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5 October 2018 APFF Roundtable Q. 10, 2018-0768811C6 F- Related business and subsection 120.4(1)-- summary under Clause (c)(i)(B) Summary Under Tax Topics- Income Tax Act- Section 120.4- Subsection 120.4(1)- Related Business- Paragraph (c)- Subparagraph (c)(i)- Clause (c)(i)(B) beneficial interests in discretionary trusts holding shares of a corporation with a mooted related business must be valued The definition of “related business” – (c)(i)(B) references a business of a corporation where a source individual owns property “that derives, directly or indirectly, all or part of its fair market value” from shares of the corporation. ... CRA responded: The property referred to in clause (c)(i)(B) of the definition of "related business" in paragraph 120.4 may include, inter alia, shares of the capital stock of a corporation, interests in a partnership or interests in a trust. … An interest in a trust is property for the purposes of the definition of "related business" in subsection 120.4(1), regardless of whether the trust is a wholly discretionary or non-discretionary trust. ...

CRA indicated that such tax was inapplicable given that "split income" – para. ... (e) excluded taxable capital gains realized on such shares – and given that under s. 96(1)(f), partnership income retained its nature and character when allocated to the partners. ...

In responding affirmatively, CRA noted (as per its summary) that “[d]espite Gillette … we have repeatedly stated that the term "person connected with a shareholder of a particular corporation" in subsection 15(2.1) can include a partnership,” and further stated: Since … the partnership and the corporation are owned by the same two individuals, we are led to believe that these individuals act in concert and control the partnership together, so that they are not dealing at arm's length with the partnership. ...

CRA responded: Deemed interest income under … Regulation 7000 debt obligations is not income of the trust under the Civil Code. ... However … we allow a deduction pursuant to subsection 104(6) in respect of deemed income if the terms of the trust indenture are such that the trustee is required to pay an amount equal to that income to the beneficiary, or if the trustee may, under the trust indenture, pay or make payable an amount equal to the amount deemed to be income under the I.T.A., if the trustee exercises that discretion irrevocably and unconditionally before the end of the trust's taxation year. ...

., s. 74.1) of the attributed income in the hands of the income transferor were inserted for greater certainty, and that the same dividend cannot be received by two persons at once – with the implication that income attributed to a trust contributor under s. 75(2) is not income of the trust even in the absence of such a specific exclusion. ... Reg. 204 imposes a requirement to file a T3 return where the trustee has control of, or receives, income, gains, or profits in the trustee’s fiduciary capacity – even if the Trust computes nil income, e.g., because of the application of s. 75(2). ...

CRA responded: Subsection 125(5.2) … applies where the corporations are related to each other, one corporation (directly or indirectly) transfers assets to the other corporation and one of the reasons for the transfer can reasonably be considered to be to reduce the amount of the adjusted aggregate investment income of the associated group for the purposes of the passive income reduction rule in paragraph 125(5.1)(b). Whether subsection 125(5.2) would apply in any given situation remains a question of fact …. ...

The definition of “pension income” in s. 118(7) – (a)(iii) refers inter alia to “a payment out of or under a registered retirement income fund.” CRA did not consider that this wording was sufficient to render a payment deemed by s. 146.3(6) to have been paid out of a RRIF to thereby qualify as pension income, stating: For an amount to be considered as “a payment out of or under a registered retirement income fund” for the purposes of subparagraph (a)(iii) of the definition of "pension income" in subsection 118(7), the amount must be paid in satisfaction of an obligation between the issuer and the annuitant of a RRIF. … [A]n amount deemed to be received under subsection 146.3(6) by the deceased last annuitant of a RRIF is not a payment provided out of or under a RRIF. ...

.”, CRA stated: Folio S1-F5-C1 … states that “[i]n the case of a closely-held corporation (for example, where there are two or three unrelated shareholders, none of which individually controls the corporation) the CRA considers that there is a presumption that the shareholders of such a closely-held corporation will act together to control the corporation. ... On the basis of the limited facts submitted … A Corp. and B Corp. could a priori be considered not to be dealing at arm's length with X Corp. ...

Thus, to the extent that the applicable corporate law allows the corporation to pay a separate dividend on a series of shares of a given class of its capital stock … the election provided for in subsection 83(2) could be made with respect to the dividend that became payable on that series. Furthermore … if it were the case that certain reorganizations or conversions of shares carried out through a transaction, or as part of a series of transactions, one of the main purposes of which is to enable shareholders to receive capital dividends, then the application of subsection 83(2.1) should be considered. ...

[Reg.] 2101 … requires the corporation to file with the Minister, inter alia, the prescribed form and a certified copy of the resolution …. ...