CRA finds that the holding of a US cottage by a discretionary family trust that was an eligible group entity of real estate Cancos likely would taint the latter under (c)(i) of “excluded entity”

A discretionary personal trust for the benefit of the spouse and child of the individual (Mr. X) controlling various Canadian real estate corporations (so that the trust was an “eligible group entity” in respect of those corporations) held, as its principal asset, a US cottage used primarily for personal use of the spouse and child, with Mr. X occasionally contributing funds to the Trust to cover the operating costs, and making substantially all of the decisions regarding the cottage in Canada. STEP Canada asked whether the Trust’s ownership of the US cottage caused the Trust (and, therefore, the corporations) to fail to meet the requirement of s. (c)(i) of the “excluded entity” definition that “all or substantially all of [its] undertakings and activities … [be] throughout the taxation year, carried on in Canada”?

CRA responded unfavourably:

Where the undertaking and activities of a taxpayer include the holding of real estate, relevant factors to be considered would include the place where the property is situated and where related undertakings or activities occur like the operation and use of the property, its maintenance and upkeep, its management, administration and financial management.

In the case of a trust holding a real property that is situated in the US, it is reasonable to consider that the facts might indicate that significant activities related to the holding and operation of the property take place in the US. Given the Trust only owns the US Cottage and a US bank account containing funds necessary to operate the US Cottage, the Trust (and therefore all Cancos) would likely not meet the “all or substantially all” requirement in subparagraph (c)(i) … .

Neal Armstrong. Summary of 25 June 2030 External T.I. 2025-1056861E5 under s. 18.2(1) - “excluded entity” – s. (c)(i).