Where a private foundation or relevant persons own more than 20% of the shares of any class of shares of a corporation (the “excess corporate holdings percentage” (“ECHP”) as defined in s. 149.1(1)), it is obligated to divest itself of the excess shares (the “divestment obligation percentage” (“DOP”)). Under s. 149.2(5)(b), shares are acquired by it by bequest will be allocated to the 5th subsequent taxation year after that of the acquisition so that the DOP only occurs in that 5th year.
However, instead of using a will, Mr. A, who is a relevant person respecting a private foundation, settles his freeze shares of a private corporation on an alter-ego trust under s. 73(1), with the trust terms providing that the residue of the trust will be distributed to the private foundation on his death. Will the private foundation be subject to s. 188.1(3.5) such that it will be treated as owning a portion of the freeze shares? CRA responded:
The excess corporate holdings regime … places limits on a private foundation’s share ownership that also takes into account the holdings of any relevant person (defined in subsection 149.1(1) to generally mean a person not dealing at arm's length with the foundation).
Subsections 188.1(3.3) to (3.5) apply for the purposes of subsection 149.1(1) and section 149.2, and generally apply in respect of indirect holdings of shares or certain other interests in a corporation by a private foundation or a relevant person through an interest in a trust. More specifically, subsection 188.1(3.5) deems a private foundation (or, in certain circumstances, a relevant person in respect of the foundation) to own shares that are actually held by a trust, in proportion to the value of the foundation's proportionate interest in the trust, where the … conditions in subsection 188.1(3.3) are met at a particular time in a taxation year … .
…Whether subsections 188.1(3.3) to (3.5) apply to a particular situation is a mixed question of fact and law … . Given the broad nature of these provisions, where a private foundation is a beneficiary under an alter-ego trust, consideration must be given to subsections 188.1(3.3) to (3.5) for the purposes of determining the private foundation’s excess corporate holdings percentage and divestment obligation percentage for a taxation year.