Partway through its calendar taxation year, a family trust received a dividend from a family corporation (Vefghi Environmental), paid that dividend to a corporate beneficiary (Vefghi Corp., also with a calendar year end) and in its return for that taxation year, made a s. 104(19) designation. CRA applied its published position (e.g., in 2020-0845821C6 F) that since (due to a sale of Vefghi Environmental to a third party) the two corporations had ceased to be connected between the time of the dividend and the effective time of the s. 104(19) designation (the December 31 trust year end), the dividend was subject to Part IV tax.
A second situation arising on the Rule 58 application under appeal was similar, except that a new taxation year of the corporate beneficiary (S.O.N.S.) started after the date of the payment of the dividend (on June 30, shortly preceding the dividend payer and beneficiary ceasing to be connected) and before the (December 31) effective date of the s. 104(19) designation by the trust, so that on no day in that taxation year of S.O.N.S. was the dividend payer connected to it.
Webb JA essentially agreed with the CRA position that the determination of whether, in each case, the corporate payer was connected with the corporate beneficiary for purposes of s. 186(1)(a), was to be made at the end of the particular taxation year of the trust in which the trust received the dividend from the corporate payer.
Thus, since such connected status did not exist at the trust year-end, Part IV tax was payable.
In reaching this conclusion, Webb JA noted various considerations including:
- As s. 186(4) did not “explicitly link the particular time at which the connected test is to be applied to the time that the dividend is received by a corporate shareholder” (para. 30).
- Since the s. 104(19) designation “cannot be made before the end of the trust's taxation year, the last day of the trust's taxation year is the earliest date on which this designation could be made” and, indeed, “[i]t is only once the designation is made, and the corporate beneficiary is deemed to receive a dividend, that the determination of whether the beneficiary corporation is connected to the corporation that paid the dividend to the trust can be made” (para. 48).
- Conversely, finding that the date the trust made the designation was the relevant date could lead to a conflict with the wording of s. 104(19), for example, if a trust with a December 31 year-end made a designation when it filed its tax return after December 31, that “would be after the taxation year of the corporate beneficiary in which the trust's taxation year ends” (para. 53).
- Thus, “the only date on which the dividend could be deemed to be received by a corporate beneficiary without resulting in a potential conflict between the date of deemed receipt and the stipulation that the dividend is deemed to be received in the taxation year of the beneficiary in which the trust's taxation year ends, is the last day of the trust's taxation year” (para. 54).
- It also was to be noted that, as illustrated in the case of S.O.N.S., “using the date that the trust received the dividend could conflict with the requirement that the dividend be included in the taxation year of the beneficiary as specified in subsection 104(19)” (para. 50).