are designed to restrict the portability of losses of a corporation between unrelated parties.
CRA has taken the position that an acquisition of control could occur where there is a change of the trustee of a trust. We would like to ask for further guidance as to CRA's position in this regard.
1. In the following example, a Canadian corporation, CanCo, is owned by a trust (which may be an inter vivos or a testamentary trust). Would an acquisition of control occur in the following circumstances:
(a) The trust has one trustee, Mr. A, who resigns and Mr. B takes over as trustee.
(b) The same circumstances as (a), except that Mr. A and Mr. B are related persons.
(c) The trust has two trustees, Mr. C and Mr. D. Mr. D retires in favour of Mr. E.
(d) The trust has three trustees, Messrs. F, G, and H. The trust document requires unanimous decision-making. Mr. H retires in favour of Mr. I.
(e) The trust has three trustees, Messrs. J, K, and L. The trust requires majority decision making. Mr. L retires in favour of Mr. M.
Response:
Based on the decision in M.N.R v. Consolidated Holding Company Limited, where the majority of the voting shares of a corporation are held by a trust, it is the trustees of the trust who have the legal ownership of the shares, who have the right to vote those shares, and who, therefore, control the corporation. Where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts, including the terms of the trust document. However, in the absence of evidence to the contrary, we would consider there to be a presumption that all of the trustees would constitute a group that controls the corporation.
Given our position as summarized above, we would generally take the position that there would be an acquisition of control in each of the situations described in 1(a), (c), (d), and (e). With respect to 1(b), paragraph 256(7)(a) may apply, where shares are acquired by a person related to the former trustee, to deem that there be no acquisition of control.
2. Does it make a difference if the trust is an inter vivos or a testamentary trust?
Response:
Generally, no, except in the circumstances described in 4 below.
3. In the event that there are multiple changes in the trustee in the course of a year, does an acquisition of control occur each time there is a change of trustee?
Response:
Yes, in the event that it is determined that an acquisition of control occurred in more than one occasion over the course of a year, there would be more than one acquisition of control in the year.
4. If one of the trustees dies, does this result in the acquisition of control rules becoming applicable?
Response:
In the event one of the trustees dies, our position with respect to the change in a trustee, as outlined above, would apply in determining whether there is an acquisition of control. However, in the case of an estate, paragraph 10 of IT-302R3 indicates that where the executor, administrator, or trustee of the estate is replaced as a result of that person's death or inability to fulfill her or her functions, control of the corporation will be regarded as remaining unchanged. As indicated in Income Tax Technical News No. 34, the position outlined in IT-302R3 was adopted when a previous version of paragraph 256(7)(a) provided a legal basis for the position. Consideration will have to be given to withdrawing the current position when the bulletin is next revised.
5. If your answer is that in most or all circumstances above an acquisition of control will occur, would you consider making a recommendation to the Department of Finance for an amendment to the Act in order to restrict the circumstances under which this matter may rise?
Response:
As indicated in Income Tax Technical News No. 34, we have raised the matter with the Department of Finance.
6. Is there an effective date as to the application of this policy, and what should taxpayers do who have failed to apply the acquisition of control rules?
Response:
There is no effective date as to the application of this policy. Each taxpayer who has failed to apply the acquisition of control rules will have to evaluate their particular circumstances to determine an appropriate course of action.
Katie Campbell
2011-040193
June 3, 2011
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2011
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2011
Email this Content