David Carolin, Manu Kakkar, "Estate Plans, Trusts, and Dividends: Is There a Gap Here?", Tax for the Owner-Manager, Vol. 21, No. 1, January 2021, p. 1

Summary Under
Tax Topics - Income Tax Act - Section 104 - Subsection 104(19)

Deferral opportunity arising from CRA’s position that s. 104(19)-designated dividend is not received for s. 186(1)(b) purposes until year end of trust

  • Opco, whose shares are held by a family trust, pays a $1 million dividend to the trust on January 15, 2020 and claims a dividend refund of $383,300 for its taxation year ended January 31, 2020. The dividend is not allocated by the trust to Bankco (a resident corporate beneficiary with a November 30 year-end) until the trust’s year-end of December 31, 2020 so that, based on 2016-0647621E5 and 2013-0495801C6, it is not reported by Bankco until its year ending November 30, 2021. Assuming that Opco’s dividend refund is received by June 30, 2020, 19 months pass before Bankco is required to pay its matching Pt. IV tax. (p. 1)

Potential for subsequent connectedness to exempt a previously paid dividend

  • Suppose, instead, that on March 31, being a day that Opco and Bankco are not connected, a dividend is paid both by Opco to the trust, and by the trust to Bankco – but on September 30, a share ownership change results in Opco and Bankco now being connected, so that the CRA position suggests that Pt. IV tax will not apply. (pp. 1-2)

Potential for CRA policy on when a s. 104(19) dividend arises to defer or permit the offsetting of a s. 55(2) gain

  • Suppose that Opco pays a dividend in excess of safe income on hand on January 15, 2020. Bankco need not report the resulting s. 55(2) deemed capital gain until its year ending November 30, 2021. In addition to this deferral of the capital gains tax, a permanent tax saving might result through acquiring losses or other deductions in the meantime, subject to the various loss-restriction rules. (p. 2)
Summary Under
Tax Topics - Income Tax Act - Section 186 - Subsection 186(1) - Paragraph 186(1)(b)
deferral (or other) opportunities arising from CRA’s position that s. 104(19)-designated dividend is not received until year-end of trust

CRA’s position (e.g., in 2016-0647621E5 and 2013-0495801C6) is that a dividend designated under s. 104(19) by a trust to a beneficiary is not received by the beneficiary for most ITA purposes until the year-end of the trust. This position, if correct, raises some planning possibilities:

  • Suppose that Opco, whose shares are held by a family trust, pays a $1 million dividend to the trust on January 15, 2020 and claims a dividend refund of $383,300 for its taxation year ended January 31, 2020. The dividend is not allocated by the trust to Bankco (a connected resident corporate beneficiary with a November 30 year-end) until the trust’s year-end of December 31, 2020, and is not reported by Bankco until its year ending November 30, 2021. If Opco’s dividend refund is received on June 30, 2020, 19 months pass before Bankco is required to pay its matching Pt. IV tax under s. 186(1)(b) – a tax deferral.
  • Suppose, instead, that on March 31, being a day that Opco and Bankco are not connected, a dividend is paid both by Opco to the trust, and by the trust to Bankco – but on September 30, a share ownership change results in Opco and Bankco now being connected, so that CRA’s position suggests that Pt. IV tax has been avoided.
  • Now suppose that Opco pays a dividend in excess of safe income on hand on January 15, 2020. Bankco need not report the resulting s. 55(2) deemed capital gain until its year ending November 30, 2021. In addition to deferral of the capital gains tax, a permanent tax saving might result through acquiring losses or other deductions in the meantime.