A discretionary family trust ("Trust") receives a cash taxable dividend on June 20, 2017 on its non-voting common shares of Opco (whose voting shares are held by Mr. A) and immediately distributes that amount to Holdco (a family corporation controlled by Mr. A, and with a June 30 year end) in its capacity of beneficiary. Three days later, the control of Opco is acquired by a third party, resulting in (i) a deemed taxation year end for Opco (but with December 31 being retained as its year end) and (ii) it no longer being connected to Holdco. By virtue of a s. 104(19) designation by Trust in its return for its year ended December 31, 2017, the amount is deemed to be a taxable dividend received by Holdco.
Headquarters indicated that such dividend was subject to Part IV tax in the hands of Holdco because the time at which it was considered to have received the s. 104(19) dividend (the calendar year end of the Trust) was in the taxation year of Holdco (commencing on July 1, 2017) throughout which Opco was no longer connected to Holdco. In reaching this conclusion, it stated:
[T]he CRA's position is to consider that the amount designated to the beneficiary by a trust in accordance with subsection 104(19) is deemed to be received as a dividend by the beneficiary of the trust at the end of the taxation year of the trust in which the trust received the dividend. This position is based inter alia on the fact that the trust cannot make the designation under subsection 104(19) before the end of its taxation year. In addition, it is only at the end of its taxation year that a trust will be able to determine whether all the conditions set out in that provision are satisfied. ...
[T]he taxation year in which the amount received by Holdco from Trust will be deemed to be a taxable dividend for Holdco is the year ending on June 30, 2018. It is also in that year that Holdco may claim the dividend deduction in subsection 112(1). It is therefore in that taxation year that Holdco will be subject to Part IV tax on the dividend paid by Opco to Trust on June 20, 2017.