Principal Issues: Meaning of beneficiary for the purposes of subparagraph 55(5)(e)(ii).
Position: The CRA will apply the broad meaning of beneficiary adopted by the Federal Court of Appeal in The Queen v. Propep Inc. (2009 FCA 274) for the purpose of subparagraph 55(5)(e)(ii). Therefore, the CRA will take into account for that purpose, the definition of "beneficially interested" in subsection 248(25). To determine whether a person is a "beneficiary" or has a "right as a beneficiary" in a particular situation requires the analysis of the common law or the civil law, as the case may be.
Reasons: The Propep decision. The words "is or may... be entitled" used in subparagraph 55(5)(e)(ii) also support a broad meaning of the notion of beneficiary.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 3
Undesignated beneficiary for purposes of paragraph 55(5)(e)
For the purposes of determining the possible application of the exceptions provided for in
For the purposes of determining the possible application of the exceptions provided in paragraph 55(3)(a) for the purposes of subsection 55(2), paragraph 55(5)(e) provides clarification on what constitutes a related person for the purposes of section 55. For this purpose, subparagraph 55(5)(e)(ii) states the following:
Where at any time a person is related to each beneficiary (other than a registered charity) under which a trust who is or may (otherwise than by reason of the death of another beneficiary under the trust) be entitled to share in the income or capital of the trust, the person and the trust shall be deemed to be related at that time to each other, and for this purpose, a person shall be deemed to be related to himself, herself or itself.
Often, trust deeds provide for potential future beneficiaries (corporations, individuals or trusts) who are not specifically named but are determined and may be designated by the trustees. Here is a sample clause:
any corporation, incorporated or to be incorporated, designated by the Trustee and whose sole shareholders shall be one or more of the persons or trust patrimonies designated under paragraph 2.1 including the ABC Trust.
as well as any trust designated by the Trustee and whose sole beneficiaries will be one or more of the persons or trustees appointed under paragraph 2.1.
The decision of the Court of Québec in Fiducie Famille Salammbô v. Ville de Montréal (2011 QCCQ 11322) dealt with this issue for the purposes of real estate transfer tax. The Court confirmed, that given that the transfer tax is payable on the date of registration of the transfer, it makes sense to verify the identity of the beneficiaries at that time. Thus, potential beneficiaries not specifically named should not be taken into account if they were not beneficiaries at the time of registration.
We understand that the Act respecting Duties on Transfers of Immovables is different from the Canadian Income Tax Act. However, for purposes of determining the presence of related persons for the purposes of subparagraph 55(5)(e)(ii) between a trust and its beneficiaries, would the CRA be in agreement with the findings of the Court of Québec in the Salammbo Family Trust case? Consequently, does the CRA accept that it should consider only the persons who have been designated as beneficiaries at the particular time?
CRA response
In The Queen v. Propep, 2009 FCA 274, the Federal Court of Appeal interpreted the term "beneficiary" in subparagraph 256(1.2)(f)(iii) based on the broad concept of "income interest" in subsections 108(1) and 248(1) and taking into account the expression "beneficially interested" in subsection 248(25).
The CRA considers that the courts would adopt this expanded sense of the concept of beneficiary for purposes of subparagraph 55(5)(e)(ii). It also could be argued that this expanded concept of beneficiary is inter alia engaged by the text of subparagraph 55(5)(e)(ii), which refers to "each beneficiary under a trust who is or may (otherwise than by reason of the death of another beneficiary under the trust) be entitled to share in the income or capital of the trust." Consequently, the position stated at the 2004 APFF Conference [2004-0086961C6] on the meaning of "beneficiary" for the purposes of subparagraph 55(5)(e)(ii), which was to disregard subsection 248(25), is not valid.
For the purposes of subparagraph 55(5)(e)(ii), as the term "beneficiary" is not defined in the Act, it would be interpreted in the light of its meaning under applicable private law. The definition of "beneficially interested" in subsection 248(25) would also be interpreted in the light of the applicable private law.
However, it is beyond the scope of this Roundtable to comment on the meaning to be accorded to the term "beneficiary" and under the definition of "beneficial interest" in subsection 248(25) in accordance with the applicable private law taking into account only what you stated in the introduction to your question. In order to answer such a question in a particular situation, the CRA should obtain the trust deed and should consult with the Department of Justice to conduct a full analysis of the applicable private law and of the judicial decisions rendered under that law.
Sylvie Labarre
(613) 946-5357
October 10, 2014
2014-053802