11 July 2006 External T.I. 2006-0177781E5 - Association - Deemed Ownership of Shares

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: Whether subparagraph 256(1.2)(f)(ii) would operate to deem certain beneficiaries of a trust to own all the shares of a particular corporation.

Position: Yes.

Reasons: The law.

XXXXXXXXXX Michael Cooke
2006-017778
July 11, 2006

Dear XXXXXXXXXX:

Re: Subparagraph 256(1.2)(f)(ii) of the Act

This is in response to your letter dated March 21, 2006, wherein you requested our opinion on the application of the above-noted provision of the Income Tax Act ("the Act") to the fact situation described in your letter.

In your letter, you indicate that an individual, Mr. A, owns 100% of the shares of Aco while Mr. A's spouse, Mrs. A, owns 100% of the shares of Bco. Mr A and Mrs. A have an adult child ("Child").

Mr. A will establish an inter vivos trust ("Trust") having terms that will comply with clause 73(1.01)(c)(iii)(A) of the Act.

The terms of Trust provide that:

(a) during Mr. A's lifetime, Mr. A is entitled to all of the income of Trust and so much of the capital as determined by the trustee in his/her discretion;

(b) should Mrs. A survive Mr. A, Mrs. A is entitled to all of the income of Trust and so much of the capital as determined by the trustee in his/her discretion; and

(c) should Mrs. A predecease Mr. A, then upon Mr. A's death all of the remaining capital of Trust is to be distributed to Child.

You also ask if our answer would be different if the term described in (b) above provided that should Mrs. A survive Mr. A, all of the remaining capital of Trust must be distributed to Mrs. A. You indicate that since Mrs. A's share of the capital from the Trust is dependent upon "the exercise by any person of, or the failure by any person to exercise, any discretionary power" that subparagraph 256(1.2)(f)(ii) would appear to apply to deem Mrs. A to own all the Aco shares. Similarly, you are also of the view that since Child's share of the capital from the Trust is also dependent upon such "discretionary power" that subparagraph 256(1.2)(f)(ii) would appear to apply to deem Child to own all the Aco shares.

Your request appears to relate to either a proposed transaction or a completed transaction. Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5 (IC-70-6R5) dated May 17, 2002. However, if the situation relates to a completed transaction a request for the Canada Revenue Agency's views must be made to your local Tax Services Office. Notwithstanding the above, we offer the following comments.

It is our opinion that in the fact situation described above, subparagraph 256(1.2)(f)(ii) would apply to deem Mrs. A and Child to own all the Aco shares. This is because the amount of the Trust's capital available for distribution to a beneficiary in a year subsequent to Mr. A's death depends on the trustee's discretion during a period prior to Mr. A's death. Our opinion would not change if the term of the Trust described in (b) above was modified to the alternative wording that you have suggested.

Our comments are provided in accordance with the practice described in paragraph 22 of IC-70-6R5.

Yours truly,

David Palamar
Manager
Corporate Reorganizations Section II
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch