A discretionary trust (Old Trust) that is approaching its 21st anniversary distributes property with an unrealized gain to a corporate beneficiary (Canco) that is wholly owned by a newly-established discretionary trust (New Trust – also resident in Canada) under s. 107(2). S. 104(5.8) should not affect the timing of the 21st anniversary of New Trust since the property was not transferred directly from Old Trust to New Trust. Does CRA agree?
When this issue came before it on a ruling request, the GAAR Committee concluded that this planning circumvented s. 104(5.8) contrary to its object and spirit, as well as that of the deemed disposition rule in 104(4)(b) and the scheme of the Act for the realization of capital gains. Accordingly if the distribution is made by an existing discretionary trust to a Canadian-resident corporation wholly owned by a new discretionary trust resident in Canada, CRA generally will infer that the primary purpose of the distribution is to defer the income tax otherwise applicable under s. 104(4).
CRA is further concerned that this device could be used to defer the realization of the capital gains for several generations, or even indefinitely.
A distribution to a corporate beneficiary will generally be acceptable if the individual shareholders of that corporation are resident in Canada because, ultimately, what that means is that, as the individuals are residents of Canada, there will be taxation in their lifetime or on death. As for non-resident individual beneficiaries, CRA is looking to see that there will be taxation within Canada in their lifetime.