1st Situation: X, who holds all the shares of Newco, and is a beneficiary of a discretionary trust holding all the shares of Opco (so that X is deemed by s. 256(1.2)(f)(ii) to own such shares), renounces all rights as beneficiary. Does this cause Newco and Opco to not be associated? CRA responded (TI translation):
It would be necessary to take into account the rules in subsection 248(25) to determine if X was a beneficiary of the discretionary trust…[and] to determine from our legal Service that the documents signed by X were sufficient to consider that X was not a beneficiary at any particular time in the taxation year of Opco and Newco (taking into account subsection 248(25).
If [so]…subparagraph 256(1.2)(f)(ii) would not apply… .
2nd Situation: Mother controls Opco through holding the preferred shares and a discretionary trust of which Mother and a minor child are the beneficiaries holds all the common shares. The trust deed provides that the trust cannot distribute income or capital to the child before the age of 18. Father holds all the shares of Newco.
Would Opco and Newco be associated under ss. 256(1.2)(f)(ii) and 256(1.3) – and would it make any difference if the trust deed precluded only the distribution of income before 18? CRA responded:
[E]ven if the minor child has no right to income or capital while not having attained the age of 18, part of the accumulated capital is conditional on the fact that a person does or does not exercise a discretionary power.
Consequently, subparagraph 256(1.2)(f)(ii) would apply to deem the minor child to be the owner of the shares in the capital of Opco held by the discretionary trust.
…[W]e assume that the minor child does not manage the affairs of the corporation. In determining whether Newco is associated with Opco, Father would be deemed, by virtue of subsection 256(1.3), to hold the shares held by the discretionary trust in Opco (by reason of the resumption in subparagraph 256(1.2)(f)(ii)…). Thus, Newco and Opco would be associated… .
The answer would not change with the indicated trust deed variations.
3rd Situation: 80% and 20% of the shares of Opco are held, respectively, by: Mother; and a trust (“Trust 1”) of which she and her three minor children are discretionary beneficiaries. 80% and 20% of the shares of Newco are held, respectively, by: Father; and a trust (“Trust 2”) of which he and his three minor children are discretionary beneficiaries. Trusts 1 and 2 have separate trustees. The children do not manage the affairs of the corporations. Would Opco and Newco be associated under ss. 256(1.2)(f)(ii) and 256(1.3)? CRA responded:
[S]ubsection 256(1.3) would apply…to deem Father to hold 20% of the shares in the capital of Opco, being all the shares…held by Trust 1. Furthermore, Mother would be deemed to hold 20% of the shares…of Newco by virtue of subsection 256(1.3), being all the shares…of Newco held by Trust 2. Subparagraph 256(1.2)(f)(ii) and subsection 256(1.3) would apply individually in relation to each beneficiary so that the shares…of Opco or Newco, as the case may be, would not be counted two or more times.
Thus…Newco would not be associated with Opco because Father would not hold or be deemed to hold at least 25% of the shares…of Opco and because Mother would not hold or be deemed to hold at least 25% of the shares…of Newco.