Mr. X and Mrs. X, each owning 50% of the common shares of corporation that is not a small business corporation, effect a s. 51 exchange of their respective shareholdings for the issuance of freeze preferred shares, with a discretionary trust created for each spouse (the Mr. X Trust and Mrs. X Trust), but with discretion to pay income or capital thereof to the other spouse, subscribing nominal and equal amounts for new common shares of the Corporation. Would the equal holding of the common shares by Mr. X and Mrs. X immediately before the freeze, and the equal holding by the Mr. X Trust and Mrs. X Trust after the freeze, result in the intent test in s. 74.4(2) not being satisfied?
After noting that s. 51(1)(c) provided that an s. 51 is deemed, for the purposes of ss. 74.4 and 74.5, to be a transfer of the property exchanged by the taxpayer to the corporation, CRA stated:
[O]ne of the spouses could potentially be entitled to more than 50% of the income of the Corporation because of his or her beneficial interest in both trusts. Accordingly, an estate freeze by Mr. X and Mrs. X in favour of Mr. X Trust and Mrs. X Trust could have the effect of reducing Mr. X's or Mrs. X's income from the Corporation benefiting their spouse. Subsection 74.4(2) could therefore apply to the transfers of property made by Mr. X and Mrs. X if the Purpose Test were satisfied.