Section 74.4

Mr. X and Mrs. X, each owning 50% of the common shares of corporation that is not a small business corporation, effect a s. 51 exchange of their respective shareholdings for the issuance of freeze preferred shares, with a discretionary trust created for each spouse (the Mr. X Trust and Mrs. X Trust), but with discretion to pay income or capital thereof to the other spouse, subscribing nominal and equal amounts for new common shares of the Corporation. Would the equal holding of the common shares by Mr. X and Mrs. X immediately before the freeze, and the equal holding by the Mr. X Trust and Mrs. X Trust after the freeze, result in the intent test in s. 74.4(2) not being satisfied?

After noting that s. 51(1)(c) provided that an s. 51 is deemed, for the purposes of ss. 74.4 and 74.5, to be a transfer of the property exchanged by the taxpayer to the corporation, CRA stated:

[O]ne of the spouses could potentially be entitled to more than 50% of the income of the Corporation because of his or her beneficial interest in both trusts. Accordingly, an estate freeze by Mr. X and Mrs. X in favour of Mr. X Trust and Mrs. X Trust could have the effect of reducing Mr. X's or Mrs. X's income from the Corporation benefiting their spouse. Subsection 74.4(2) could therefore apply to the transfers of property made by Mr. X and Mrs. X if the Purpose Test were satisfied.

CRA confirmed that where an individual exchanges preferred shares received in the course of a previous estate freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation:

• If s. 74.4(2) applied to the original estate freeze (e.g., the distribution restriction in s. 74.4(4) was not complied with), the preferred shares received on the refreeze will be excluded consideration that do not reduce the “outstanding amount” (as determined under s. 74.4(3)) on which the deemed interest benefit is computed under s. 74.4(2).
• If the refrozen preferred shares are redeemed for cash consideration, that consideration will reduce the outstanding amount, but only to the extent of the fair market value of those shares. However, the corporate attribution rules would cease to apply, for example, when the children were no longer minors.

Mr. X effects an estate freeze in favour of a family trust (entailing a s. 51 exchange by him of his shares of Holdco, which is not a small business corporation (SBC), for preferred shares under s. 51(1), and the family trust subscribing a nominal amount for common shares). The s. 74.4(4) exception is unavailable. Mr. X’s spouse and children do not participate in the business of Holdco and none of the split-income exceptions applies to the income received by the beneficiaries from the trust.

Given the application of s. 120.4(2), does s. 74.4(2) not apply in this situation since the main purpose test (the “Purpose Test”) is not satisfied?

CRA responded:

[T]he part of the Purpose Test related to the designated person only turns on the question of whether it is reasonable to consider that one of the main purposes of the transfer made by the individual was to benefit, either directly or indirectly, the designated person, regardless of the tax treatment to the designated person of any income that is part of the benefit the individual was seeking to confer.

Furthermore, where the designated person is a specified individual, as defined in subsection 120.4(1), paragraph 74.4(2)(g) only mitigates the impact, resulting from the application of subsection 74.4(2), on the transferring individual by reducing the amount that the transferring individual is deemed to have received as interest. That reduction is the amount to be included in computing the designated person's income for the year as a taxable dividend that the designated person received, if it is reasonable to consider that it is part of the benefit that the taxpayer sought to confer and is included in computing the designated person’s split income for any taxation year.

As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (the “Initial Trust”) holds the non-voting common shares. The Initial Trust’s beneficiaries are A, his adult children and his wife and its trustees are A, his brother (B) and an arm’s length individual. Now a further estate freeze is effected under which Initial Trust exchanges its shares for preferred shares under s. 51 and a newly-formed discretionary family trust (“New Trust” – also having grandchildren and family corporations as beneficiaries and with a different unrelated individual as the third trustee) subscribes for new non-voting common shares. Is A’s spouse a designated person in relation to the Initial Trust? CRA responded:

[W]whether it is reasonable to consider that one of the main purposes of a transfer of property is to reduce the income of the individual and to benefit, either directly or indirectly, a designated person (the "Purpose Test”) is a question of fact ... .

In view of the fact that subsection 104(2) provides that a trust is deemed to be an individual in respect of the trust property, subsection 74.4(2) could apply to a trust, assuming that all of the conditions for the application of subsection 74.4 are satisfied.

However, only a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.

In light of the foregoing, the Mr. A’s spouse cannot not be a designated person in respect of Initial Trust.

On the other hand, Mr. A's spouse is still a designated person in respect of Mr. A.

Thus ... subsection 74.4(2) could apply to the transfer of property made by Mr. A, in connection with the estate freeze carried out by Mr. A. in favour of Initial Trust, if the Purpose Test were satisfied.

In addition, we are of the view that the question of the application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property effected by this estate freeze was made indirectly by Mr. A through Initial Trust.

Consequently, if it were possible to establish that the Purpose Test was satisfied, subsection 74.4 (2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.

1^st Situation. Mr. and Ms.X are the sole shareholders of Opco and Holdco, respectively. Opco uses excess liquidity to subscribe for preferred shares of Holdco, which has never been a small business corporation (“SBC”). How would s. 74.4(2) apply? CRA responded (TaxInterpretations translation):

[S]ubsection 74.4(2) does not generally apply when it is a corporation, rather than an individual, who transfers or lends property to a corporation. This legislative provision could however apply if it is demonstrated that an individual indirectly, by means of a trust or otherwise, transferred or lent property to a corporation or if subsection 74.5(6) applies.

…[T]he consideration paid by Opco to Holdco for the acquisition of preferred shares in the capital of Holdco would never accrue personally to Mr. X. Consequently, Mr. X would not be considered, for purposes of subsection 74.4(2), to have transferred, directly or indirectly, property to Holdco. …[W]e refer you to…2002-0147325… .

2^nd Situation. Same as 1^st situation except that, rather than subscribing for preferred shares of Holdco, Opco declares a dividend on its common shares (held by Mr. X), which is satisfied by issuing preferred shares whose redemption amount is equal to its liquid assets and whose paid-up capital is nominal. The preferred shares are transferred by Mr. X under s. 85(1) to Holdco in consideration for Holdco preferred shares, and Opco redeems its preferred shares in the same amounts as the 1^st situation. CRA stated:

[T]he transfer by Mr. X of the preferred shares in the capital of Opco to Holdco would represent…a transfer by an individual of property to a corporation other than an SBC. Furthermore, Ms. X would be…a designated person in respect of Mr. X. Consequently, the provisions of subsection 74.4(2) could apply respecting the transfer, to the extent that the other conditions of its application were satisfied.

3^rd situation. Mr. X holds all the shares, having a fair market value of $1M, of Opco, which is not an SBC. Opco declares and pays a dividend on the shares held by Mr. X by issuing preferred shares with a redemption amount of $1M and a nominal paid-up capital. Mr. X’s spouse then subscribes for common shares. CRA stated:

As indicated in [2014-0538041C6 F]…technically subsection 74.4(2) does not apply to the issuance of shares as stock dividends.

Furthermore, the CRA does not generally comment on the application of secton 245 in the context of a request for a technical interpretation… .

1^st Situation. Mr. X instigates an estate freeze for his corporation (Opco), which is a small business corporation (“SBC”) and all of whose common shares end up being held by the “X Trust” (whose beneficiaries are his grown children, spouse and a newly-incorporated corporation (“Holdco”) which is never an SBC and is held by X Trust). In order that Opco can continue qualifying as an SBC, Opco annually pays dividends to X Trust out of its earnings, which allocates and distributes them to Holdco, making a s. 104(19) designation. Would s. 74.4(2) apply? CRA responded (TaxInterpretations translation):

[T]he provisions of subsection 74.4(2) would not apply to the transfer of property by Mr. X to Opco in the course of an estate freeze so long as Opco remained an SBC.

...[A]lthough the payment of a dividend by Opco to Holdco equal to the surplus funds generated in carrying on the business of Opco could be considered a transfer of property, subsection 74.4(2) generally would not apply where it is a corporation, rather than an individual, which transfers or lends property to a corporation. This legislative provision could however apply if it is demonstrated that an individual indirectly, by means of a trust or otherwise, transferred or lent property to a corporation or if subsection 74.5(6) applied. ...[W]e refer you to ...2002-0147325... . Mr. X would not be considered, for purposes of subsection 74.4(2), to have indirectly transferred property to Holdco.

2^nd Situation. Mr. X transfers his business under s. 85(1) to a new corporation (“Opco”) for treasury shares. The other Opco shareholders are his spouse, minor children - and Holdco (which never is an SBC) holding a separate class of shares which are entitled to a discretionary dividend. Mr. and Ms, X, and the children, subscribe for common shares. In order that Opco can continue qualifying as an SBC, Opco annually pays dividends to Holdco out of the surplus funds generated from its operations. CRA stated:

[F]or so long as Opco remains an SBC, [subsection 74.4(2)] would not apply to the transfer of property (the business assets) effected by Mr. X to Opco in the course of incorporating his business, nor ... to the consideration paid by Mrs. X for the acquisition of shares in the capital of Opco. Furthermore, ... Mr. X would not be considered, for purposes of subsection 74.4(2), to have indirectly transferred property to Holdco.

...[T]he consideration paid by Mr. or Mrs. X for the acquisition of shares in the capital of Holdco, which is not an SBC, would technically constitute a transfer of property by an individual (Mr. or Mrs. X) to a corporation other than an SBC (Holdco). Thus, subsection 74.4(2) could technically apply, depending on the other facts and circumstances, to such transfers.

Result of 1st freeze

Trust A (an inter vivos personal trust) holds all the common shares of Opco (a CCPC but not a small business corporation) and Mr. X (who is the sole trustee of Trust A) holds all of its preferred shares as the result of a previous estate freeze transaction. The beneficiaries of Trust A are Mr. X's adult children, their minor children and the adult siblings of Mr. X.

2nd freeze

In a fresh estate freeze transaction, Trust A will exchange its common shares of Opco for preferred shares under s. 51, and common shares will be issued for their fair market value to a new trust (Trust B), whose beneficiaries are the same as for Trust A, plus Mr. X, his ex-spouse and any corporation controlled by one or other of the beneficiaries (other than any corporation in which Trust B has a direct or indirect interest).

Q&A

Who are the individual and the designated persons for purposes of ss. 74.4(2) and 74.5(5)? After referring to the ss. 104(1) and (2) definitions, CRA stated (TaxInterpretations translation):

[T]he individual, for purposes of subsection 74.4(2), would be Trust A.

Respecting who are the objects of the test provided in subsection 74.4(2), which refers to where it may reasonably be considered that where one of the main reasons for a transfer or a loan of property to a corporation may be to reduce the income of the transferor and to benefit a designated person in respect of the individual, we are of the view that a designated person in respect of Trust A would include, in this situation, a person under 18 years who would be beneficially interested in Trust A if subsection 248(25) applied without taking into account clauses (b)(iii)(A)(II) to (IV), or a person under 18 years who did not deal at arm's length with a person who would be beneficially interested in Trust A if subsection 248(25) applied without taking into account clauses (b)(iii)(A)(II) to (IV). This follows from the definition of designated person in subsection 74.5(5), and from paragraph 251(1)(b) which indicates that a taxpayer and a personal trust are deemed not to deal at arm's length.

Consequently…the grandchildren of Mr. X are "designated persons" respecting Trust A.

Mr. X holds all 100 of Opco's Class A shares with a fair market value of $1,000,000 and nominal ACB and PUC. Opco pays a stock dividend comprising Class B shares which have a retraction right for $900,000; the 100 Class shares are exchanged for estate freeze Class C preferred shares; and the family trust subscribes for Class A shares for $10. (Consistently with 2003-0004125 F) would s. 74.4(2) not apply to the Class B shares issued on the stock dividend? What would be the safe income attributable to the Class B shares issued as the stock dividend? If the shares of the corporation instead were held equally by three shareholders and the steps otherwise were the same except that the new common shares would be issued to three family trusts, would s. 15(1.1) would apply to the stock dividend. CRA responded (Tax Interpretations translation):

In general, a stock dividend paid by a corporation does not constitute in itself a transfer directly or indirectly (by means of a trust or otherwise) to a corporation by an individual. Thus, the provisions of ITA subsection 74.4(2) would not apply so as to calculate deemed income on the value of the Class B shares received in satisfaction of the stock dividend.

In contrast, the exchange of the 100 Class A shares of Opco for preferred Class C freeze shares would constitute a transfer made directly or indirectly (by means of a trust or otherwise) to a corporation by an individual for purposes of ITA subsection 74.4(2).

Holdco's Active Shareholders set up a corporate asset protection structure and introduced certain key employees into the shareholding structure, through the following steps:

(i) creation of a new family trust by each Active Shareholder involved in Holdco's business, whose spouse and minor children were the beneficiaries;

(ii) Opco incorporated a new corporation ("Group Opco") for the protection of Opco's assets;

(iii) Group Opco created a new corporation ("Opco 2") for Opco's day-to-day operations;

(iv) Opco transferred all of its business assets (excluding excess cash and investments) to Group Opco, on as. 85(1) rollover basis in consideration for the assumption of liabilities, a promissory note and preferred rollover shares of its capital stock (i.e. non-voting, dividend-paying, redeemable, non-voting shares for an amount equal to the value of the consideration received on the issue of those shares);

(v) Group Opco transferred to Opco 2, on a s. 85(1) rollover basis, its accounts receivable, inventory and goodwill in consideration for the assumption of accounts payable, and the issuance to Group Opco of a note and common shares.;

(vi) The newly created family trusts and certain key employees subscribed for common shares of Group Opco for a nominal amount;

(vii) Group Opco purchased for cancellation the common shares of its capital stock held by Opco for an amount equal to the subscription price for the latter;

(viii Holdco and Opco amalgamate;

(ix) each family trust shareholder of Holdco was wound-up and its assets (i.e. common shares of the capital stock of Holdco) were distributed to a holding corporation controlled by the Active Shareholder who had proceeded with a freeze of their interest in Holdco in favour of a family trust.

CRA stated that “it appears, prima facie, that the transactions described in [(iv)] above would not result in the application of subsection 74.4(2), even at a time when Group Opco and Opco 2 would no longer qualify as an SBC.

In Situation 1, Mr. A holds all the shares of Opco, being 100 common shares having an FMV of $800,000. Opco declares and pays to Mr. A a stock dividend comprising 800 preferred shares with a redemption amount and FMV of $1000 per share, so that the FMV of the common shares is reduced to $100. Immediately thereafter, a trust for his children subscribes for 1000 common shares of Opco for $1000. Does s. 74.4(2) apply? CRA responded:

[I]n general, a stock dividend paid by a corporation is not in itself a transfer made directly or indirectly (by means of a trust or otherwise), to a corporation by an individual.

Mr. X would exchange all of the common shares of X Inc., which is not a small business corporation, for non-voting preferred shares, and (in Situation 2) a discretionary family trust for the benefit of his two adult children then subscribes for 90.1% of the (new) common shares of X Inc. and his wife ("Ms. X") subscribes for 9.9% of the common shares.

In Situation 3, following the common-for-preferred exchange by Mr. X, the common share subscription for 90.1% of the common shares was by a discretionary trust for the benefit of Ms. X and Mr. X's two adult children, and Ms. X subscribed directly for 9.9% of the common shares.

S. 74.4(2) would not apply in Situation 2 because the children, as adults, were not "designated persons" and because, although Ms. X would be a "designated person", she would not be a "specified shareholder."

In Situation 3, Ms. X would be a specified shareholder under para. (e) of the s. 248(1) definition because her share of the trust income or capital depended on the exercise or non-exercise of a discretionary power - so that, under para. (e), she would be deemed to own each share of X Inc. owned by the trust. As she also would be a designated person, s. 74.4(2) could therefore apply to the extent that it would be reasonable to consider that one of the main purposes of the transfer of Mr. X's common shares to X Inc. as part of the exchange was to reduce Mr. X's income and to directly or indirectly benefit, through a trust or otherwise, Ms. X, as a "designated person" with respect to Mr. X. However, s. 74.4(2) would cease to potentially apply from the death of Mr. X, because she would thereupon cease to be a designated person.

The minor children become the holders of the non-voting common shares of a Holdco, their parents subscribe for shares of Opco and Holdco acquires, as its only share of Opco, a single discretionary dividend share on which it will receive periodic distributions in order to purify it for SBC purposes. CCRA indicated that the share subscriptions by the parents constituted transfers to corporations for s. 74.4(2) purposes, and that it seemed unlikely that Holdco would qualify as an SBC.

Subject to s. 74.4(4), the provisions of s. 74.4(2) will apply to a typical estate freeze whether it utilizes s. 85(1) or s. 86.

"In a situation where subsections 74.1(1) and 74.2(1) of the Act apply to attribute to an individual the income or loss from transferred property and the taxable capital gain or allowable capital loss arising from the property, it would appear to us that one cannot generally say that one of the main purposes of the transfer of the property by the individual to his or her spouse is to reduce the income of the individual and to benefit the spouse. Therefore, provided that subsections 74.1(1) and 74.2(1) of the Act apply, and subsection 74.5(11) of the Act does not apply, then subsection 74.4(2) of the Act would not normally apply to deem the individual to have received an amount as interest."

Where a holding company amalgamates with its operating subsidiary, there will be considered to be a "transfer of property" to the amalgamated corporation for purposes of s. 74.4 if, as a result of the amalgamation, shares of the holding company are cancelled by it and new shares are issued.

"Technically the application of subsection 74.4(2) of the Act could change from time to time if a corporation moved from being a small business corporation to a non-small business corporation and back to a small business corporation."

Where a corporation ("A") owned by an individual amalgamates with a second corporation ("B") owned by a trust for the benefit of the individual's infant children, s. 84(9) of the Act would result in a disposition of shares of A to Amalco if, as a result of the amalgamation, shares of A were cancelled by A and new shares were issued. In such event, there would be considered to be a "transfer of property" to Amalco for purposes of s. 74.4. The individual would not be regarded as having transferred property of A indirectly to Amalco.

S.74.4(2) would not apply where a corporation (as opposed to an individual) transfers or loans property to another corporation unless an individual may be said to have indirectly transferred or loaned property to the other corporation, or s. 74.5(6) is applicable.

Where one's spouse guarantees a bank loan made to an investment company owned equally by both spouses, s. 74.5(7) will not permit the interest payments made to the bank by the investment company to be deducted when making the calculation under s. 74.4(2)(e), because the guarantor will not be deemed to have received such interest payments. However, the purpose test in s. 74.4(2) will not be satisfied only by the fact that an individual guarantees an arm's length loan made by a bank at a commercial rate to a corporation of which his spouse owns not less than 10% of the issued shares of one class.

There is no provision for a reduction in the amount of attributed income where the income actually earned by the corporation is less than the prescribed rate.

Any rights or dividend entitlements attached to preferred shares held by an individual would not by themselves be indicators that a particular transaction does not benefit a designated person.

The fact that the property transferred to the corporation does not produce income (e.g., it is vacant land) may be an indication that the reduction of the transferor's income was not one of the main reasons for the transfer.

The purpose test in s. 74.4(2) must be applied separately to each transfer of property, with the result that imputed income on a transfer which does not meet the purpose test effectively cannot be off-set by excess income received as the result of a transfer of property that does not violate the purpose test.

An individual exchanges preferred shares received in the course of a previous estate freeze for newly-issued preferred shares with a redemption amount equal to the current (lower) equity value of the underlying corporation

If s. 74.4(2) applied to the original estate freeze, the preferred shares received on the refreeze do not reduce the “outstanding amount” (as determined under s. 74.4(3)) on which the deemed interest benefit is computed under s. 74.4(2).

Furthermore, if the refrozen preferred shares are redeemed, the “outstanding amount” is only reduced to the extent of the value of those shares, leaving a potential indefinite “outstanding amount” on which the corporate attribution rules could continue to generate deemed interest income. Does CRA agree?

CRA agreed with the above analysis (but noted that usually an estate-freeze would be structured to avoid s. 74.4(2), e.g. by meeting the requirements of s. 74.4(4).)

Confirming the first point, CRA indicated that if an estate freeze is subject to s. 74.4(2), the deemed interest benefit is computed based on the outstanding amount determined under s. 74.4(3), and the shares received on the refreeze constitute excluded consideration as defined in s. 74.4(1) – so that such consideration does not reduce the outstanding amount under 74.4(3).

Confirming the second point, CRA agreed that the redemption of refrozen shares for cash consideration would reduce the outstanding amount, but only to the extent of the FMV of those shares. However, the corporate attribution rules would cease to apply, for example, when the children were no longer minors.

A discretionary inter vivos family trust (the “Old Trust”), which was approaching its 21^st anniversary, had provisions in its declaration of trust which contemplated that, prior to that anniversary, the trustee would make an irrevocable declaration establishing the respective shares to the trust fund of the family beneficiaries, so that the trust fund would be distributed to those beneficiaries except those who were “designated persons” (i.e., grandchildren who were minors), whose respective shares as so determined would instead be held for them until they attained the age of majority. Designated person status was relevant under s. 74.4 given that the Old Trust had subscribed for common shares of a holding company (ACO 1), which had been formed to hold shares held by the family patriarch (Mr. A) of a Canadian public company (Pubco), in connection with an estate freeze transaction. After an amalgamation of ACO 1 to form ACO 2, the Old Trust transferred its common shares of ACO 2 to Holdco for Holdco common shares.

In order to address “ambiguities” in the declaration of trust for Old Trust, a judgment was obtained from the Quebec Superior Court declaring that the ambiguities were resolved as sought by the trustee. All the assets of the Old Trust (being mostly the common shares of Holdco) were transferred to a new trust (“New Trust”), whose trustee was the same “Initial Trustee,” and whose terms were “for all practical purposes” the same as for the Old Trust but “adjusted to take into account the conclusions of the declaratory judgment rendered.”

CRA ruled that this transfer was deemed not to be a disposition under the exception in para. (f) of the s. 248(1) disposition definition (and so that s. 248(25.1) deemed the new trust to be a continuation of the old), and also provided an opinion that the making by the trustee of the designation, which was deemed under the New Trust terms to become irrevocable immediately before the 21^st anniversary of the Old Trust (or on him ceasing to be a trustee, if sooner), thereby causing all the interests in the new trust to indefeasibly vest in the beneficiaries in accordance with their declared shares, did not detract from the minor grandchildren continuing to comply with s. 74.4(4)(b). In particular, CRA opined that provided that the terms of the Deed of Trust for the new trust are such that a designated person beneficiary may not receive or otherwise obtain the use of the income or capital of the trust before the date of death of Mr. A, the irrevocable determination respecting all interests in the capital and income of the new trust will not, by itself, result in the requirements of s. 74.4(4)(b) not being satisfied respecting the transfer of the shares of Pubco to ACO 1 described above.

underline;">: Scenario 1.

X holds all the common shares of Opco. An inter vivos trust for the minor children of X ("Trust") holds all the common shares of Holdco. X transfers all his common shares of Opco to Opco in consideration for preferred shares of Opco and, at the same time, Holdco subscribes for common shares of Opco. Does s. 74.4(a) require that the trust hold the shares of the transferee corporation directly?

Scenario 2

X holds all the common shares of Opco 1 and 2, and Opco 1 holds the preferred shares of Opco 2. X transfers all his common shares of Opco 1 to Opco 1, and of Opco 2 to Opco 2, in consideration for preferred share of Opco 1 or Opco 2, as the case may be and, at the same time, an inter vivos trust for the minor children of X ("Trust") subscribes for common shares of Opco 1 and Opco 2. Is s. 74.4(a) satisfied respecting the transfer made by X to Opco 2 as the trust holds shares of Opco 2 both directly and indirectly through Opco 1? CRA responded (TaxInterpretations translation):

… Scenario 1…[T]he condition provided in paragraph 74.4(4)(a) would not be satisfied by reason of the shares in the issued share capital of Opco not being held by Trust but rather by Holdco. …[T]his situation could be corrected if Trust, rather than Holdco, subscribed for the new common shares in the capital of Opco.

… Scenario 2…[T]he designated person would have two interests in Opco 2… .

Thus, respecting the interest which the designated person would have in Opco 2 by means of Opco 1, the condition stipulated by paragraph 74.4(4)(a) would not be satisfied because the preferred shares in the capital of Opco 2 would be held by Opco 1, and not directly by Trust.

An individual ("Individual") first implemented an estate freeze, whereby his participating shares of Opco were converted into preferred shares, and a personal trust ("Trust1"), whose beneficiaries were the Individual’s children ("Child1" and "Child2"), subscribed for participating shares. Some years later, a second freeze is implemented, whereby the participating shares of Opco held by Trust1 are converted into preferred shares, and a personal trust ("Trust2"), whose beneficiary is Child1, subscribes for participating shares. The terms of Trust1 and Trust2 contain the restrictions described in s. 74.4(4).

CRA confirmed that the condition described in s. 74.4(4)(a) would be met, even though Child1 would be the beneficiary of two trusts holding shares of Opco (“subsection 74.4(4) would not be inapplicable solely because Child1 would be beneficially interested in two separate trusts holding shares of Corporation”).

Where the grandfather of the taxpayer settles a trust of which the taxpayer is a beneficiary, and the taxpayer's father contributes shares of a corporation to the trust, the conditions in 74.4(4) will be met if the taxpayer has no other interest in the corporation, he is only entitled to the income and capital of the trust after his father's death and he does not receive or otherwise obtain the use of any of the income and capital of the trust while he remains a designated person in respect of his father. If his father dies before he attains 18 years, s. 74.1(2) may apply to deem his revenue from the trust to be his grandfather's revenue.