Principal Issues: Can the CRA advise if there have been any further developments on the issue of whether a change in any of the trustees of a trust would result in a change in control of the corporation of which the trust is the shareholder?
Position: There have been no further developments on this particular issue, although other related issues brought to our attention.
Reasons: On-going issues.
2007 STEP Round Table
Q. 12 Change of Trustees and Control
In May of 2005, the CRA issued a technical interpretation (2004-0087761E5) that may have widespread implications for corporations that have trusts as shareholders. The technical interpretation dealt with the question of whether there is an acquisition of control of a corporation on the replacement of one or more of three trustees of an inter vivos trust which holds the majority of shares in the corporation. The CRA said that a change in any of the trustees of the trust would generally result in a new group of persons controlling the corporation, even if there is no change in beneficial ownership. The CRA further commented on its position in Income Tax Technical News No. 34, wherein the CRA acknowledged that the possibility of an acquisition of control of a corporation where there has been no change in beneficial ownership presents a policy issue.
Can the CRA advise if there have been any further developments on this issue?
Response
As indicated in Income Tax Technical News No. 34 ("ITTN #34), we have raised the issue with the Department of Finance and Finance recognizes that there is a problem. There have been no further developments on this particular issue, although other related issues have been brought to our attention in technical opinion requests, including, for example:
(1) whether a Canadian-controlled private corporation ("CCPC") retains its status as a CCPC on the death of an individual where a subsidiary of a public company is the executor of the individual's estate (i.e., a reconsideration of the administrative position set out in the addendum to our response to question 25 of the 1980 Canadian Tax Foundation Round Table; and
(2) whether a corporation that is a subsidiary of a publicly traded income fund with Canadian resident individuals or private corporations as the trustees can qualify as a CCPC.
These issues are currently under consideration by our Directorate and we anticipate having discussions with the Department of Finance before we respond to the technical interpretation requests.
ITTN #34 also comments on the position set out in paragraph 10 of IT-302R3, which indicates that control of a corporation will be regarded as remaining unchanged where the executor, administrator or trustee of an estate is replaced as a result of that person's death or inability to fulfill his or her functions.
Specifically, we advised that: (1) the interpretation bulletin position was first adopted when a previous version of paragraph 256(7)(a) of the ITA provided a legal basis for the position; (2) a 1994 amendment to paragraph 256(7)(a) of the ITA had removed the legal basis for the position; (3) the bulletin position cannot therefore be extended to inter vivos trusts; and (4) consideration will have to be given to withdrawing the current bulletin position when the bulletin is next revised.
The CRA has been asked whether the bulletin position may be relied upon in the specific scenario described therein - that control of a corporation will be regarded as remaining unchanged where the executor, administrator or trustee of an estate is replaced as a result of that person's death or inability to fulfill his or her functions.
The ITTN #34 statement that consideration will have to be given to withdrawing the current bulletin position when the bulletin is next revised means that the bulletin position may be relied upon until there is a formal retraction of paragraph 10 of IT-302R3 or a revised bulletin is published.
June 8, 2007