The beneficiaries of a Canadian resident discretionary family trust (the “Trust”) are individuals who are intended to receive the Trust’s property (not described in ss. 128.1(4)(b)(i) to (iii)) who had emigrated from Canada as well as one or more Canadian companies (“Canco”) that are wholly owned by one or more of such beneficiaries. The trustees propose to distribute such property s. 107(2), to Canco. Does CRA agree that the transfer occurs on a tax-deferred basis under s. 107(2)?
After noting that 2016-0669301C6 and 2017-0693321C6 dealt with a distribution to a Canadian corporation whose shares were wholly owned by a newly established Canadian-resident discretionary trust, CRA indicated that, in this scenario, any capital gain on the property distributed to Canco may be deferred beyond the 21st anniversary of the trust, and potentially beyond the lifetime of the non-resident beneficiary - or indefinitely, and that this deferral would not be achieved if the beneficiary were a Canadian individual resident. The transactions here did not achieve the intention of s. 107(5) of ensuring that Canada maintains the ability to tax the gain that accrued while the property was held by the Canadian trust, and also contravened one of the underlying principles of the capital gains system (supported by ss. 70(5), 104(4) and 107(2)) that the gain that accrued in Canada should be taxed. Accordingly, CRA will consider applying GAAR, when faced with a similar set of transactions, if there is not substantial evidence supporting the non-application of GAAR.