Principal Issues: If a trust which receives taxable dividends pays the dividends to its corporate beneficiary which is a private corporation and makes a designation under subsection 104(19), will the dividends be subject to tax under Part IV under the provisions of paragraph 186(1)(b)?
Position: Provided the corporate payor is connected with the corporate beneficiary under the provisions of paragraph 186(4)(a) and subsection 186(2), the provisions of paragraph 186(1)(b) will be applicable.
Reasons: Meets the requirements of the law.
XXXXXXXXXX 2005-012193
Fiona Harrison
October 24, 2005
Dear XXXXXXXXXX:
This is in reply to your letter of March 18, 2005, wherein you requested a technical interpretation with respect to the interaction of subsection 104(19) and subsection 186(1) of the Income Tax Act (the "Act') in the following situation:
- Aco and Bco are Canadian-controlled private corporations as defined under subsection 125(7) and subsection 248(1).
- A discretionary personal trust (the "Trust") owns 100% of the voting common shares of both Aco and Bco.
- Bco is an income and capital beneficiary of the Trust.
- Aco pays a taxable dividend to the Trust.
- The Trust pays the dividend to Bco and makes a designation under subsection 104(19) in respect of the dividend in respect of Bco.
You note that, by virtue of the designation under subsection 104(19), the dividend will be deemed to be a taxable dividend on a share received by Bco in the particular year from Aco.
You enquire as to whether the dividend received by Bco will be subject to tax under Part IV under the provisions of only paragraph 186(1)(b) (and not under paragraph 186(1)(a)) since Bco will be connected to Aco.
Our Comments
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency.
We note that where a trust is resident in Canada throughout a taxation year and, in that year, receives a taxable dividend from a taxable Canadian corporation, subsection 104(19) enables a trust, in certain circumstances, to make a designation with respect to a distribution of the dividend to the trust's beneficiary with the result that the beneficiary will be deemed to have received the dividend from the corporation. Under the provisions of subsection 104(19), in order to make a designation, it must be reasonable to consider that the taxable dividend was included in the income of the particular beneficiary and was not designated by the trust in respect of any other beneficiary of the trust. In making this determination, it is necessary to consider all of the circumstances including the terms and conditions of the trust arrangement. Where the trustees have full discretion with respect to distributions of income and capital, the trustees can choose to exercise their discretion to make an amount of taxable dividends payable to a particular beneficiary.
Subject to the foregoing comments, where Trust makes a designation under subsection 104(19) in respect of Bco, for purposes of section 186, Bco will be deemed to have received a taxable dividend on a share from Aco. Since Aco is connected with Bco under the provisions of subsection 186(2) and paragraph 186(4)(a), Bco will only be subject to tax under Part IV on the taxable dividends to the extent that paragraph 186(1)(b) applies.
We trust the above comments will be of assistance to you.
Yours truly,
Mark Symes
Corporate Reorganizations Section 1
Reorganizations and Resources Division
Income Tax Rulings Directorate