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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Two questions concerning "related persons" for the purpose of section 55 involving trusts.
Position: In one situation parties are related, in the other not.
Reasons: 55(5)(e)(ii) and (iii).
981951
XXXXXXXXXX D.A. Palamar
957-2127
Attention: XXXXXXXXXX
August 18, 1998
Dear Sirs:
Re: Related Parties for the Purposes of Subsection 55(2)
This is in reply to your letter of July 24, 1998 wherein you requested our opinion on the determination of related parties for the purposes of section 55 (all statutory references in this letter are to the Income Tax Act).
Facts
Situation 1
1. X Co. is 100% owned by a trust (Trust #1)
The beneficiaries consist of a brother and a sister. They are the only beneficiaries.
The trustees are the father of the beneficiaries (Mr. X) and two people that deal at arm’s length with Mr. X. Trustee decisions are made based upon a majority.
2. Y Co. is owned 100% by X Co.
3. Assume that as part of the series of transactions that includes a dividend paid by Y Co. to X Co., Mr. X acquires a significant interest in Y Co.
Query
Is Mr. X related to X Co. and Y Co. for the purposes of section 55?
Your Views - Situation 1
1. Mr. X is related to each beneficiary of Trust #1 and therefore, is related to Trust #1 by virtue of subparagraph 55(5)(e)(ii).
2. Mr. X is related to X Co. and Y Co. by virtue of subparagraph 251(2)(b)(iii).
Situation 2
Assume that, instead of Mr. X., a new trust (Trust #2) acquires a significant interest in Y Co. Trust #2 would be identical to Trust #1 in all respects (i.e., same beneficiaries, same trustees) except the date set for distribution.
Query
Is Trust #2 related to X Co. and Trust #1 for the purposes of section 55?
Your Views - Situation 2
1. X Co. is related to Trust #1 by virtue of subparagraph 55(5)(e)(iii).
2. It is the trustees of Trust #1 who, in effect, control X Co. The trustees of Trust #2 include all of the trustees of Trust #1, no other person is a trustee of Trust #2, and a majority of trustees are required to act under either trust. Therefore, it appears that Trust #2 could also be considered to control X Co. since the trustees of Trust #2 effectively control X Co.
3. In that case, Trust #2 and X Co. would also be related by virtue of subparagraph 55(5)(e)(iii).
4. Furthermore since Trust #1 and Trust #2 are identical trusts, the trusts should be considered related by virtue of subparagraph 55(5)(e)(ii).
Our Views
We agree with your conclusion that, in Situation 1, Mr. X is related to X Co. and Y Co. for the reasons stated.
Unfortunately, we are unable to agree with your conclusion that, in Situation 2, Trust #2 is related to X Co or Trust #1 for the purposes of section 55. Subparagraph 55(5)(e)(iii) provides that a trust and a person shall be deemed not to be related unless they are deemed to be related by paragraph 55(3.2)(d) or subparagraph 55(5)(e)(ii), or the person is a corporation that is controlled by the trust. In our view, none of these provisions apply to cause Trust 2 to be related to X Co. and Trust #1.
More specifically, Trust #2 is not related to each of the beneficiaries of Trust #1 and therefore is not deemed by subparagraph 55(5)(e)(ii) to be related to Trust #1. Trust #2 does not control X Co. The fact that Trust #2 has the same trustees as Trust #1, which does control X Co. and Y Co, does not alter our conclusion in this regard.
The above comments represent our general views on the questions raised in your letter and are given and are provided in accordance with our policy set out in paragraph 22 of Information Circular 70-6R3.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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