A Canadian resident discretionary family trust (the “Trust”) holds taxable Canadian property (e.g., shares of a Canadian realty company) not described in ss. 128.1(4)(b)(i) to (iii) (the “Property”). In order that beneficiaries who are non-resident (“NR”) beneficiaries can ultimately receive the Property, the trustees distribute the Property on a s. 107(2) rollover basis to one or more Canadian corporations (“Canco”) that are wholly owned by one or more of the NR beneficiaries. After referencing a largely identical response in 2019-0823581C6, CRA stated:
[I]f the Property distributed to Canco constitutes taxable Canadian property, other than a property described in subparagraphs 128. 1(4)(b)(i) to (iii) or a share of the capital stock of a non-resident-owned investment corporation, such transactions would result in a misuse or abuse of subsections 107(2), (2.1) and (5). Subsections 107(2.1) and (5) effectively result in the immediate realization of capital gains on property distributed to non-residents over which Canada does not retain the absolute right to tax without restriction. It is the CRA’s view that the intention of subsection 107(5) is to ensure that Canada maintains the ability to tax capital gains that accrue during the period that property is held by a Canadian resident trust and that the transactions described herein are not consistent with this intention.
The CRA has significant concerns regarding these transactions and will consider the application of the General Anti-Avoidance Rule (GAAR) when faced with a similar set of transactions unless substantial evidence supporting its non-application is provided. In addition …, it would be appropriate to consider that the same conclusion would apply regardless of whether or not the transactions are being undertaken to avoid the 21-year deemed disposition rule in subsection 104(4).