Subsection 191.1(1) - Tax on taxable dividends
18 October 89 Meeting with Quebec Accountants, Q.4 (April 90 Access Letter, ¶1166)
Where a shareholder holds identical shares of a corporation some of which are taxable preferred shares and some of which were issued before 1987, and less than all of the shares are redeemed, the shareholder and the corporation may decide which of the shares will be considered to have been redeemed first. The choice must be made at the time of the redemption. Although a share certificate merely proves that its holder is entitled to the shares described therein and does not allow distinctions between those shares, if separate certificates have been issued for the two sub-categories of shares, then the apparent intention of the parties is that the cancelled certificate represents the redeemed shares. If there is no indication of the intent of the issuer or of the holder, RC will consider the taxable preferred shares to have been redeemed first.
Austin del Rio, "Part VI.1 Tax on Dividend Paid Through Family Trust", Tax for the Owner-Manager, Vol. 19, No. 3, July 2019, p. 9
Structure for example (p. 9)
… Opco) has several shareholders. These include (1) Mr. X, who operates the business; (2) a family trust; and (3) a holding corporation (Holdco) controlled by Mr. X. … Mr. X owns voting preferred shares, allowing him to control Opco. The trust owns non-voting common shares and preferred shares, and Holdco owns preferred shares. Opco issued the preferred shares to the trust as part of a previous estate freeze. The trust's preferred shares have low PUC and ACB and are subject to a price adjustment clause. The trustees of the trust are Mr. X and an independent trustee. The trust's beneficiaries are Mr. X, his spouse, his lineal descendants, corporations controlled by a beneficiary of the trust, and other inter vivos trusts in favour solely of other beneficiaries of the trust … . Opco wants to redeem the preferred shares held by the trust; the trust will then allocate the resulting deemed dividend to Holdco… .
Estate freeze exemption in s. 191(4) if no price-adjustment clause (p. 9)
An exemption applies if the dividend arises upon the redemption of certain qualifying freeze shares. … [T]he CRA has taken the position that it will not apply if the redemption price of the freeze shares is subject to a price adjustment clause…see…59342… .
When Opco redeems the preferred shares, the trust will allocate the dividend to Holdco and make the designation under subsection 104(19). However, the trust will still be considered to have received the dividend for certain purposes of the Act…..
Likely requirement for Holdco to have a substantial interest independent of trust interest (p. 10)
[T]he CRA appears to have left open the possibility that as long as both the trust and Holdco are shareholders and hold a substantial interest in Opco, Part VI.1 tax should be avoided.
…Holdco is a direct shareholder of Opco and should be related to Opco by virtue of the common control of Mr. X … . Thus, Holdco should have a substantial interest in Opco.
Whether trust has a substantial interest (p. 10)
[T]he CRA has confirmed that a trust will be related to a person if that person is related to all of the trustees of the trust (2009-0311891l70…and 2002-0117885…). Thus, Mr. X must maintain control of Opco, and the independent trustee should be a person related to Mr. X… .
[In addition] every beneficiary must be related to every other person who is beneficially interested in the trust (other than registered charities). For the purposes of this test, aunts, uncles, nieces, and nephews are deemed to be related to one another, and rights to acquire an interest in another person are ignored (paragraph 191(3)(d))….
[A]ny corporate beneficiaries of the trust will be controlled by another beneficiary and should also be related (subparagraphs 251(2)(b)(i) and (iii)).
… [A]ny trusts that are beneficiaries of the trust will likely be related when the trustees of such trusts are related to the other beneficiaries of the trust. …
[U]nrelated trusts may still be beneficially interested in the trust, even before their creation….due to the broad meaning of “beneficially interested,” … [in s.] 248(25)… .