Mr. X is the beneficiary of a discretionary inter vivos trust. The trust deed provides that when Mr. X dies, his adult son, Mr. Y, will become beneficiary of the trust. The trust holds all the issued and outstanding shares of the capital stock of Xco. Mr. Y holds all the issued and outstanding shares of the capital stock of another corporation, Yco. At the 2004 APFF Roundtable (2004-0086891C6), CRA addressed this situation as follows:
[I]t appears that Mr. Y would be deemed to own Xco shares pursuant to subparagraph 256(1.2)(f)(ii) I.T.A., if Mr. Y's share in the trust's capital depends on the trustee's (or trustees') exercise or failure to exercise any discretionary power in relation to Mr. X.
The response would be the same if the trust deed had provided that the trustee would no longer have any discretionary power after Mr. X's death.
When asked to elaborate on this position, CRA stated:
Our understanding of the situation presented is that Mr. Y is specifically named as a beneficiary in the trust deed, but cannot receive income or capital from the trust until Mr. X dies.
In such a situation, we believe that Mr. Y can be considered a beneficiary under civil law.
In our view, subparagraph 256(1.2)(f)(ii) is broad enough to apply to a person designated as a beneficiary even if the person's entitlement to the income and capital of the trust is triggered by the death of the individual’s father.
… [I]t is clear from the wording of subparagraph 256(1.2)(f)(ii) that Parliament intended this provision to apply where a person is named as a beneficiary in the trust indenture, and the person's share of the trust's income or accumulated capital is conditional on the exercise or non-exercise of discretion in that regard.