A personal trust (the "Trust") wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco" with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which pays that amount to Holdco.
(a) If the Trust designates the $5,000 amount to Holdco pursuant to s. 104(19), when must Opco be connected to Holdco for Part IV tax computation purposes?
(b) What is the effect on Holdco's Part IV tax liability if, after September 20, 20X1 and before December 31, 20X1, the Trust disposes of Opco a third party?
(c) What is the effect if Holdco is no longer a beneficiary of the Trust on December 31, 20X1?
(d) What is the effect if, for an indefinite period commencing after September 20, 20X1, Holdco is still a beneficiary but ceases to be controlled by a person who does not deal at arm's length with the person controlling Opco?
Q.17(a)
After noting its position that a s. 104(19) designation cannot be made before the end of a trust's taxation year, so that the beneficiary is deemed to have received the dividend at the end of that year, CRA indicated that, as the designation pursuant to s. 104(19) is effective on December 31, 20X1, whether Opco is connected with Holdco is tested at that time.
Q.17(b)
Accordingly, if on December 31, 20X1, all the Opco shares are held by a third party, Opco will not be connected with Holdco pursuant to s. 186(4)(a), and Holdco will be liable for Part IV tax on the $5,000 assessable dividend deemed to be received by it.
Q.17(c)
After noting that it “generally accepts that the time at which an amount becomes payable to a recipient is the earlier of the time of payment or the time at which the recipient is entitled to enforce payment of it,” and that “a taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13),” CRA found that since:
the $5,000 was paid on September 20, 20X1 by the Trust to Holdco, who was a beneficiary of the Trust at that time, that amount may therefore be considered to have become payable to Holdco on that date for the purposes of paragraph 104(13)(a). The amount of $5,000 will therefore be included in the computation of Holdco's income for its taxation year ended September 30, 20X2, i.e., the taxation year in which the Trust's taxation year ends … .
[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.
Finally, if Opco is connected with Holdco per s. 186(4) at the end of the Trust's taxation year, i.e. December 31, 20X1, Holdco will be subject to the application of paragraph 186(1)(b) for the purpose of computing Part IV tax on the amount of the $5,000 assessable dividend. If Opco is not connected with Holdco, then Holdco will be subject to paragraph 186(1)(a) in computing its Part IV tax.
Q.17(d)
After noting that by virtue of s. 251(1)(b), the Trust and Holdco are deemed not to deal with each other at arm's length, CRA went on to note that since more than 50% of the fully-voting Opco shares belonged to the Trust, which did not deal at arm's length with Holdco, Holdco controlled Opco per s. 186(2), so that Opco was connected to Holdco under s. 186(4)(a).
If the Trust makes a s. 104(19) designation of the amount of the taxable dividend for its taxation year ending December 31, 20X1, Holdco will be required to include the dividend income in computing its income for its taxation year ending September 30, 20X2 and will be subject to s. 186(1)(b) for Part IV tax purposes – or if the Trust does not make the designation, such amount will not be a taxable dividend and Holdco will not be subject to Part IV tax on the $5,000..