The expanded s. 104(5.8) signifies that a small s. 107(2) distribution to a beneficiary in which a second trust had a small investment would taint the second trust

Bill C-31 would expand s. 104(5.8) so that it would apply not only where a trust transferred capital property, land, inventory, or resource properties to another trust under s. 107(2), but also where it transferred such property under s. 107(2) “to a taxpayer that is a beneficiary under the transferor trust … if an interest in the taxpayer is held directly or indirectly by another trust at the particular time.”

Suppose that “Old Trust” distributes its portfolio of marketable securities with an FMV of $5,000 to Holdco as a discretionary beneficiary, and that “New Trust,” with a $5 million portfolio of marketable securities, owns a 1% equity interest in Holdco, with the remaining 99% interest held by another party. Although the interest of New Trust in Holdco is insignificant, the expanded s. 104(5.8) would apply to subject the entirety of New Trust’s $5 million portfolio to an accelerated deemed disposition under s. 104(4).

It is also noted that, although in this example it is clear that an interest in the taxpayer (i.e., Holdco) is “held directly or indirectly by another trust” (New Trust, a Holdco shareholder), the concept of an "interest" is broad enough that the application of s. 104(5.8) potentially could be engaged by various types of direct or indirect legal, equitable, or economic entitlements.

Neal Armstrong. Summary of Taylor Grenning and Ergi Thodhori, "Trusts and the 21-Year Deemed Disposition Rules: The Evolving Reach of S. 104(5.8)," Canadian Tax Focus, Vol. 16, No. 3, August 2026, p. 1 under s. 104(5.8).