An "evil trust" is structured to deliberately cause the application of subsection 75(2), so as to cause the attribution of dividend income to a connected corporation, where the income will not be taxable, while at the same time distributing proceeds in the form of cash by way of either a capital distribution or a loan to the intended recipient. CRA noted that:
[The] trust structures designed to purposely invoke attribution pursuant to subsection 75(2), with a view to avoiding the payment of tax on extracted corporate dividends …typically involves two Canadian corporations and a trust that acquires shares in one of the corporations ("Corp A"). In some cases, the acquisition is by subscription for the Corp A shares using cash contributed to the trust by the other corporation ("Corp B"), or the arrangement may involve having Corp B contribute shares of Corp A that it holds directly to the trust. In either case, when Corp A subsequently declares a dividend on the shares held by the trust, the scheme is intended to attribute the dividend income to Corp B, which then claims an offsetting deduction under section 112.
After noting that in some instances and based on Sommerer "subsection 75(2) will not apply to attribute income in respect of that property to the beneficiary," CRA stated:
In the alternative, if the facts are such that it may be concluded that the trust did not acquire the shares for fair market value consideration, CRA will typically challenge the arrangement on other grounds. Depending on the particular facts, assessments may be pursued to include the dividend income pursuant to paragraph 12(1)(j) or subsection 104(13), in calculating the income of the trust and/or its beneficiaries. Furthermore, CRA would typically hold the view that a strong GAAR argument would exist in support of an assessing position in such cases.