2 December 2025 CTF Roundtable Q. 8, 2025-1080721C6 - Whether a Beneficiary under a Trust is Affiliated with a Corporation Controlled by the Trust

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether a beneficiary under a trust is affiliated with a corporation controlled by the trust in three scenarios: (A) the trust holds all of the voting shares of the corporation (B) the trust holds 80% of the voting shares of the corporation and the beneficiary holds 20% of the voting shares (C) would the CRA's answers to (A) and (B) change if the beneficiary was also a trustee of the trust.

Position: (A) No. (B) No. (C) No.

Reasons: See below.

2025 CTF Annual Tax Conference

CRA Round Table

Question 8: Whether a Beneficiary under a Trust is Affiliated with a Corporation Controlled by the Trust

Background

Section 251.1 (footnote 1) contains a set of rules to determine whether persons are affiliated with each other for purposes of the Act (hereafter “the affiliated persons rules”). Notably, pursuant to subparagraph 251.1(1)(b)(i), a corporation will be affiliated with a person by whom the corporation is controlled, and pursuant to subparagraph 251.1(1)(b)(ii), a corporation will be affiliated with each member of an affiliated group of persons by which the corporation is controlled. For these purposes, and for purposes of the affiliated persons rules in general, the reference to “controlled” means controlled, directly or indirectly in any manner whatever and, as such, encompasses both control in fact (de facto control) and legal control (de jure control). An “affiliated group of persons” is defined in subsection 251.1(3) as meaning a group of persons each member of which is affiliated with every other member. The affiliated persons rules also contain specific rules applicable to trusts. In particular:

• subparagraph 251.1(1)(g)(i) provides that a person will be affiliated with a trust if the person is a “majority-interest beneficiary” of the trust, as that term is defined in subsection 251.1(3); and
• paragraph 251.1(4)(c) generally provides that, for purposes of the affiliated persons rules, a reference to a trust does not include a reference to the trustee or other persons who own or control the trust property.

We are seeking the CRA’s view on the application of the affiliated persons rules in the following fact situation.

Fact situation

1. Individual A is a majority-interest beneficiary of a discretionary trust (Trust). Accordingly, Individual A is affiliated with Trust, and Individual A and Trust form an affiliated group of persons.

2. BCo is a corporation incorporated in Canada that only has one class of shares (“BCo Voting Common Shares”).

3. Trust owns 100% of the BCo Voting Common Shares and therefore exercises de jure control over BCo.

4. Individual A does not, either alone or as part of a group, exercise de facto control over BCo within the meaning of subsections 256(5.1) and (5.11).

Questions

A. Even if Trust alone holds all of the BCo Voting Common Shares, do Individual A and Trust form an affiliated group of persons by which BCo is controlled, such that BCo is affiliated with Individual A pursuant to subparagraph 251.1(1)(b)(ii)?

B. Would the CRA’s answer to Question A change if, instead of Trust holding all of the BCo Voting Common Shares, Trust held 80% of the BCo Voting Common Shares and Individual A held 20% of the BCo Voting Common Shares?

C. Would the CRA’s answers to Question A and Question B change if Individual A had the ability to control Trust’s property as the trustee of Trust or as part of a group of trustees of Trust?

CRA Response

Preliminary comments

As previously stated, the control test for purposes of the affiliated persons rules includes both de jure and de facto control. However, because it is stated in the fact situation that Individual A does not, alone or as part of a group, exercise de facto control over BCo, the CRA’s responses to the questions will only consider the application of the de jure control test in determining whether Individual A is affiliated with BCo.

Case law has established that the general test for de jure control is whether the controlling party enjoys, by virtue of its shareholdings, the ability to elect the majority of the board of directors. (footnote 2) In addition, if a single person owns a sufficient number of shares to exercise de jure control over a corporation, resort to whether a group of persons holds de jure control is precluded. (footnote 3)

Further, the affiliated persons rules do not contain any provisions that would effectively override the above-noted principles established by case law. For instance, the affiliated persons rules do not contain provisions similar to the provisions contained in paragraph 256(1.2)(b), which provide that, for the purposes of determining if a corporation is associated with another corporation, a corporation may be controlled by a person or a particular group of persons notwithstanding that the corporation is also controlled by another person or group of persons.

CRA Response (A)

As previously noted, pursuant to the interpretative rule in paragraph 251.1(4)(c), a reference to a trust does not include a reference to the trustee or other persons who own or control trust property. In this case, therefore, it is Trust that is considered to have de jure control of BCo by virtue of holding all of the BCo Voting Common Shares, such that Trust and BCo are affiliated persons under subparagraph 251.1(1)(b)(i). Since BCo is controlled by a single person (i.e., Trust), it cannot be said that BCo is controlled by any person other than Trust or by a group of persons for purposes of subparagraphs 251.1(1)(b)(i) or 251.1(1)(b)(ii).

Accordingly, since BCo is not controlled by the affiliated group of persons formed by Individual A and Trust, BCo is not affiliated with Individual A under subparagraph 251.1(1)(b)(ii).

CRA Response (B)

The CRA’s answer to Question A would be the same if, instead of Trust holding all of the BCo Voting Common Shares, Trust held 80% of the BCo Voting Common Shares and Individual A held 20% of the BCo Voting Common Shares. This is because, even if Individual A held 20% of the BCo Voting Common Shares, Trust would still own a sufficient number of BCo Voting Common Shares (i.e., 80%) to exercise alone de jure control over BCo. Accordingly, it cannot be concluded that BCo would be controlled by a group of persons (i.e., a group formed by Individual A and Trust), since BCo would in fact be controlled by a single person (i.e., Trust).

CRA Response (C)

The CRA’s answers to Question A and Question B would not change if Individual A was a trustee of Trust and, as a trustee or as part of a group of trustees, had the ability to control Trust’s property.

Pursuant to paragraph 251.1(4)(c), Individual A would not be viewed, in his or her capacity as trustee of Trust, as a person owning the BCo Voting Common Shares held by Trust or as a person controlling BCo, either alone or as part of a group of trustees. As such, from a de jure control perspective, BCo would still be controlled by Trust alone and would not be affiliated with Individual A for the same reasons as those mentioned in our answers to Question A and Question B.

Laurence Gagné
2025-108072
December 2, 2025

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. Unless otherwise stated, all references to a statute are to the relevant provision of the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, (the Act), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended, (the Regulations)

2. Duha Printers (Western) Ltd. v. Canada, 98 DTC 6334 (SCC), at para. 36. Reiterated in Deans Knight Income Corp. v. Canada, 2023 SCC 16, at para. 80

3. Southside Car Market Ltd. v. The Queen, (FCDT), 82 DTC 6179.