CTF - 1990 Conference Report
QUESTION I 96
Estate Freezes
Consider the following estate freeze situation where a discretionary trust is used:
1. Mr. A, the sole shareholder of Opco, exchanges all of his common shares of Opco, in a transaction to which section 86 of the Income Tax Act applies, for preferred shares of Opco having a fair market value equal to the fair market value of the common shares of Opco.
2. A trust, of which Mr. A and his children are the beneficiaries, then subscribes for all of the common shares of Opco.
3. The trustee of the trust would have discretion over distribution of trust capital, with the result that the common shares of Opco could eventually pass to Mr. A, or his children, or some combination thereof.
Would the Department apply subsection 245(2) to this estate freeze, due to the reversionary nature of the freeze?
Would the Department's position be different if the only beneficiaries of the trust were Mr. A's wife and his children?
DEPARTMENT'S POSITION
Whether the Department would apply subsection 245(2) of the Income Tax Act to a particular situation can only be determined following a thorough review of all of the facts of that situation. However, if one of the transactions in the series of transactions that includes the distribution of the Opco shares or trust income to Mr. A is an avoidance transaction within the meaning of subsection 245(3), the provisions of subsection 245(2) may apply to the transaction. Also, depending on the facts of the situation, other provisions of the Income Tax Act, such as subsections 74.1(2), 74.3(1), 74.4(2), 75(2) and 86(2), may have application.
Prepared by: S. Leung