7 October 2020 APFF Roundtable Q. 17, 2020-0845821C6 F - Part IV tax and trust

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53(2)(h), 104(6), 104(13), 104(19), 186

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

Principal Issues: A personal trust (Trust) is the sole shareholder of a corporation (Opco). Another corporation (Gesco) is a beneficiary of the trust. The end of the taxation years of Trust and Opco is December 31 and September 30 for Gesco. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to Trust and on the same day Trust remits the amount to Gesco.

1) When does Opco have to be connected to Gesco for the calculation of Part IV tax by Gesco? 2) How would Gesco calculate Part IV tax if after September 20, 20X1 but before December 31, 20X1 Trust disposed of all the shares of Opco to a third party ? 3) What would be the consequences for Gesco for the calculation of Part IV tax if Gesco is not a beneficiary of Trust on December 31, 20X1? 4) What would be the consequences for Gesco for the calculation of Part IV tax if after September 20, 20X1 Gesco is a beneficiary of Trust but ceased to be controlled by a person that is not dealing at arm’s length with Opco?

Position: 1) To be valid, a designation under subsection 104(19) has to be made in Trust’s tax return. The amount of taxable dividend designated by Trust is deemed to be received by the beneficiary (Gesco) at the time that is the end of the taxation year of Trust in which the dividend was received by Trust. A connected relationship has to be determined at the time the beneficiary is deemed to have received the taxable dividend, which is at the end of the taxation year of Trust. 2) At the end of the taxation year of Trust, Opco would not be connected to Gesco. If Trust designates the amount of taxable dividend under subsection 104(19) received from Opco to Gesco in its December 31, 20X1 tax return, Gesco would be subject to Part IV tax under paragraph 186(1)(a) in its September 30, 20X2 tax return. 3) Under subsection 104(13), there shall be included in computing the income for a particular taxation year of a beneficiary (Gesco) under a trust such part of the amount that, but for subsections 104(6) and 104(12), would be the trust’s income for the trust’s taxation year that ended in the particular year as became payable in the trust’s year to the beneficiary. Since Gesco was a beneficiary of Trust when Trust made the payment, Trust may designate under subsection 104(19) the amount of $5,000 to Gesco to be a taxable dividend. If on December 31, 20X1, Opco is connected to Gesco by virtue of subsection 186(4), paragraph 186(1)(a) would apply, otherwise paragraph 186(1)(b) would be applicable. 4) Under paragraph 25(1)(b) a taxpayer and a personal trust are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV). Trust and Gesco are not dealing at arm’s length. Since more that 50% of the shares of Opco are owned by Trust, and Trust is not dealing at arm’s length with Gesco, consequently Gesco controls Opco pursuant to subsection 186(2). Accordingly, under paragraph 186(4)(a), Opco is connected to Gesco. If Trust designates, under subsection 104(19), the amount of taxable dividend received from Opco to Gesco, Gesco would be subject to Part IV tax under paragraph 186(1)(a) in its December 31, 20X2 tax return. If there is no designation by Trust under subsection 104(19), the amount received by Gesco would not be a taxable dividend and Gesco would not be subject to Part IV tax.

Reasons: Application of the Act and previous positions.

FEDERAL TAX ROUNDTABLE OCTOBER 7, 2020
APFF CONFERENCE 2020

17. Subsection 104(19) and the Part IV tax

Assume that a trust (the "Trust") holds all of the issued and outstanding shares of the capital stock of a corporation ("Opco") and that the taxation years of both Trust and Opco end on December 31. The Trust has a corporate beneficiary ("Holdco," or “Gesco”) with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust. On the same day, the Trust pays the $5,000 amount to Holdco.

The amount paid by the Trust to Holdco may retain its status as a taxable dividend by virtue of the "conduit rule" in subsection 104(19). For certain statutory purposes, the taxable dividend designated to Holdco pursuant to subsection 104(19) will then be deemed to have been received directly from Opco by Holdco and not to have been received by the Trust. Holdco will be subject to Part IV tax to the extent provided for in subsection 186(1).

For the purposes of subsection 186(1), it must be determined whether Opco is connected with Holdco. If both Opco and Holdco are controlled by persons who do not deal with each other at arm's length, Opco will be connected with Holdo pursuant to paragraph 186(4)(a) and subsection 186(2). Paragraph 186(4)(b) would not be applicable because Holdco does not hold any shares of the capital stock of Opco.

Questions to the CRA

(a) If the Trust designates the $5,000 amount to Holdco pursuant to s. 104(19), when must Opco be connected to Holdco exist for Part IV tax computation purposes?

(b) What is the effect on Holdco's liability for Part IV tax if, after September 20, 20X1 and before December 31, 20X1, the Trust disposes of all of the Opco Shares it held to a third party that deals at arm's length with Holdco?

(c) What is the effect on Holdco's liability for tax under Part IV if Holdco is no longer a beneficiary of the Trust on December 31, 20X1, the year in which the $5,000 was paid to it by the Trust?

(d) What is the effect on Holdco's liability for Part IV tax if, for an indefinite period commencing after September 20, 20X1, Holdco is still a beneficiary of the Trust but ceases to be controlled by a person who does not deal at arm's length with the person who controls Opco?

CRA Response

General Comments

First, we have assumed that the Trust is a personal trust, as that term is defined in subsection 248(1).

The purpose of subsection 104(19) is to preserve the character of an amount of income received as a taxable dividend by a trust when it designates that amount of income to a beneficiary.

Subparagraph 104(19)(a)(i) provides that a designation of an amount to a taxpayer that is equal to the portion of a taxable dividend received by a trust in a particular taxation year must be made by the trust in its return of income for the particular year under Part I.

Subparagraph 104(19)(a)(ii) requires that the amount designated by a trust that may reasonably be considered, having regard to all the circumstances, including the terms of the trust agreement, to be part of the amount that, because of, inter alia, paragraph 104(13)(a), was included in computing the income of the taxpayer - who is a beneficiary of the trust in the particular year by virtue of paragraph 104(13)(a) - for the taxpayer's taxation year in which the particular year ends. That condition can only be satisfied at the end of the trust's taxation year since subsection 104(13) provides for the inclusion in computing the income of the beneficiary for its taxation year in which the taxation year of the trust ends. A trust is only able to compute its income at the end of its taxation year.

In addition, paragraph 104(19)(c) provides that the trust must be resident in Canada throughout the particular year of the trust.

Finally, pursuant to paragraph 104(19)(d), the total of the amounts that a trust may designate to any of its beneficiaries cannot exceed the total of the taxable dividends received by the trust in its taxation year. However, a trust is only able to calculate the amount of taxable dividends it has received at the end of its taxation year.

Based on the text, context and purpose of subsection 104(19), the designation cannot be made before the end of a trust's taxation year. Consequently, the beneficiary of a trust is deemed to have received the dividend at the end of the trust's taxation year.

CRA Response to Question 17(a)

On September 20, 20X1, at the time of the payment by the Trust of the $5,000 to Holdco, no designation by virtue of subsection 104(19) can be made by the Trust. As for Holdco, it is not in a position at this time to determine the nature of the payment received from Trust. The designation pursuant to subsection 104(19) will be made at the end of the Trust's taxation year, i.e. December 31, 20X1, and it is at that time that Holdco will be deemed to have received a taxable dividend from Opco.

The tax under Part IV applies to "assessable dividends", as defined in subsection 186(3) (footnote 1), received by a private corporation or a subject corporation in a taxation year. The calculation of Part IV tax is set out in subsection 186(1). More specifically, paragraph 186(1)(b) provides, inter alia, for the computation of the Part IV tax payable that a private corporation must pay in respect of the total of all amounts each of which is an assessable dividend received from a corporation with which it is connected, within the meaning of subsection 186(4). In that regard, it must be established that the assessable dividend was received from a connected corporation at the time the dividend was received.

If the Trust designates the $5,000 amount to Holdco pursuant to subsection 104(19), then it will be necessary to determine whether Opco is connected with Holdco, within the meaning of subsection 186(4), at the end of the Trust's taxation year, i.e., December 31, 20X1.

CRA Response to Question 17(b)

The formulation of this question specifies that Holdco does not hold shares in the capital stock of Opco at any relevant time. Consequently, Opco can only be connected to Holdco pursuant to paragraph 186(4)(a), namely, by virtue of the fact that Opco is controlled by Holdco on December 31, 20X1. By virtue of subsection 186(2), Opco will be controlled by Holdco if more than 50% of the issued shares of its capital stock - having full voting rights under all circumstances – belong to persons with whom Holdco does not deal at arm's length. If on December 31, 20X1, all of the shares of the capital stock of Opco are held by a third party dealing at arm's length with Holdco, Opco will not be connected with Holdco within the meaning of paragraph 186(4)(a). Consequently, Holdco will be liable for Part IV tax calculated pursuant to paragraph 186(1)(a), being 38 1/3% of the $5,000 assessable dividend it is deemed to have received, less any adjustment under paragraphs 186(1)(c) and 186(1)(d).

CRA Response to Question 17(c)

Subsection 104(13) generally requires a beneficiary of a trust to include in computing the beneficiary's income for a particular taxation year such part of the amount that, but for subsections 104(6) and 104(12), would be the trust’s income for the trust’s taxation year that ended in the particular year as became payable in the trust’s taxation year to the beneficiary.

For this purpose, it must be determined whether all or part of the income of the trust has become payable to the beneficiary. That determination must first be made in light of the ordinary meaning given to the term "payable" under the applicable private law.

Note that for the purposes of subparagraph 53(2)(h)(i.1) and subsections 104(6), 104(7), 104(7.01), 104(13), 104(16) and 104(20) ("the relevant provisions"), subsection 104(24) provides a deeming rule modifying the meaning of "payable". However, it should be noted that subsection 104(24) does not alter the ordinary meaning of the term "payable" nor does it specify when an amount becomes payable. Rather, subsection 104(24) provides that, for the purposes of those provisions, an amount otherwise payable under the applicable private law is deemed not to have become payable to a recipient in a taxation year. However, this deeming rule does not apply if the amount was paid to the beneficiary in the year or if the beneficiary was entitled in the year to enforce payment of it.

The CRA generally accepts that the time at which an amount becomes payable to a recipient is the earlier of the time of payment or the time at which the recipient is entitled to enforce payment of it.

The CRA is also of the view that a taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13). Thus, it is necessary to determine whether the taxpayer is a beneficiary of the trust at the time an amount becomes payable to the beneficiary.

Since the $5,000 was paid on September 20, 20X1 by the Trust to Holdco, who was a beneficiary of the Trust at that time, that amount may therefore be considered to have become payable to Holdco on that date for the purposes of paragraph 104(13)(a). The amount of $5,000 will therefore be included in the computation of Holdco's income for its taxation year ended September 30, 20X2, i.e., the taxation year in which the Trust's taxation year ends, by virtue of paragraph 104(13)(a), if the other conditions for the application of that paragraph are otherwise satisfied.

The CRA is also of the view that since Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.

Finally, it is necessary to determine whether Opco is connected with Holdco within the meaning of subsection 186(4) at the end of the Trust's taxation year, i.e., December 31, 20X1. If so, Holdco will be subject to the application of paragraph 186(1)(b) for the purpose of computing Part IV tax on the amount of the $5,000 assessable dividend. If Opco is not connected with Holdco, then Holdco will be subject to paragraph 186(1)(a) in computing its Part IV tax.

CRA Response to Question 17(d)

Paragraph 251(1)(b) provides, inter alia, that a taxpayer and a personal trust (footnote 2) are deemed not to deal with each other at arm’s length if the taxpayer would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV). Assuming that the trust is a personal trust as described above, the taxpayer and the trust are deemed not to deal with each other at arm's length. Assuming that the Trust is a personal trust as described in paragraph 251(1)(b), the Trust and Holdco are then deemed not to deal with each other at arm's length. Since more than 50% of the issued shares of the capital stock of Opco - having full voting rights under all circumstances – belong to the Trust and the Trust does not deal at arm's length with Holdco, Holdco controls Opco by virtue of subsection 186(2). Therefore, Opco is connected to Holdco by virtue of paragraph 186(4)(a).

If, pursuant to subsection 104(19), the Trust designates the amount of the taxable dividend, received from Opco, to Holdco in its return of income for its taxation year ending December 31, 20X1, Holdco will be required to include the dividend income in computing its income for its taxation year ending September 30, 20X2 and will be subject to paragraph 186(1)(b) for the purpose of computing its Part IV tax. On the other hand, if the Trust does not designate the amount of the taxable dividend received from Opco to Holdco, such amount will not be a taxable dividend and Holdco will not be subject to Part IV tax on the $5,000 received from the Trust.

Yvon Beaudoin
(514) 496-6688
October 7, 2020
2020-084582

FOOTNOTES

Due to our system requirements, footnotes contained in the original document are reproduced below:

1 That is, the portion of a taxable dividend that is deductible pursuant to section 112, paragraph 113(1)(a), 113(1)(a.1), 113(1)(b) or 113(1)(d) or subsection 113(2).

2 Except a trust described in any of paragraphs (a) to (e.1) of the definition "trust" in subsection 108(1).

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Text of Severed Letter

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.

Principales Questions: A personal trust (Trust) is the sole shareholder of a corporation (Opco). Another corporation (Gesco) is a beneficiary of the trust. The end of the taxation years of Trust and Opco is December 31 and September 30 for Gesco. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to Trust and on the same day Trust remits the amount to Gesco.

Position Adoptée: 1) To be valid, a designation under subsection 104(19) has to be made in Trust’s tax return. The amount of taxable dividend designated by Trust is deemed to be received by the beneficiary (Gesco) at the time that is the end of the taxation year of Trust in which the dividend was received by Trust. A connected relationship has to be determined at the time the beneficiary is deemed to have received the taxable dividend, which is at the end of the taxation year of Trust. 2) At the end of the taxation year of Trust, Opco would not be connected to Gesco. If Trust designates the amount of taxable dividend under subsection 104(19) received from Opco to Gesco in its December 31, 20X1 tax return, Gesco would be subject to Part IV tax under paragraph 186(1)(a) in its September 30, 20X2 tax return. 3) Under subsection 104(13), there shall be included in computing the income for a particular taxation year of a beneficiary (Gesco) under a trust such part of the amount that, but for subsections 104(6) and 104(12), would be the trust’s income for the trust’s taxation year that ended in the particular year as became payable in the trust’s year to the beneficiary. Since Gesco was a beneficiary of Trust when Trust made the payment, Trust may designate under subsection 104(19) the amount of $5,000 to Gesco to be a taxable dividend. If on December 31, 20X1, Opco is connected to Gesco by virtue of subsection 186(4), paragraph 186(1)(a) would apply, otherwise paragraph 186(1)(b) would be applicable. 4) Under paragraph 25(1)(b) a taxpayer and a personal trust are deemed not to deal with each other at arm’s length if the taxpayer, or any person not dealing at arm’s length with the taxpayer, would be beneficially interested in the trust if subsection 248(25) were read without reference to subclauses 248(25)(b)(iii)(A)(II) to (IV). Trust and Gesco are not dealing at arm’s length. Since more that 50% of the shares of Opco are owned by Trust, and Trust is not dealing at arm’s length with Gesco, consequently Gesco controls Opco pursuant to subsection 186(2). Accordingly, under paragraph 186(4)(a), Opco is connected to Gesco. If Trust designates, under subsection 104(19), the amount of taxable dividend received from Opco to Gesco, Gesco would be subject to Part IV tax under paragraph 186(1)(a) in its December 31, 20X2 tax return. If there is no designation by Trust under subsection 104(19), the amount received by Gesco would not be a taxable dividend and Gesco would not be subject to Part IV tax.

Raisons: Application of the Act and previous positions.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 7 OCTOBRE 2020
APFF - CONGRÈS 2020

17. Le paragraphe 104(19) L.I.R. et l’impôt de la partie IV L.I.R.

Considérons qu’une fiducie (« Fiducie ») détient toutes les actions émises et en circulation du capital-actions d’une société (« Opco ») et que les années d’imposition de Fiducie et d’Opco se terminent le 31 décembre. Fiducie compte parmi ses bénéficiaires une société (« Gesco ») dont l’année d’imposition se termine le 30 septembre. Le 20 septembre 20X1, Opco verse un montant de dividende imposable de 5 000 $ à Fiducie. La même journée, Fiducie verse le montant de 5 000 $ à Gesco.

Le montant versé par Fiducie à Gesco peut conserver son statut de dividende imposable grâce à la « règle de conduit » prévue au paragraphe 104(19) L.I.R. Pour l’application de certaines dispositions législatives, le dividende imposable attribué à Gesco en vertu du paragraphe 104(19) L.I.R. sera alors réputé reçu directement d’Opco par Gesco et ne pas avoir été reçu par Fiducie. Gesco sera assujettie à l’impôt de la partie IV L.I.R. dans les limites prévues au paragraphe 186(1) L.I.R.

Pour l’application du paragraphe 186(1) L.I.R., il faut déterminer si Opco est rattachée à Gesco. Si Opco et Gesco sont toutes deux contrôlées par des personnes ayant un lien de dépendance entre elles, Opco sera rattachée à Gesco en vertu de l’alinéa 186(4)a) L.I.R. et du paragraphe 186(2) L.I.R. L’alinéa 186(4)b) L.I.R. ne saurait pas être applicable, car Gesco ne détient pas d’actions du capital-actions d’Opco.

Questions à l’ARC

a) Si Fiducie attribue le revenu de dividende imposable de 5 000 $ à Gesco en vertu du paragraphe 104(19) L.I.R., à quel moment le rattachement d’Opco à Gesco doit-il exister pour le calcul de l’impôt de la partie IV L.I.R.?

b) Quelle est l’incidence sur l’assujettissement de Gesco à l’impôt de la partie IV L.I.R., si après le 20 septembre 20X1 et avant le 31 décembre 20X1, Fiducie dispose de la totalité des actions d’Opco qu’elle détenait en faveur d’un tiers qui n’a aucun lien de dépendance avec Gesco?

c) Quelle est l’incidence sur l’assujettissement de Gesco à l’impôt de la partie IV L.I.R., si Gesco n’est plus elle-même bénéficiaire de Fiducie le 31 décembre 20X1, soit l’année au cours de laquelle le montant de 5 000 $ lui a été versé par Fiducie?

d) Quelle est l’incidence sur l’assujettissement de Gesco à l’impôt de la partie IV L.I.R., si pour une période indéterminée commençant après le 20 septembre 20X1, Gesco est toujours bénéficiaire de Fiducie, mais cesse d’être contrôlée par une personne ayant un lien de dépendance avec la personne qui contrôle Opco?

Réponses de l’ARC

Commentaires généraux

Dans un premier temps, nous tenons pour acquis que Fiducie est une fiducie personnelle, telle que cette expression est définie au paragraphe 248(1) L.I.R.

L’objectif du paragraphe 104(19) L.I.R. est de préserver la nature d’un montant de revenu reçu à titre de dividende imposable par une fiducie lorsque celle-ci attribue ce montant de revenu à un bénéficiaire.

Le sous-alinéa 104(19)a)(i) L.I.R. prévoit que l’attribution d’une somme à un contribuable – laquelle est égale à la partie d’un dividende imposable reçu par une fiducie au cours d’une année d’imposition donnée – doit être effectuée par la fiducie dans la déclaration de revenus qu’elle produit pour l’année donnée en vertu de la partie I L.I.R.

Quant au sous-alinéa 104(19)a)(ii) L.I.R., il requiert que la somme attribuée par une fiducie puisse raisonnablement être considérée, compte tenu des circonstances, y compris les modalités de l’acte de fiducie, comme faisant partie du montant qui, par l’effet, entre autres, de l’alinéa 104(13)a) L.I.R. a été inclus dans le calcul du revenu du contribuable – qui est un bénéficiaire de la fiducie au cours de l’année donnée en vertu de l’alinéa 104(13)b) L.I.R. – pour son année d’imposition au cours de laquelle l’année donnée se termine. Cette condition ne peut être satisfaite qu’à la fin de l’année d’imposition de la fiducie puisque le paragraphe 104(13) L.I.R. prévoit l’inclusion dans le calcul du revenu du bénéficiaire pour son année d’imposition au cours de laquelle l’année d’imposition de la fiducie se termine. Une fiducie n’est en mesure de calculer son revenu qu’à la fin de son année d’imposition.

Par ailleurs, l’alinéa 104(19)c) L.I.R. édicte que la fiducie doit résider au Canada tout au long de l’année donnée de la fiducie.

Enfin, en vertu de l’alinéa 104(19)d) L.I.R., le total des sommes qu’une fiducie peut attribuer à l’un de ses bénéficiaires ne peut excéder la somme des dividendes imposables qu’elle a reçus au cours de son année d’imposition. Or, une fiducie n’est en mesure de calculer la somme des dividendes imposables qu’elle a reçus qu’à la fin de son année d’imposition.

Selon le texte, le contexte et l’objet du paragraphe 104(19) L.I.R., l’attribution ne peut pas être effectuée avant la fin de l’année d’imposition d’une fiducie. Par conséquent, le bénéficiaire d’une fiducie est réputé avoir reçu le dividende à la fin de l’année d’imposition d’une fiducie.

Réponse de l’ARC à la question 17a)

Le 20 septembre 20X1, au moment de la remise par Fiducie de la somme de 5 000 $ à Gesco, aucune attribution en vertu du paragraphe 104(19) L.I.R. ne peut être effectuée par Fiducie. Quant à Gesco, celle-ci n’est pas en mesure à ce moment de déterminer la nature du paiement reçu de Fiducie. L’attribution en vertu du paragraphe 104(19) L.I.R. se fera à la fin de l’année d’imposition de Fiducie, soit le 31 décembre 20X1, et c’est à ce moment que Gesco sera réputée avoir reçu un dividende imposable d’Opco.

L’impôt de la partie IV L.I.R. s’applique aux « dividendes imposables déterminés », au sens de la définition de cette expression prévue au paragraphe 186(3) L.I.R. (footnote 1) , reçus par une société privée ou une société assujettie au cours d’une année d’imposition. Le calcul de l’impôt de la partie IV L.I.R. est prévu au paragraphe 186(1) L.I.R. De façon plus particulière, l’alinéa 186(1)b) L.I.R. prévoit, entre autres, le calcul de l’impôt de la partie IV L.I.R. qu’une société privée doit payer à l’égard du total des montants représentant chacun un dividende imposable déterminé reçu d’une société à laquelle elle était rattachée, au sens du paragraphe 186(4) L.I.R. À cet égard, il doit être établi que le dividende imposable déterminé a été reçu d’une société rattachée au moment où le dividende a été reçu.

Si Fiducie attribue le montant de 5 000 $ à Gesco conformément au paragraphe 104(19) L.I.R., il faudra alors déterminer si Opco est rattachée à Gesco, au sens du paragraphe 186(4) L.I.R., à la fin de l’année d’imposition de Fiducie, à savoir le 31 décembre 20X1.

Réponse de l’ARC à la question 17b)

L’énoncé de la présente question précise que Gesco ne détient pas d’actions du capital-actions d’Opco à tout moment pertinent. Par conséquent, Opco ne peut être rattachée à Gesco qu’en vertu de l’alinéa 186(4)a) L.I.R., à savoir en raison du fait qu’Opco est contrôlée par Gesco le 31 décembre 20X1. En vertu du paragraphe 186(2) L.I.R., Opco sera contrôlée par Gesco si plus de 50 % des actions émises de son capital-actions – comportant plein droit de vote en toutes circonstances – appartiennent à des personnes avec lesquelles Gesco a un lien de dépendance. Si le 31 décembre 20X1, toutes les actions du capital-actions d’Opco appartiennent à un tiers n’ayant aucun lien de dépendance avec Gesco, Opco ne sera donc pas rattachée à Gesco au sens de l’alinéa 186(4)a) L.I.R. Par conséquent, Gesco sera redevable d’un impôt de la partie IV L.I.R. calculé conformément à l’alinéa 186(1)a) L.I.R., soit 38 1/3 % du dividende imposable déterminé de 5 000 $ qu’elle est réputée avoir reçu, moins tout ajustement prévu aux alinéas 186(1)c) et 186(1)d) L.I.R., le cas échéant.

Réponse de l’ARC à la question 17c)

De manière générale, le paragraphe 104(13) L.I.R. prévoit que le bénéficiaire d’une fiducie doit inclure dans le calcul de son revenu pour une année d’imposition donnée la partie du montant qui, si ce n’était des paragraphes 104(6) et 104(12) L.I.R., représenterait le revenu de la fiducie pour son année d’imposition s’étant terminée dans l’année donnée, qui est devenue payable au bénéficiaire au cours de l’année d’imposition de la fiducie.

À cette fin, il doit être établi si tout ou partie du revenu de la fiducie est devenu payable au bénéficiaire. Cette détermination doit dans un premier temps être faite à la lumière du sens ordinaire donné au terme « payable » en vertu du droit privé applicable.

Il est à noter qu’aux fins du sous-alinéa 53(2)h)(i.1) L.I.R. et des paragraphes 104(6), 104(7), 104(7.01), 104(13), 104(16) et 104(20) L.I.R. (« Dispositions en cause »), le paragraphe 104(24) L.I.R. prévoit une règle déterminative modifiant le sens du terme « payable ». Cependant, il est à noter que le paragraphe 104(24) L.I.R. ne modifie pas le sens ordinaire du terme « payable » ni ne précise le moment auquel une somme devient payable. Plutôt, le paragraphe 104(24) L.I.R. édicte qu’aux fins des Dispositions en cause, une somme autrement payable en vertu du droit privé applicable est réputée ne pas être devenue payable à un bénéficiaire au cours d’une année d’imposition. Cependant, cette règle déterminative n’est pas applicable si la somme a été payée au bénéficiaire au cours de l’année ou si ce dernier a eu le droit au cours de l’année d’en exiger le paiement.

L’ARC accepte généralement que le moment auquel une somme devient payable à un bénéficiaire soit le premier en date du moment du paiement ou du moment auquel le bénéficiaire est en droit d’en exiger le paiement.

L’ARC est également d’avis qu’un contribuable n’a pas à être bénéficiaire d’une fiducie tout au long de l’année d’imposition de cette dernière au cours de laquelle une somme lui est devenue payable afin que cette somme soit incluse dans le calcul du revenu du bénéficiaire en vertu du paragraphe 104(13) L.I.R. Ainsi, il faut déterminer si le contribuable est bénéficiaire de la fiducie au moment où une somme lui est devenue payable.

Étant donné que la somme de 5 000 $ a été payée le 20 septembre 20X1 par Fiducie à Gesco, laquelle était bénéficiaire de Fiducie à ce moment, cette somme peut donc être considérée comme étant devenue payable à Gesco à cette date aux fins de l’alinéa 104(13)a) L.I.R. La somme de 5 000 $, sera donc à inclure dans le calcul du revenu de Gesco pour son année d’imposition terminée le 30 septembre 20X2, soit l’année d’imposition au cours de laquelle l’année d’imposition de Fiducie se termine, par l’effet de l’alinéa 104(13)a) L.I.R. si, par ailleurs, les autres conditions d’application de cet alinéa sont respectées.

L’ARC est également d’avis que puisque Gesco est bénéficiaire de Fiducie au moment où la somme de 5 000 $ est devenue payable à Gesco, la condition prévue à l’alinéa 104(19)b) L.I.R., à savoir que Gesco est bénéficiaire de Fiducie au cours de l’année d’imposition de cette dernière, est respectée. Fiducie pourrait donc attribuer la somme de 5 000 $ à Gesco conformément au paragraphe 104(19) L.I.R. si toutes les autres conditions d’application de cette disposition sont par ailleurs respectées.

Enfin, il faudrait déterminer si Opco est rattachée à Gesco au sens du paragraphe 186(4) L.I.R. à la fin de l’année d’imposition de Fiducie, soit le 31 décembre 20X1. Si tel est le cas, Gesco sera assujettie à l’application de l’alinéa 186(1)b) L.I.R. pour le calcul de l’impôt de la partie IV L.I.R. sur le montant du dividende imposable déterminé de 5 000 $. Si Opco n’est pas rattachée à Gesco, Gesco sera alors assujettie à l’application de l’alinéa 186(1)a) L.I.R. pour le calcul de l’impôt de la partie IV L.I.R.

Réponse de l’ARC à la question 17d)

L’alinéa 251(1)b) L.I.R. édicte, entre autres, qu’un contribuable et une fiducie personnelle (footnote 2) sont réputés avoir entre eux un lien de dépendance dans la cas où le contribuable aurait un droit de bénéficiaire dans la fiducie, si le paragraphe 248(25) L.I.R. s’appliquait compte non tenu de ses subdivisions b)(iii)(A)(II) à (IV) L.I.R. En supposant que Fiducie est une fiducie personnelle telle que décrite à l’alinéa 251(1)b) L.I.R., Fiducie et Gesco sont alors réputées avoir entre elles un lien de dépendance. Puisque plus de 50 % des actions émises du capital-actions d’Opco – comportant plein droit de vote en toutes circonstances – appartiennent à Fiducie et que Fiducie a un lien de dépendance avec Gesco, cette dernière contrôle Opco en vertu du paragraphe 186(2) L.I.R. Donc, Opco est rattachée à Gesco en vertu de l’alinéa 186(4)a) L.I.R.

Si, en vertu du paragraphe 104(19) L.I.R., Fiducie attribue, dans sa déclaration de revenu pour son année d’imposition terminée le 31décembre 20X1, le montant du dividende imposable reçu d’Opco à Gesco, cette dernière devra inclure le revenu de dividende dans le calcul de son revenu pour son année d’imposition se terminant le 30 septembre 20X2 et elle sera assujettie à l’application de l’alinéa 186(1)b) L.I.R. pour le calcul de l’impôt de la partie IV L.I.R. Par contre, si Fiducie n’attribue pas le montant du dividende imposable reçu d’Opco à Gesco, ce montant ne sera pas un dividende imposable et Gesco ne sera pas assujettie à l’impôt de la partie IV sur le montant de 5 000 $ reçu de Fiducie.

Yvon Beaudoin
(514) 496-6688
Le 7 octobre 2020
2020-084582

FOOTNOTES

En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous :

1 À savoir la partie d’un dividende imposable qui est déductible en vertu de l’article 112 L.I.R., des alinéas 113(1)a), 113(1)a.1), 113(1)b) ou 113(1)d) L.I.R. ou du paragraphe 113(2) L.I.R.

2 Sauf une fiducie visée à l’un des alinéas a) à e.1) de la définition de « fiducie » au paragraphe 108(1) L.I.R.

NON CLASSIFIÉ / UNCLASSIFIED

Summaries

Summary Under

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

various applications of proposition that an s. 104(19) designation is not effective until the trust’s year end

A personal trust (the "Trust") wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco" with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which pays that amount to Holdco.

(a) If the Trust designates the $5,000 amount to Holdco pursuant to s. 104(19), when must Opco be connected to Holdco for Part IV tax computation purposes?

(b) What is the effect on Holdco's Part IV tax liability if, after September 20, 20X1 and before December 31, 20X1, the Trust disposes of Opco a third party?

(d) What is the effect if, for an indefinite period commencing after September 20, 20X1, Holdco is still a beneficiary but ceases to be controlled by a person who does not deal at arm's length with the person controlling Opco?

Q.17(a)

After noting its position that a s. 104(19) designation cannot be made before the end of a trust's taxation year, so that the beneficiary is deemed to have received the dividend at the end of that year, CRA indicated that, as the designation pursuant to s. 104(19) is effective on December 31, 20X1, whether Opco is connected with Holdco is tested at that time.

Q.17(b)

Accordingly, if on December 31, 20X1, all the Opco shares are held by a third party, Opco will not be connected with Holdco pursuant to s. 186(4)(a), and Holdco will be liable for Part IV tax on the $5,000 assessable dividend deemed to be received by it.

Q.17(c)

After noting that it “generally accepts that the time at which an amount becomes payable to a recipient is the earlier of the time of payment or the time at which the recipient is entitled to enforce payment of it,” and that “a taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13),” CRA found that since:

the $5,000 was paid on September 20, 20X1 by the Trust to Holdco, who was a beneficiary of the Trust at that time, that amount may therefore be considered to have become payable to Holdco on that date for the purposes of paragraph 104(13)(a). The amount of $5,000 will therefore be included in the computation of Holdco's income for its taxation year ended September 30, 20X2, i.e., the taxation year in which the Trust's taxation year ends … .

[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.

Finally, if Opco is connected with Holdco per s. 186(4) at the end of the Trust's taxation year, i.e. December 31, 20X1, Holdco will be subject to the application of paragraph 186(1)(b) for the purpose of computing Part IV tax on the amount of the $5,000 assessable dividend. If Opco is not connected with Holdco, then Holdco will be subject to paragraph 186(1)(a) in computing its Part IV tax.

Q.17(d)

After noting that by virtue of s. 251(1)(b), the Trust and Holdco are deemed not to deal with each other at arm's length, CRA went on to note that since more than 50% of the fully-voting Opco shares belonged to the Trust, which did not deal at arm's length with Holdco, Holdco controlled Opco per s. 186(2), so that Opco was connected to Holdco under s. 186(4)(a).

If the Trust makes a s. 104(19) designation of the amount of the taxable dividend for its taxation year ending December 31, 20X1, Holdco will be required to include the dividend income in computing its income for its taxation year ending September 30, 20X2 and will be subject to s. 186(1)(b) for Part IV tax purposes – or if the Trust does not make the designation, such amount will not be a taxable dividend and Holdco will not be subject to Part IV tax on the $5,000..

Summary Under

Tax Topics - Income Tax Act - Section 186 - Subsection 186(2)

s. 104(13), unlike s. 104(19), can apply contemporaneously with a trust dividend distribution, and ss. 186(2) and 251(1)(b) can apply synergistically

A personal trust wholly-owns Opco, which also has a December 31 year end, and has a corporate beneficiary ("Holdco") with a September 30 taxation year end. On September 20, 20X1, Opco pays a taxable dividend of $5,000 to the Trust, which immediately on-pays that amount to Holdco.

As also noted in 2018-0757591I7 F and 2020-0839891C6), a s. 104(19) designation by a trust cannot be effective until the trust’s year end. Accordingly, if by the effective time of the deemed dividend payment as a result of the designation (December 31, 20X1), the above trust had disposed of Opco to a third party, whether Opco was connected for Pt. IV tax purposes would be tested at that time, so that there would be no exemption from Pt. IV tax under s. 186(1)(a).

However, a similar timing issue would not arise if, for some reason, Holdco ceased, after the receipt by it of the $5,000 from the Trust (September 20, 20X1) and before the trust year end (December 31, 20X1), to be a trust beneficiary, but with Opco continuing to be connected on December 31, 20X1 with Holdco pursuant to s. 186(4)(a) by virtue of common control as described in s. 186(2). CRA stated:

[A] taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13),”

[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.

The question addressed by CRA was premised on Opco initially being connected with Holdco under ss. 186(4)(a) and 186(2) on the basis that Holdco was controlled by a person (X) who did not deal at arm's length with the person who controlled Opco. CRA indicated that there would be no effect on Holdco's liability for Pt. IV tax if Holdco, while continuing as a beneficiary of the trust, ceased to be controlled by X. The reason: the trust and Holdco were deemed not to deal with each other at arm's length by virtue of s. 251(1)(b), so that (under the control test in s. 186(2)) more than 50% of the fully-voting Opco shares belonged to a person (the Trust), which did not deal at arm's length with Holdco.

Summary Under

Tax Topics - Income Tax Act - Section 104 - Subsection 104(24)

under the ordinary meaning of payable, an amount is payable at a time if it is paid then

CRA indicated that since a s. 104(19) designation by a trust cannot be effective until the trust’s year end, if by the effective time of the deemed dividend payment as a result of the designation (December 31, 20X1), the above trust had disposed of Opco to a third party, whether Opco was connected for Pt. IV tax purposes would be tested at that time, so that there would be no exemption from Pt. IV tax under s. 186(1)(a).

[I]t must be determined [for s. 104(13) purposes] whether all or part of the income of the trust has become payable to the beneficiary. That determination must first be made in light of the ordinary meaning given to the term "payable" under the applicable private law.

… [I]t should be noted that subsection 104(24) does not alter the ordinary meaning of the term "payable" nor does it specify when an amount becomes payable. Rather, subsection 104(24) provides that, for the purposes of those provisions, an amount otherwise payable under the applicable private law is deemed not to have become payable to a recipient in a taxation year. However, this deeming rule does not apply if the amount was paid to the beneficiary in the year or if the beneficiary was entitled in the year to enforce payment of it. …

[A] taxpayer does not have to be a beneficiary of a trust throughout the taxation year of the trust in which an amount becomes payable to the taxpayer in order for that amount to be included in computing the beneficiary's income pursuant to subsection 104(13)” ... .

[S]ince Holdco is a beneficiary of the Trust at the time the $5,000 became payable to Holdco, the condition in paragraph 104(19)(b), that Holdco be a beneficiary of the Trust in the Trust's taxation year, is satisfied. The Trust could therefore designate the $5,000 amount to Holdco in accordance with subsection 104(19) if all the other conditions for the application of that provision are otherwise satisfied.

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7 October 2020 APFF Roundtable Q. 17, 2020-0845821C6 F - Part IV tax and trust

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