Principal Issues: An individual ("Individual") first implements an estate freeze, whereby his participating shares of the capital stock of a corporation ("Opco") are converted into preferred shares of the capital stock of Opco, and a personal trust ("Trust1") subscribes for participating shares of the capital stock of Opco. The beneficiaries of Trust1 are the two minor children of Individual ("Child1" and "Child2"). The terms of Trust1 contain the restrictions described in subsection 74.4(4). At that point, the only interests of Child1 and Child2 in Opco are their beneficial interests in the shares of Opco held by Trust1. Some years later, a second freeze is implemented, whereby the participating shares of the capital stock of Opco held by Trust1 are converted into preferred shares of the capital stock of Opco, and a personal trust ("Trust2") subscribes for participating shares of the capital stock of Opco. The beneficiary of Trust2 is Child1. The terms of Trust2 contain the restrictions described in subsection 74.4(4). Whether the condition described in paragraph 74.4(4)(a) would be met, even if Child1 would be the beneficiary of two trusts holding shares of the capital stock of Opco.
Position: Yes. In the given situation, the fact that Child1 would be the beneficiary of two trusts holding shares of the capital stock of Opco would not, in and by itself, render subsection 74.4(4) inapplicable.
Reasons: Wording of the Act.
2007-025431 XXXXXXXXXX S. Prud'Homme (613) 957-8975 April 30, 2008
Dear Sir,
Subject: Request for Technical Interpretation - Subsection 74.4(4) of the Income Tax Act.
This is in response to your letter of September 25, 2007, in which you requested our opinion regarding the application of subsection 74.4(4) of the Income Tax Act (the "Act") in a particular situation.
Unless otherwise indicated, any statutory reference is to a provision of the Act.
It appears to us that the situation described in your letter and summarized below may be an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the practice of this Directorate to provide comments on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involved specific taxpayers and one or more completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for its opinion. However, we are able to offer the following general comments that may be helpful. It should be noted that the application of one or more provisions of the Act generally requires an analysis of all the facts relating to a particular situation. Accordingly, and given that your letter only briefly describes a hypothetical situation, the comments we provide below may not be fully applicable in a particular situation.
1) Particular Situation
You have presented us with the situation described below (the "Particular Situation") as part of your request for a technical interpretation.
A few years ago, an individual ("Individual") implemented a freeze of Individual’s interest in a particular corporation ("Corporation") in favour of a personal trust ("Trust1").
After the freeze transaction, Individual held preferred shares in the capital stock of the Corporation and Trust1 held all of the participating common shares in the capital stock of the Corporation.
The beneficiaries of Trust1 are the two minor children of Individual ("Child1" and "Child2"). Under the Trust1 trust indenture, each of Child1 and Child2 may not receive or otherwise obtain the use of any of the income or capital of the trust, while under the age of 18. In addition, we understand that Child1 and Child2 have not received or otherwise obtained the use of any of the income or capital of Trust1, and no deduction has been made by Trust1 in computing its income under subsection 104(6) or (12) in respect of amounts paid or payable to, or included in the income of, those individuals, while being "designated persons" within the meaning of subsection 74.5(5) in respect of Individual.
Child1 and Child2 do not hold any other interest in the Corporation.
A second freeze was made at the level of the Corporation in favour of a new personal trust ("Trust2 "). Specifically, the participating common shares of the capital stock of the Corporation held by Trust1 were converted into preferred shares of the capital stock of the Corporation. Trust2 subscribed for new participating common shares in the capital stock of the Corporation.
The beneficiary of Trust2 is Child1. According to the trust indenture for Trust2, Child1 may not receive or otherwise obtain the use of any of the income or capital of the trust, while under the age of 18. Further, we understand that Child1 has not received or otherwise obtained the use of any of the income or capital of Trust2, and no deduction has been made by Trust2 in computing its income under subsection 104(6) or (12) in respect of amounts paid or payable to, or included in the income of, Child1 while being "designated persons" within the meaning of subsection 74.5(5) in respect of Individual.
2) Your comments on the Particular Situation
You are of the view that the conditions described in subsection 74.4(4) would be satisfied in the Particular Situation. Specifically, you are of the view that, in the Particular Situation, the condition in paragraph 74.4(4)(a) would be satisfied despite the fact that Child1 would be beneficially interested in two separate trusts that would hold shares of the Corporation.
3) Our comments on this case
We agree with your analysis. We are of the view that, in the Particular Situation, subsection 74.4(4) would not be inapplicable solely because Child1 would be beneficially interested in two separate trusts holding shares of Corporation.
We apologize for the delay in responding to your request.
We hope that our comments will be of assistance.
Stéphane Prud'Homme, Notary, M. Fisc.
for the Director
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.