If the terms of a discretionary family trust (“Old Trust”) so permit, the trustees (as the 21st anniversary approaches) could choose to distribute the trust property to a corporate beneficiary (“Canco”), whose shares are held by a new discretionary trust (“New Trust”).
- Does CRA agree that s. 104(5.8) does not apply as the trust property is not transferred directly to New Trust?
- Would the response be different if the gain in the assets rolled out to Canco could not be realized at a date subsequent to the death of the discretionary beneficiaries who were alive on the 21st anniversary?
CRA indicated that it generally would consider it to be an abusive circumvention of the rule for the realization by a trust of gains on its 21st anniversary (and of the related anti-avoidance rule in s. 104(5.8)) to distribute the property of a discretionary trust to a corporate beneficiary (Canco) who was owned by a new discretionary trust (New Trust). CRA then stated:
Our response would not be different even if the transactions put in place ensured that the realization of the capital gain inherent in the transferred property could not be postponed beyond the lifetime of the Old Trust's discretionary beneficiaries, who could have received property directly before the 21st anniversary. … [T]he Act does not contemplate any deferral beyond a 21-year period while property is directly or indirectly held in a discretionary trust and therefore, this situation raises the same policy concerns as in the situation described above.