The first appellant (“Vefghi Corp.”), which had a calendar taxation year, was a beneficiary of a calendar-year family trust (the “Vefghi Trust”). On July 1, 2015, when the Vefghi Trust received a dividend on the common shares held by it in another corporation (“Consultant Inc.”) and immediately paid it to Vefghi Corp. as beneficiary, the two corporations were connected - but they ceased immediately thereafter to be connected as a result of a sale by the Vefghi Trust of its shares of Consultant Inc. CRA assessed Part IV tax on the dividend deemed to be received by Vefghi Corp. pursuant to s. 104(19) on the basis that the designation made by the trust pursuant to that provision was not effective until the end of the trust’s taxation year (December 31, 2015).
The second appellant (“S.O.N.S.”), which had an August 31 taxation year end, was a beneficiary of the “Mate Trust,” with a calendar year. Both on June 30, 2015, when the Mate Trust received a dividend-in-kind on the Class B shares held by it in “Environmental Corp.” and, a day later, when the Mate Trust declared a distribution of such property to S.O.N.S. as beneficiary, the two corporations were connected - but they ceased immediately thereafter to be connected as a result of a sale of shares of Environmental Corp. CRA also assessed Part IV tax on the dividend deemed to be received by S.O.N.S. as a result of a designation made pursuant to s. 104(19).
In responding to a Rule 58 question as to when the connected status of the two corporations in each case was to be tested for s. 186(1)(a) purposes, D’Arcy J stated (at paras. 54, 61-62):
I agree with the Respondent that the determination of the application of subsection 104(19) can only be made at the trust’s year-end. However, I do not agree that this results in the relevant point in time for determining whether corporations are connected being the trust’s year-end. …
If the corporate beneficiary is deemed under subsection 104(19) to have received the same dividend as the dividend received by the trust in the same taxation year as the dividend was, as a question of fact, received by the trust, then the legal fiction created by subsection 104(19) does not change the actual date that the dividend was received. It was received by the corporate beneficiary on the same day as it was received by the trust.
The legal fiction created by subsection 104(19) deems the dividend to have been received in a particular taxation year. However, subsection 104(19) does not state when in that taxation year the dividend was received. This legal fiction does not change the point in time that the dividend was received, unless it deems the dividend to have been received in a taxation year of the corporate beneficiary that does not include the point in time when the dividend was received by the trust. [emphasis added]
Accordingly, Vefghi Corp. was deemed to have received a dividend on the day of receipt by the Vefghi Trust, when it was connected with Consultant Inc. However, S.O.N.S. was deemed by s. 104(19) to have received a dividend in its taxation year (of September 1, 2015 to August 31, 2016) in which the 2015 calendar taxation year of the Mate Trust ended, and on no day in that taxation year of S.O.N.S. was it connected to Environmental Corp.