Principales Questions: A personal trust (Trust) is the sole shareholder of a corporation (Opco). Another corporation (Gesco) is a beneficiary of the trust. The end of the taxation years of Trust and Opco is December 31 and September 30 for Gesco. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to Trust and on the same day Trust remits the amount to Gesco.
1) When does Opco have to be connected to Gesco for the calculation of Part IV tax by Gesco? 2) How would Gesco calculate Part IV tax if after September 20, 20X1 but before December 31, 20X1 Trust disposed of all the shares of Opco to a third party ? 3) What would be the consequences for Gesco for the calculation of Part IV tax if Gesco is not a beneficiary of Trust on December 31, 20X1? 4) What would be the consequences for Gesco for the calculation of Part IV tax if after September 20, 20X1 Gesco is a beneficiary of Trust but ceased to be controlled by a person that is not dealing at arm’s length with Opco?
Position Adoptée: 1) To be valid, a designation under subsection 104(19) has to be made in Trust’s tax return. The amount of taxable dividend designated by Trust is deemed to be received by the beneficiary (Gesco) at the time that is the end of the taxation year of Trust in which the dividend was received by Trust. A connected relationship has to be determined at the time the beneficiary is deemed to have received the taxable dividend, which is at the end of the taxation year of Trust. 2) At the end of the taxation year of Trust, Opco would not be connected to Gesco. If Trust designates the amount of taxable dividend under subsection 104(19) received from Opco to Gesco in its December 31, 20X1 tax return, Gesco would be subject to Part IV tax under paragraph 186(1)(a) in its September 30, 20X2 tax return. 3) Under subsection 104(13), there shall be included in computing the income for a particular taxation year of a beneficiary (Gesco) under a trust such part of the amount that, but for subsections 104(6) and 104(12), would be the trust’s income for the trust’s taxation year that ended in the particular year as became payable in the trust’s year to the beneficiary. Since Gesco was a beneficiary of Trust when Trust made the payment, Trust may designate under subsection 104(19) the amount of $5,000 to Gesco to be a taxable dividend. If on December 31, 20X1, Opco is connected to Gesco by virtue of subsection 186(4), paragraph 186(1)(a) would apply, otherwise paragraph 186(1)(b) would be applicable. 4) Under paragraph 25(1)(b) a taxpayer and a personal trust are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV). Trust and Gesco are not dealing at arm’s length. Since more that 50% of the shares of Opco are owned by Trust, and Trust is not dealing at arm’s length with Gesco, consequently Gesco controls Opco pursuant to subsection 186(2). Accordingly, under paragraph 186(4)(a), Opco is connected to Gesco. If Trust designates, under subsection 104(19), the amount of taxable dividend received from Opco to Gesco, Gesco would be subject to Part IV tax under paragraph 186(1)(a) in its December 31, 20X2 tax return. If there is no designation by Trust under subsection 104(19), the amount received by Gesco would not be a taxable dividend and Gesco would not be subject to Part IV tax.
Raisons: Application of the Act and previous positions.
