Stan Shadrin, Manu Kakkar, David Carolin, "Application of Part IV Tax to Amalgamations of Companies Owned by Trusts with Corporate Beneficiaries", Tax for the Owner-Manager, Vol. 22, No. 1, January 2022, p. 1

CRA position on year-end timing of s. 104(19) dividend (p. 1)

  • Per 2012-0465131E5, 2016-0647621E5 and 2018-0757591I7, a dividend received and paid by a trust in a taxation year of the trust is considered to have been received by the beneficiary at the end of that year, so that the dividend payer and a corporate beneficiary need to be connected at that time in order for Part IV tax not to apply.

Example (p.1)

  • Suppose that on November 30, 2020, Opco 1 (owned, like Opco 2, by a resident trust) pays a dividend to the trust, which immediately distributes the funds to Benco, which is a corporate beneficiary whose shareholder (Mr. X, also a trust beneficiary) is the trustee. The next day (on December 1) Opco 1 and Opco 2 amalgamate to form Amalco.

Absence of a continuity rule for horizontal amalgamations may engage Part IV tax for family dividends paid through a family trust (p. 2)

  • Given that Benco has no direct ownership of Opco 1, so that the 10% ownership test in s. 186(4)(b) cannot be satisfied, whether the dividend deemed under s. 104(19) to be received by Benco on December 31 is subject to Part IV tax, turns on whether, pursuant to s. 186(2), Opco 1 was controlled by Benco (and they thus were connected). However, given that on December 31 (which is the date on which the connected status needs to be determined, according to the above CRA position), Opco 1 no longer existed, Benco and Opco 1 would appear to not be connected on that date.
  • Under s. 87(2.11), the new corporation is deemed to be a continuation of the predecessor parent for the purposes of applying Part IV “in respect of” that particular corporation. This may suggest that the corporate beneficiary receiving the dividend from the predecessor receives Part IV tax relief. However, the phrase “applying . . . Part IV . . . in respect of the particular corporation” in subsection 87(2.11) might not extend to the corporate beneficiary of the trust.
  • Either way, s. 87(2.11) applies only to vertical amalgamations, and not to the amalgamation of the two sisters held by the trust. Thus, given that Opco 1 and Benco are not connected on December 31, the dividend paid by Opco 1 to the trust prior to amalgamation and then allocated by the trust to Benco is subject to Part IV tax.

A horizontal amalgamation may cause a dividend paid to another family corporation through a trust to be subject to Part IV tax (pp. 1-2)

  • CRA considers that a dividend received a trust in a trust taxation year and pushed out to a beneficiary under s. 104(19) is not received by the beneficiary as a dividend until the end of that year.
  • Suppose that on November 30, 2020, Opco 1 pays a dividend to its wholly-owning trust shareholder, which immediately distributes the funds to Benco (a corporate beneficiary). The next day Opco 1 amalgamates with its sister corporation (also owned by the trust.
  • Whether the dividend deemed under s. 104(19) to be received by Benco on December 31 is subject to Part IV tax, turns on whether, pursuant to s. 186(2), Opco 1 was controlled by Benco (and they thus were connected) on December 31. However, Opco 1 no longer existed on that date, so that Benco and Opco 1 would appear to not be connected on December 31.
  • Under s. 87(2.11), a new corporation arising on a vertical amalgamation is deemed to be a continuation of the predecessor parent for the purposes of applying Part IV “in respect of” that particular corporation. This may suggest that the corporate beneficiary receiving the dividend from the predecessor receives Part IV tax relief. However, be that as it may, s. 87(2.11) provides no assistance where, as here, there was a horizontal amalgamation.
  • Accordingly, it is suggested that the dividend paid by Opco 1 to the trust prior to amalgamation and then allocated by the trust to Benco is subject to Part IV tax.