Section 251.1

The superficial loss rules did not apply where an individual sold his shares of a public corporation at a loss and, within 30 days of that sale, the individual's daughter purchased identical shares, given that a father and daughter are not affiliated under s. 251.1(1)(a).

A corporation ("Lossco") that was controlled by an individual ("X") was accepted as being affiliated with a corporation ("Opco") that was held by a partnership of which the general partner was a corporation controlled by X (and one of whose limited partners was a corporation controlled by X).

The suspended loss rules did not apply where a holding company sold its shares of a public corporation at a loss and, within 30 days of that sale, the daughter of its controlling shareholder purchased identical shares, given that a corporation which is wholly controlled by an individual and the individual's daughter are not affiliated under s. 251.1(1)(b).

Where an estate has de facto control of a corporation (Holdco) by virtue of control of a corporate trustee which holds all the voting shares of Holdco, s. 40(3.6) will apply to deny a loss on a redemption by Holdco of preferred shares held by the estate.

A trust of which Mr. A is the sole trustee is affiliated with a corporation controlled by Mr. A in his individual capacity.

The taxpayer described a structure in which the individual wholly-owning shareholder ("X") of "Xco" held 65% of a corporation ("Zco") which held all the GP units of two limited partnerships which, in turn, held two corporations ("Aco" and "Bco"). The limited partners (including Xco) had no voting rights in their capacities of limited partners of the partnerships. The taxpayer asked whether Xco, Aco and Bco were affiliated. The Directorate declined to address this question directly because it "was too specific" but stated:

"The principle enunciated in Vineland Quarries applies where the intermediate shareholder is either a corporation or a partnership. In other words, where a partnership owns more than 50% of the issued voting shares of a corporation and where a particular partner is entitled, without restriction, to exercise more than 50% of the votes that may be cast at a meeting of the partnership, it is our view, that the particular partner controls the corporation."

A corporation is controlled by one person who also is a majority-interest partner of a partnership.

The corporation and partnership would not be affiliated under s. 252.1(1)(d), in light of the Southside principle that " Where one person controls the corporation, it is not possible to identify a group that controls the corporation." However, the corporation and partnership would be affiliated under s. 252.1(1)(e) in light of the definition of majority interest partner. Furthermore, if the partnership had de facto control of the corporation, they would also be affiliated with each other under s. 251.1(1)(b)(i).

Where a corporation is controlled by one person who also is a majority-interest partner of a partnership, the corporation and partnership would be affiliated under s. 252.1(1)(e) in light of the definition of majority interest partner:

Since the corporation was affiliated with its controlling shareholder by virtue of subparagraph 251.1(1)(b)(i) and the shareholder was a majority-interest partner of the partnership, the corporation would also be considered a majority-interest partner of the partnership.

Is it the contributor to an RESP or instead the beneficiary who is affiliated with that plan, or potentially both? What about an RDSP?

CRA first noted that a trust and a majority-interest beneficiary are affiliated under s. 251.1(1)(g)(ii), that s. 251.1(3) provides that a beneficiary includes a person beneficially interested in the trust as broadly defined in s. 248(25), noted that s. 251.1(1)(g)(ii) provides that a person and a trust are affiliated if the person would be affiliated with a majority-interest beneficiary of the trust in the absence of paragraph 251.1(1)(g) (e.g., a spouse), that in light of s. 251.1(4)(d)(i) (respecting deemed exercise of discretion) a subscriber and a beneficiary of an RESP Trust could each be a majority-interest beneficiary of that trust and, thus, each affiliated with it per s. 251.1(1)(g)(i), and then stated:

In the case of a so-called family plan, that is, an RESP Trust allowing the subscriber, subject to certain conditions, to appoint more than one beneficiary, each beneficiary will generally be deemed to be a majority-interest beneficiary of the RESP Trust pursuant to subparagraph 251.1(4)(d)(i) and will generally be affiliated with the RESP Trust.

Similarly, any person that would be affiliated with a majority-interest beneficiary of an RESP Trust in the absence of paragraph 251.1(1)(g), should generally be affiliated with that RESP Trust. …

Finally, any person who would be affiliated with a majority-interest beneficiary in a particular RDSP Trust in the absence of paragraph 251.1(1)(g), should generally be affiliated with such trust.

Mr. X was the settlor and is sole beneficiary of Trust A and is its trustee along with his brother. The trustees of Trust B, which was a discretionary trust settled by "Sister X" of Mr. X (apparently out of her estate, as she also is stated to have died before the formation of Trust B), are Mr. X and his brother, and its beneficiaries are Mr. X and his spouse and children. Trust A and B are the respective sole shareholders of Corporations A and B. Are Corporations A and B affiliated for purposes of s. 69(11)?

After noting that, under ss. 251.1(1)(c)(i) and 251.1(4)(c), the two corporations would be affiliated if they were controlled de jure by affiliated trusts, and whether the two trusts were affiliated under s. 251.1(1)(h)(i) turned, in part, on whether Sister X, who had been related to Mr. X, could be considered to still be aa affiliated "contributor" to Trust B, as defined in s. 251.1(3), CRA stated (TaxInterpretations translation):

[B]ased on…2014-0534851C6, …when it is necessary to determine if a contributor to a trust is affiliated to the contributor to another trust for purposes of paragraph 251.1(1)(h), a deceased person should be assimilated to the "persons" referred to in subparagraph 251.1(4)(d)(iv).

…Mr. X and Sister X would be persons related by blood by virtue of paragraph s. 251.1(6)(a) and they would be deemed to be affiliated to each other by virtue of subparagraph 251.1(4)(d)(iv). Furthermore, Mr. X, as sole beneficiary of Trust A, would be a majority interest beneficiary of Trust A. Mr. X would also, by virtue of subparagraph 251.1(4)(d)(i), be a majority interest beneficiary of Trust B…

… Trust A and Trust B would thus be affiliated…by virtue of subparagraph 251.1(1)(h)(i)… .

Consequently, Corporation A and Corporation B also would be affiliated… .

Unlike the s. 94(1) definition, the s. 251.1(3) definition does not specify that a contributor includes a decedent. Is one included? CRA responded (TaxInterpretations translation):

[D]epending on the context, a deceased person could be considered as having at any time made, a loan or transfer of property, either directly or indirectly, in any manner whatever, to or for the benefit of a trust. This position applies to transfers of property made as a result of the death of a taxpayer and to inter vivos loans or transfers of property made by a taxpayer prior to his or her death.

The residue of Father’s estate was divided equally among his children including Son, with each child being entitled to the income from that child’s share, with the power of the trustees to distribute all of a portion of a child’s share to the child on or after attaining 25 (but with no such encroachment having occurred), and with the child’s remaining share to be held in trust for that child’s issue on the child’s death.

Whether Son was a “majority-interest beneficiary” impacted whether s. 69(11) applied to a “lossco transaction”. Although s. 251.1(4)(d)(i) deemed the trustees to have fully exercised their discretion to encroach, this by itself did not render Son a “majority-interest beneficiary” as the trustees did not have the discretion to pay one child’s share to another. The Directorate went on to note that “Son also held contingent beneficial interests in the remaining … Estate [assets], which would only be realized if the other Children die without issue surviving” and that:

…[I]t is unlikely that the FMV of Son’s contingent beneficial interests at the Time could result in him being considered a “majority-interest beneficiary” of Father’s Estate. … Accordingly, it is unlikely that the FMV of the total of Son’s respective income or capital interests in Father’s Estate could reasonably be considered to be greater than 50% of the FMV of all of the income or capital interests in Father’s Estate … .

Where a person is not a beneficiary, but it affiliated with a beneficiary with a majority interest in a trust, is that person also included in the definition of "majority-interest beneficiary"? CRA stated (TaxInterpretations translation):

A person (other than a trust [later referencing s. 251.1(4)(d)(iii)]) which does not have an interest qua beneficiary in the income nor an interest qua beneficiary in the capital of a trust could be a majority interest beneficiary in certain cases. This is the case if such person is affiliated with a person or persons who have interests qua beneficiary in the income of the trust having a fair market value exceeding 50% of the fair market value of all the interests qua beneficiary in the income of the trust or who have interests qua beneficiary in the capital of the trust having a fair market value exceeding 50% of the fair market value of all the interests qua beneficiary in the capital.

The Explanatory Notes example (re Philip and Muriel) on s. 251.1(3) confirms this interpretation.

Aco disposed of its shares of Cco (the “Subject Shares”) at a loss to a wholly-owned subsidiary of Aco (Bco). On a triangular amalgamation of Bco and Cco, Aco became the sole shareholder of Amalco. S. 40(3.5)(c)(i) deemed Amalco to own the Subject Shares for as long as it was affiliated with the transferor (Aco). Amalco was then wound-up into Aco pursuant to s. 88(1).

CRA rejected Aco’s argument that on the winding-up, Amalco ceased to be affiliated with the transferor (Aco) so as to trigger the suspended loss pursuant to s. 40(3.4)(b)(i): by virtue of s. 87(2)(g.4), Aco was considered following the winding-up to be a continuation of Amalco, and to own the Subject Shares and, given that under s. 251.1(4)(a), a person is affiliated with itself, Aco as the transferor continued to be affiliated with the person (Aco as the continuation of Amalco) who was the deemed owner of the Subject Shares.

In applying s. 251.1(4)(c) to s. 251.1(1), does it apply only when dealing with the word “trust”, i.e., does it apply only to ss. 251.1(1)(g) and (h), or does this reading rule apply in interpreting s. 251.1(1) wherever the person described is a trust [e.g., regarding s. 251.1(1)(c)(i), would two corporations be affiliated if they were each owned by a trust for a different family but the two trusts happened to have the same trustee?] CRA responded:

The explanatory notes for the amendments to subsection 251.1(4) of the Act that included the introduction of paragraph 251.1(4)(c) of the Act indicate that one of the effects of the rules is that two trusts are not affiliated simply because they share the same trustee and that a person is not affiliated with a trust simply because that person is affiliated with the trustee of the trust.

Consistent with the language in the legislation and the policy objectives outlined in the explanatory notes the interpretive rule in paragraph 251.1(4)(c) should be taken into account when interpreting subsection 251.1(1) regardless of whether there is a specific reference to a trust in the paragraph being examined.