As a result of a previous estate freeze, A holds the voting freeze preferred shares of Opco (which is not a small business corporation) and a discretionary family trust (the “Initial Trust”) holds the non-voting common shares. The Initial Trust’s beneficiaries are A, his adult children and his wife and its trustees are A, his brother (B) and an arm’s length individual. Now a further estate freeze is effected under which Initial Trust exchanges its shares for preferred shares under s. 51 and a newly-formed discretionary family trust (“New Trust” – also having grandchildren and family corporations as beneficiaries and with a different unrelated individual as the third trustee) subscribes for new non-voting common shares. Is A’s spouse a designated person in relation to the Initial Trust? CRA responded:
[W]whether it is reasonable to consider that one of the main purposes of a transfer of property is to reduce the income of the individual and to benefit, either directly or indirectly, a designated person (the "Purpose Test”) is a question of fact ... .
In view of the fact that subsection 104(2) provides that a trust is deemed to be an individual in respect of the trust property, subsection 74.4(2) could apply to a trust, assuming that all of the conditions for the application of subsection 74.4 are satisfied.
However, only a person under the age of 18 who does not deal at arm's length with a trust could logically be a designated person in respect of a trust.
In light of the foregoing, the Mr. A’s spouse cannot not be a designated person in respect of Initial Trust.
On the other hand, Mr. A's spouse is still a designated person in respect of Mr. A.
Thus ... subsection 74.4(2) could apply to the transfer of property made by Mr. A, in connection with the estate freeze carried out by Mr. A. in favour of Initial Trust, if the Purpose Test were satisfied.
In addition, we are of the view that the question of the application of subsection 74.4(2) could arise with respect to the estate freeze by Initial Trust if it were determined that the transfer of property effected by this estate freeze was made indirectly by Mr. A through Initial Trust.
Consequently, if it were possible to establish that the Purpose Test was satisfied, subsection 74.4 (2) could also apply to Mr. A in respect of the estate freeze by Initial Trust.