A discretionary family trust (the "Trust") held all the Class C non-voting common shares of Opco having an FMV of $1,500,000, and Mr. X held all the voting shares, and Class E preferred shares with a nominal ACB and paid-up capital and a redemption value of $1,000,000.
Mr. X had been actively involved etc. in the Opco business for over five years, whereas his spouse (Ms. X), and their 20 year old child (Child X), who were beneficiaries of the Trust, had no such involvement.
Situation A
The will of Mr. X, who died on December 30, 2021, provided for a bequest of half the Class E shares to a testamentary trust for the benefit of Child X ("Trust X"), as well as bequest of the remaining shares to Ms. X. The will provided that: Trust X was to provide an annual income of $30,000 to Child X until age 35 and to distribute the Trust capital to Child X on turning 36.
Accordingly, Child X receives the Class E shares (that had not previously been encroached on) on turning 36 – whereupon Child X requests their redemption, thereby resulting in the receipt of a deemed dividend of $100,000.
Are the following amounts received by Child X "excluded amounts" under s. 120.4(1.1)(b)(ii): (a) the dividends of $30,000; and (b) the $100,000 deemed dividend?
In responding affirmatively, CRA noted that the Class E shares were acquired by Trust X (on behalf of Child X, its sole beneficiary) pursuant to the terms of Mr. X's will and thus were deemed by s. 248(8)(a) to be acquired as a consequence of Mr. X's death. Furthermore, the distribution of Class E shares on Child X turning 36 - as provided in Mr. X's will – would also be considered an acquisition of property made as a consequence of Mr. X's death. CRA stated that pursuant to s. 120.4(1.1)(b)(ii):
Child X will therefore be deemed to have been actively, regularly, continuously and substantially engaged in the business of Opco and Opco's business will be an excluded business for Child X. All dividends paid (or deemed to be paid) by Opco on the Class E shares of its capital stock and received (or deemed to be received) by Child X directly or indirectly through Trust X, will then be excluded amounts for Child X pursuant to subparagraph (e)(ii) of the definition of "excluded amount" … .
Situation B
The Trust deed provides that, upon the death of Mr. X, the beneficiaries of the Trust would be whichever of Ms. X and Child X was expressly designated by Mr. X in his will. Mr. X died on December 30, 2021, and his will provided for all his Opco shares to go to Ms. X.
However, the will provided that: Trust X was to provide an annual income of $30,000 to Child X until age 35; and to distribute the Trust capital to Child X on turning 36.
Would the dividends of $30,000 received by Child X be excluded amounts under s. 120.4(1.1)(b)(ii)?
CRA indicated that the Class C shares held by the Trust were not acquired by the Trust on behalf of Child X as a consequence of the death of another person, as the Trust already held such shares at the time of Mr. X's death, so that the s. 120.4(1.1)(b)(ii) deeming rule did not apply, and the dividends indirectly received by Child X, through the Trust would not be excluded amounts under s. (e)(ii) of the definition.
However, the acquisition by Child X of the Class C shares distributed to that child upon turning 36 would occur as provided for in Mr. X's will and, thus, as a consequence of Mr. X's death – so that from that time on, the conditions in s. 120.4(1.1)(b)(ii) will be satisfied and the income from those shares (including the deemed dividend) will be an excluded amount to Child X.