Principal Issues: A person is not a beneficiary of a trust. The person is affiliated to a majority-interest beneficiary. Whether the person would also be a majority-interest beneficiary, as defined in subsection 251.1(3).
Position: The person does not need to be a beneficiary of the trust to be a majority-interest beneficiary of a trust if the person is affiliated with a person who has an interest described in paragraph (a) or (b) of the definition of the expression majority-interest beneficiary in subsection 251.1(3).
Reasons: Wording of the Act.
FINANCIAL STRATEGIES AND INSTRUMENTS ROUNDTABLE, OCTOBER 10, 2014
2014 APFF CONFERENCE
Question 3
Extended definition of majority-interest beneficiary
The definition in subsection 251.1(3) of a majority-interest holding an interest in a trust is as follows:
Majority-interest beneficiary, of a trust at any time, means a person whose interest as a beneficiary, if any, at that time
(a) in the income of the trust has, together with the interests as a beneficiary in the income of the trust of all persons with whom the person is affiliated, a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the income of the trust; or
(b) in the capital of the trust has, together with the interests as a beneficiary in the capital of the trust of all persons with whom the person is affiliated, a fair market value that is greater than 50% of the fair market value of all the interests as a beneficiary in the capital of the trust. (bénéficiaire détenant une participation majoritaire)
(your emphasis)
The wording of the definition of "majority-interest beneficiary" is substantially the same as that used to define a “majority-interest partner” in subsection 248(1). A recent Technical Interpretation 2013-051565 dated January 15, 2014 specifies that under the definition of majority-interest partner and paragraph 251.1(1)(e), which sets out the rules for affiliation for partnerships, a person who is not a member of the partnership could be included in the definition of “majority-interest partner” and could be affiliated to the partnership under the broader definition of the concept of "affiliated persons," depending on the circumstances.
The definitions being similar for partners and beneficiaries, the resulting conclusion could be the same.
The definition of majority-interest beneficiary is broadened to include persons who are not beneficiaries but are affiliated with them. It therefore appears that a person who is not a beneficiary, but who is affiliated with a majority-interest beneficiary, will also be included in the definition of majority-interest beneficiary.
Will a person who is not a beneficiary but is affiliated with a majority-interest beneficiary also be included in the definition of majority-interest beneficiary under subsection 251.1(3)?
CRA response
A person (other than a trust) who does not have an interest qua beneficiary in the income nor an interest qua beneficiary in the capital of a trust could be a majority interest beneficiary in certain cases. This is the case if such person is affiliated with a person or persons who have interests qua beneficiary in the income of the trust having a fair market value exceeding 50% of the fair market value of all the interests qua beneficiary in the income of the trust or who have interests qua beneficiary in the capital of the trust having a fair market value exceeding 50% of the fair market value of all the interests qua beneficiary in the capital.
The first example given by the Department of Finance under subsection 251.1(3) "majority-interest beneficiary" in the Department of Finance Technical Notes: Income Tax, supports this interpretation:
“Situation: Philip has no interest as a beneficiary in either the income or capital of Trust A, but his wife, Muriel, with whom he is affiliated, has an interest in the income of Trust A, the fair market value of which is more than half of the fair market value of all the interests as a beneficiary in the income of Trust A.
Result: Philip, as well as Muriel, is a majority interest beneficiary of Trust A because he is affiliated with a person who has an interest in the income of Trust A the fair market value of which is more than half of the fair market value of all the interests as a beneficiary in the income of Trust A.”
However, as provided by subparagraph 251.1(4)(d)(iii), a trust is a majority interest beneficiary in another trust only if it has an interest as a beneficiary in the income or capital of the other trust.
Sylvie Labarre
(613) 946-5357
Le 10 octobre 2014
2014-053484