Principal Issues: Whether corporations are related
Position: General comments.
Reasons: Question of fact.
2007-024672 XXXXXXXXXX S. Grégoire (613) 957-2746 February 20, 2008
Dear Sir,
Subject: Related persons - section 251 of the Income Tax Act
This is in response to your email of 24 July 2007, in which you described three situations in which trusts are included in the ownership of corporations. More specifically, you wish to know whether, in each of the situations presented, such corporations are related. With respect to the first two situations presented, you are of the opinion that such determination is required for the purposes of calculating the notional tax under Part I.3 of the Income Tax Act (the "Act"). In particular, the determination of that notional tax is necessary to establishing the amount of the reduction in the business limit as provided by subsection 125(5.1). As for the third situation, you indicated that such determination is important because it would affect the eligibility of shares as qualified small business corporation shares. More specifically, you question whether the condition set out in paragraph 110.6(1)(c) in the definition of qualified small business corporation share is satisfied. We apologize for the delay in responding to your request.
Unless otherwise indicated, all statutory references herein are to provisions of the Act.
You have presented us with the situations described below as part of your request for a technical interpretation.
Context for Situations 1 and 2
1. X, Y and Z are individuals resident in Canada for the purposes of the Act.
2. X, Y and Z are not related within the meaning of subsection 251(2).
3. Protective Trust X is a trust established for the purpose of asset protection. Its trustees are X and Z. The trust deed provides that decisions relating to the trust must be taken unanimously. The sole income and capital beneficiary of the trust is X. Finally, the trust deed states that the trustees have full discretion as to the distribution of income.
4. Family Trust X is a trust designed to hold property within a family unit. Its trustees are X and Z. The trust deed requires the unanimous consent of all its trustees for decisions relating to the trust. Both the capital and income beneficiaries of the trust are X, his wife and their children. The deed of trust specifies that the trustees have full discretion as to the distribution of income.
5. Like Protective Trust X, Protective Trust Z was established for asset protection purposes. Its trustees are X and Z. Under the terms of the trust deed, decisions relating to the trust must be taken unanimously. The sole income and capital beneficiary of the trust is Z. The deed specifies that the trustees have full discretion as to the distribution of the income of the trust.
6. Like Family Trust X, Family Trust Z was designed to hold property within a family unit. Its trustees are also X and Z. The trust deed requires the unanimous consent of all its trustees for decisions relating to the trust. The income and capital beneficiaries of the trust are Z, his spouse and their children. The deed specifies that the trustees have full discretion as to the distribution of income.
7. Holdco X, Holdco Z and Opco are "Canadian-controlled private corporations" within the meaning of subsection 125(7).
8. Public Inc. is a "public corporation" within the terms of section 89(1).
9. The issue of whether these corporations are related relates to whether the capital deduction is required to be allocated in computing notional Part I.3 tax for the purposes of the business limit reduction under subsection 125(5.1).
Context for Situation 3
1. X, Y and Z are individuals resident in Canada for the purposes of the Act.
2. X and Z are brothers while Y is a professional.
3. Y is not related to X or Z within the meaning of subsection 251(2). Based on the facts and circumstances of the particular situation, Y is dealing at arm's length with X or Z within the meaning of paragraph 251(1)(c).
4. Protective Trust X is a trust established for the purpose of asset protection. Its trustees are X and Y. The trust deed provides that decisions relating to the trust must be taken unanimously. The sole income and capital beneficiary of the trust is X. Finally, the deed specifies that the trustees have full discretion as to the distribution of income.
5. Family Trust X is a trust designed to hold property within a family unit. Its trustees are also X and Y. For decisions relating to the trust, the trust deed requires the unanimous consent of all its trustees. The income and capital beneficiaries of the trust are X, his spouse and their children. The deed specifies that the trustees have full discretion as to the distribution of income.
6. Like Protective Trust X, Protective Trust Z was established for asset protection purposes. However, its trustees are Z and Y. Under the terms of the trust deed, decisions relating to the trust must be taken unanimously. The sole income and capital beneficiary of the trust is Z. The trust deed specifies that the trustees have full discretion over the payment of income.
7. Like Family Trust X, Family Trust Z was established to hold property within a family unit. Its trustees, however, are Z and Y. For decisions relating to the trust, the trust deed requires the unanimous consent of all its trustees. The income and capital beneficiaries of the trust are Z, his spouse and their children. The deed specifies that the trustees have full discretion as to the distribution of income.
8. Both Realtyco and Opco are Canadian-controlled private corporations within the meaning of subsection 125(7).
9. The issue of whether certain corporations are related arises in relation to whether Realtyco's shares are eligible as qualified small business corporation shares by virtue of Realtyco's lease of a building to Opco.
Situation 1
1. All the voting and participating shares of the capital stock of Holdco X are held by Protective Trust X.
2. All of the voting and participating shares of the capital stock of Holdco Z are held by Protective Trust Z.
3. Family Trust X and Family Trust Z each hold 23% of the voting and participating shares of the capital stock of Opco, while Holdco X and Holdco Z each hold 11%. Y holds 32% of the voting and participating shares of the capital stock of Opco.
Situation 2
1. All of the voting and participating shares of the capital stock of Holdco X are held by Protective Trust X.
2. All of the voting and participating shares of the capital stock of Holdco Z are held by Protective Trust Z.
3. Holdco X and Holdco Z each hold 8% of the voting and participating shares of the capital stock of Public Inc.
4. Family Trust X and Family Trust Z each hold 9% of the voting and participating shares of the capital stock of Public Inc.
5. Protective Trust X and Protective Trust Z each hold 5% of the voting and participating shares of the capital stock of Public Inc.
6. X and Z each hold 5% of the voting and participating shares of the capital stock of Public Inc.
7. The remaining balance of the voting and participating shares of the capital stock of Public Inc. is held by the investing public.
Situation 3
1. All the voting and participating shares of the capital stock of Holdco X are held by the Protective Trust X.
2. All of the voting and participating shares of the capital stock of Holdco Z are held by Protective Trust Z.
3. Holdco X and Holdco Z each hold 50% of the voting and participating shares of the capital stock of Realtyco.
4. Family Trust X and Family Trust Z each hold 48% of the voting and participating shares of the capital stock of Opco.
5. Unrelated employees would collectively hold 4% of the voting and participating shares of the capital stock of Opco.
Questions
For each of the above situations, you would like the Canada Revenue Agency (the "CRA") to indicate whether some of the corporations involved are related to each other, on the one hand, for the purposes of calculating the notional tax in Part I.3, which makes it possible to determine the amount of the business limit reduction provided by subsection 125(5.1) and, on the other hand, to determine whether the shares of a corporation are eligible as qualified small business corporation shares. You also asked whether a distinction should be made, in terms of control of a corporation, where a person or group of persons vote the shares held by trusts with different purposes.
Your Position on the First Situation
Your analysis leads you to believe that the companies would be unrelated since the individuals are not shareholders of Opco and the group of unrelated persons controlling any of the corporations involved is not the same.
Your Position on the Second Situation
For reasons similar to those given in your analysis of the first situation, you consider that none of the corporations involved would be related to each other.
Your Position on the Third Situation
You are of the view that since the same trustees control Realtyco and Opco, they would be related.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, it is the CRA's practice not to issue written opinions on proposed transactions otherwise than through advance rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. Since we do not have the essential documents such as trust deeds, we cannot comment with certainty on the situations you have submitted to us. However, we can offer the following general comments that we hope may be helpful to you.
Your email does not contain any indication as to the legal system under which the trusts were created. For the purposes of our comments, we have assumed that they are governed by the civil law applicable in the province of Quebec and therefore would be governed by the provisions of the Civil Code of Quebec.
For the purposes of determining whether two corporations are related to each other, the concept of control of a corporation is of paramount importance. In a situation of holdings by trustees, it is important to determine the identity of the trustees who are responsible for making decisions relating to the trust and who therefore have the power to vote the shares held by the trust. In that regard, inter alia, the terms of the trust's governing document, the shareholder register and any unanimous shareholder agreement are elements that must be taken into consideration.
If there are several trustees, it should be noted that if the trust deed provides that the decisions of the trustees must be unanimous, the corporation will generally be controlled by a group of persons, which will be composed of all the trustees. The decision in MNR v. Consolidated Holding Co. Ltd. 72 D.T.C. 6007 (S.C.C.) and several subsequent decisions (see, for example, Duha Printers (Western) Ltd. v. The Queen, 98 DTC 6334 (S.C.C.); Hickman v. The Queen, 2000 DTC 2584 (T.C.C.); H.A. Fawcett & Son, Limited v. The Queen, 80 DTC 6195 (F.C.A.); and The Queen v. Lusita Holdings Limited, 84 DTC 6346 (F.C.A.)) are relevant in that regard. That principle has also been taken in several documents issued by the CRA (see for example, E 2005-0111811E5, E 2004- 0087761E5, E 2002-0140597, E 2001-0019525, F 9708715 97303395).
It should also be noted that it is possible that the presumptions of paragraph 251(5)(b) may affect the determination of control of a corporation where the shares of the corporation are held by a trust. Under that provision, where at any time a person has a right under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently, to, or to acquire, shares of the capital stock of a corporation or to control the voting rights of such shares, the person shall be deemed, subject to certain exceptions, to have the same position in relation to the control of the corporation as if the person owned the shares at that time, for the purposes of the application of, inter alia, subsection 251(2).
There is, however, some disagreement as to the application of s. 251(5)(b) in a trustee holding context. Some believe that discretionary beneficiaries of a trust would have no right to trust property to the extent that the trustees' discretion is not exercised in their favour. On the other hand, some consider that the wording of paragraph 251(5)(b) is sufficiently broad that it could indeed apply in respect of a discretionary beneficiary of trust capital.
In technical interpretation (F9730395), we previously stated that paragraph 251(5)(b) could apply to beneficiaries of a trust. We did specify, however, that paragraph 251(5)(b) could not apply to beneficiaries of a trust who held shares in a corporation if, under the terms of the trust agreement, the beneficiaries could never obtain ownership of the corporation’s shares or control the voting rights attached to these shares.
With respect to the question of whether a distinction can be made where there is a trustee performing the trustee’s role for trusts with separate purposes, it should be noted that the Supreme Court of Canada in Consolidated Holding Company Limited, referred to above, and the Federal Court of Appeal in H.A. Fawcett & Son, limited v. The Queen, 80 DTC 6195, held that there is no distinction to be made between a person acting in his or her personal capacity or as a trustee. By analogy, we apply the same principle to the dual roles played by the same trustee acting in that capacity on behalf of two separate trusts. Thus, where a trust established for one purpose controls one corporation and a second trust established for another purpose controls a second corporation, and the same trustees vote the shares of both corporations held by each trust, we are of the view that the two corporations are generally controlled by the same group of persons. We are of the view that the fact that these trusts have separate objects is not relevant to the determination of the identity of the person or group of persons controlling each of the corporations.
Comments - Situation 1
We do not share your view that the corporations involved are not related to each other. Indeed, in light of MNR v. Consolidated Holding Co. Ltd., it appears to us that, because of their role as trustees of each of the trusts, X and Z would form a group of persons that could control each of the corporations involved. Because of the provisions of subparagraph 251(2)(c)(i), it would follow that Holdco X, Holdco Y and Opco could all be related to each other.
Comments - Situation 2
With respect to situation 2, it is impossible for us to determine with certainty whether Holdco X and Holdco Z as well as Public Inc. would be related corporations since such a determination would require a detailed analysis of certain documents such as the trust deed and any unanimous shareholder agreement. Nevertheless, it is possible that in a situation similar to situation 2, Holdco X, Holdco Z and Public Inc. may not be related to each other.
Comments - Situation 3
For reasons similar to those stated in respect of Situation 1, it is possible that Realtyco and Opco could be related to each other under the provisions of subparagraph 251(2)(c)(i) if X, Y and Z as trustees could form a group of persons controlling Realtyco and, again by virtue of their role as trustees, but in respect of separate trusts, could also form a group of persons controlling Opco.
These comments are not advance income tax rulings and do not bind the CRA in any particular situation.
We hope that our comments will be of assistance.
Best regards,
Maurice Bisson, CGA
Manager
Corporate Reorganizations and Resource Industries Section
Corporate Reorganizations and Resource Industries Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.