Principal Issues: 1) Whether the CRA could provide some examples of property that derives, directly or indirectly, all or part of its fair market value from shares of the capital stock of the corporation as referred in clause 120.4(1)(c)(i)(B) of the definition “related business”. 2) Whether an interest in a discretionary trust is property for the purpose of clause 120.4(1)(c)(i)(B) of the definition “related business”.
Position: 1) Examples of the property as referred in clause 120.4(1)(c)(i)(B) of the definition "related business”: shares of the capital stock of a corporation, interest in a discretionary or non-discretionary trust, interest in a partnership. 2) Yes.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 10
Subsection 120.4(1) - "related business"
Paragraph 120.4(1)(c) of the definition of "related business" provides that a related business includes the following:
"(c) a business of a corporation, if the following conditions are met at any time in the year:
(i) a source individual in respect of the specified individual owns
(A) shares of the capital stock of the corporation, or
(B) property that derives, directly or indirectly, all or part of its fair market value from shares of the capital stock of the corporation."
Questions to the CRA:
(a) Can the CRA provide examples of what could constitute such property that derives all or part of its fair market value, directly or indirectly, from shares of the capital stock of the corporation?
(b) Could an interest in a trust (for example, a beneficial interest) be considered "property" for the purposes of this definition? If so, what if the trust is entirely discretionary?
CRA Response to Question 10(a)
The Income Tax Act defines the term "property" in subsection 248(1). This definition is very broad and provides, inter alia, that a property may be of any kind whatever whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal and that such term may include a right of any kind whatever, a share or a chose in action.
The property referred to in clause (c)(i)(B) of the definition of "related business" in paragraph 120.4 may include, inter alia, shares of the capital stock of a corporation, interests in a partnership or interests in a trust.
The question of whether part or all of the fair market value of a property is derived, directly or indirectly, from shares of the capital stock of a corporation is a question of fact.
CRA Response to Question 10(b)
An interest in a trust is property for the purposes of the definition of "related business" in subsection 120.4(1), regardless of whether the trust is a wholly discretionary or non-discretionary trust.
Furthermore, the determination of the fair market value of an interest in a discretionary trust is a question of valuation.
Yvon Beaudoin
(514) 283-8653
5 October 2018
2018-076881