All the voting common shares of Opco (carrying on an active business) are held by a discretionary inter vivos trust which was settled by the uncle of the four beneficiaries (the "children"), and its non-voting retractable preferred shares (which were issued on an estate freeze and have a value approximating 50% of the value of Opco) are held by a spousal testamentary trust, of which the four children are the beneficiaries upon the death of the surviving spouse (i.e., their mother), and of which their father was the testator).
If the testamentary trust redeemed its preferred shares for a note, would it be affiliated with Opco following such retraction?
It would be a question of fact as to whether the holding of the debt by the testamentary trust resulted in de facto control of Opco (as described in s. 256(5.1)). In such event, the exception in s. 40(3.61) would not prevent the application of the stop-loss rule in s. 40(3.6) "given that the testamentary trust is not an estate." CRA also noted [TaxInterpretations translation] that although IT-64R4 indicates that the holding of a large debt is relevant to determining whether the holder has de facto control of the debtor:
This factor nonetheless was considered of little importance in Technical Interpretation XXX where the debt represented virtually all the net value of a corporation but all its assets consisted of readily marketable securities which could serve to repay the debt held by an estate without imperiling its investment operations.