A personal 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 immediately on-pays that amount to Holdco.
CRA indicated that since a s. 104(19) designation by a trust cannot be effective until the trust’s year end, if by the effective time of the deemed dividend payment as a result of the designation (December 31, 20X1), the above trust had disposed of Opco to a third party, whether Opco was connected for Pt. IV tax purposes would be tested at that time, so that there would be no exemption from Pt. IV tax under s. 186(1)(a).
However, a similar timing issue would not arise if, for some reason, Holdco ceased, after the receipt by it of the $5,000 from the Trust (September 20, 20X1) and before the trust year end (December 31, 20X1), to be a trust beneficiary, but with Opco continuing to be connected on December 31, 20X1 with Holdco pursuant to s. 186(4)(a) by virtue of common control as described in s. 186(2). In this regard, CRA stated:
[I]t must be determined [for s. 104(13) purposes] whether all or part of the income of the trust has become payable to the beneficiary. That determination must first be made in light of the ordinary meaning given to the term "payable" under the applicable private law.
… [I]t should be noted that subsection 104(24) does not alter the ordinary meaning of the term "payable" nor does it specify when an amount becomes payable. Rather, subsection 104(24) provides that, for the purposes of those provisions, an amount otherwise payable under the applicable private law is deemed not to have become payable to a recipient in a taxation year. However, this deeming rule does not apply if the amount was paid to the beneficiary in the year or if the beneficiary was entitled in the year to enforce payment of it. …
[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)” ... .
[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.