The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco makes an interest-free loan to LLC1.
The Directorate concluded that Canco thereby was rendered a resident contributor to NRTrust (so that NRTrust was deemed to be a s. 94-resident trust) because it would be reasonable to view there as having been a resulting increase in the fair market value of the LLC1 shares.
In the Directorate’s view, this result obtained even if s. 17 (or s. 247(2)) applied to that loan, stating: would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust, stating:
First, any income deemed to be included in the income of Canco by virtue of subsection 17(1) would not have any impact on the fair market value of the shares of LLC1. Second, the increase in fair market value of the shares of LLC1 only needs to occur at the time of the loan in order for paragraph 94(2)(a) to apply to deem there to be a contribution. The wording of paragraph 94(2)(a) requires that you determine whether there has been an increase in fair market value at the time the loan was made. Therefore, any transactions or events that occur subsequent to the time the loan was made will not change the determination regarding the application of paragraph 94(2)(a).