2019-0803691I7 69(11) - majority interest beneficiary

Principal Issues: Is the Son a "majority-interest beneficiary" of the trust as defined under subsection 251.1(3) at the relevant time?

Position: While it is ultimately a question of fact and valuation, given the information available, Son should not be considered to be a "majority-interest beneficiary" of the trust.

Reasons: Based on the information available, the fair market value of Son's income or capital interests in Father's Estate could not reasonably be considered to be greater than 50% of the FMV of all of the income or capital interests in Father's Estate at the relevant time.

Author: Monteith, Laura
Section: 69(11), 108(1), 251.1(1)(g), 251.1(3), 251.1(4)(d)(i), 248(25)(a)

                                                     October 2, 2019

XXXXXXXXXX                              HEADQUARTERS
                                                      Income Tax Rulings Directorate
                                                      Laura Monteith
                                                      905-721-5099

                                                      2019-080369

“Majority-interest beneficiary” determination

We have reviewed the matter with respect to whether XXXXXXXXXX (“Son”) would be considered to be a “majority-interest beneficiary” of the estate of XXXXXXXXXX (“Father’s Estate”) for purposes of paragraph 251.1(1)(g) at a particular point in time (the “Time”) and we provide the following comments.

We understand that whether or not Son is a “majority-interest beneficiary” will impact whether subsection 69(11) could apply to a “lossco transaction”.  We have only been asked to consider the “majority-interest beneficiary” analysis with respect to Son’s interest in Father’s Estate.

All statutory references in this memorandum are references to the provisions of the Income Tax Act (“Act”).

You provided us with a copy of the Last Will and Testament of Father executed on XXXXXXXXXX (the “Will”).  We understand that Father died in XXXXXXXXXX and that his wife died in XXXXXXXXXX; therefore, the residue of the Father’s Estate was at the Time and is currently held in trust pursuant to subclause XXXXXXXXXX of the Will for the benefit of Father’s XXXXXXXXXX children (the “Children” and each a “Child” individually, of which Son is one), XXXXXXXXXX were alive at the Time and over the age of 25.  Son had issue alive at the Time.  XXXXXXXXXX of Son’s XXXXXXXXXX siblings also had issue alive at the Time.

To briefly summarize, in relevant part, paragraph XXXXXXXXXX of the Will divides the residue of the Father’s Estate into XXXXXXXXXX shares, with one share being held in trust for each of the Children.  Under subparagraph XXXXXXXXXX, the annual income from a particular share must be paid to the particular Child during their lifetime.  After the Child attains the age of 25 years, the Trustees have power in XXXXXXXXXX.  Pursuant to subparagraphs XXXXXXXXXX, upon the death of such Child, their share is held in trust for the issue of such Child (i.e., Son’s children and grandchildren, etc.) in such proportions as the Child may by their last Will direct, in default of which such share shall be held by the Trustees in trust for the issue in equal shares per stirpes.

In addition to the provisions summarized above, subparagraph XXXXXXXXXX provides Father’s issue with the following contingent interests:

XXXXXXXXXX

To summarize, clause XXXXXXXXXX of the Will provides that, notwithstanding clause XXXXXXXXXX, the Trustees shall have unfettered discretion to distribute any property of Father’s Estate to a beneficiary in satisfaction of all or part of the capital interest of such beneficiary, and that in exercising such discretion, the Trustees are to have regard to the 21 year deemed disposition rule under subsections 104(4) and (5).  Accordingly, the Trustees are permitted to distribute trust property to the beneficiaries in respect of their capital interests to minimize the tax impact of the 21 year deemed disposition.

You noted that the books and records maintained for Father’s Estate demonstrate that the Trustees treat the trust property as being divided into XXXXXXXXXX shares (and that the beneficiaries recognize it as such) and that the income distributions and loans to beneficiaries are being tracked on this basis.

It is our understanding that no significant distributions of capital have occurred prior to the Time such that the fair market value (“FMV”) of each Child’s share of the capital of Father’s Estate is XXXXXXXXXX.

Under subsection 251.1(3), in summary, a “majority-interest beneficiary” is generally a beneficiary whose interest in the income or capital (respectively) of the trust has, at the relevant time, either alone or together with all persons with whom the person is affiliated, an FMV that is greater than 50% of the FMV of all of the interests as a beneficiary in the income or capital (respectively) of the trust.

As noted in document 2004-0105471E5, it is a question of fact as to whether any heir is a “majority-interest beneficiary” at any particular point in time.  In the current situation, the “majority-interest beneficiary” test under subsection 251.1(3) must be applied at the Time.  In addition, where the amount of income or capital that the beneficiary may receive under the trust depends on the exercise or failure to exercise a discretionary power by any person, subparagraph 251.1(4)(d)(i) would apply to deem that person to have fully exercised, or to have failed to exercise, the power, as the case may be.

In our view, clause XXXXXXXXXX of the Will should not be interpreted as providing the Trustees with discretionary power to divide the trust property or to alter or re-determine the XXXXXXXXXX share of the interest of any beneficiary in Father’s Estate.  The correct interpretation of the Will is that the Children’s beneficial interests should be considered as fixed shares (XXXXXXXXXX) that are subject to the Trustees’ discretionary powers of advancement under clause XXXXXXXXXX and encroachment under clause XXXXXXXXXX regarding the actual timing and amount of distributions of capital out of the particular fixed share.

Therefore, the result of the application of subparagraph 251.1(4)(d)(i) to the current situation is that Son’s XXXXXXXXXX% interest in the capital of Father’s Estate would be viewed on the basis that the trustees had fully exercised their power of advancement under subparagraph XXXXXXXXXX and encroachment under clause XXXXXXXXXX of the Will.  As the trustees have no discretionary power over the division of Father’s Estate, subparagraph 251.1(4)(d)(i) would not apply to deem any Child to have an interest in an amount greater than XXXXXXXXXX% of the capital of Father’s Estate at the Time.

Son’s XXXXXXXXXX% share of the income of Father’s Estate at the Time was fixed and therefore subparagraph 251.1(4)(d)(i) would not apply.

By virtue of subparagraph XXXXXXXXXX of the Will, Son also held contingent beneficial interests in the remaining XXXXXXXXXX% of Father’s Estate, which would only be realized if the other Children die without issue surviving.  At the Time, XXXXXXXXXX Children were alive and XXXXXXXXXX of Son’s siblings had issue surviving.

While the FMV of the beneficial interests in Father’s Estate is a question of fact that would require a valuation, it is unlikely that the FMV of Son’s contingent beneficial interests at the Time could result in him being considered a “majority-interest beneficiary” of Father’s Estate.  The FMV of the beneficial interests of each of Son’s XXXXXXXXXX siblings (and their respective issue) in the income and capital of Father’s Estate would also need to be determined and taken into account in determining the denominator for the formula under the “majority-interest beneficiary” definition.  Accordingly, it is unlikely that the FMV of the total of Son’s respective income or capital interests in Father’s Estate could reasonably be considered to be greater than 50% of the FMV of all of the income or capital interests in Father’s Estate at the Time.

Therefore, while it is ultimately a question of fact and valuation, in our view Son should not be a “majority-interest beneficiary” of Father’s Estate for purposes of paragraph 251.1(1)(g) at the Time.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

We trust these comments will be of assistance to you.  Please do not hesitate to contact us should you require further assistance on this matter.

Yours truly,

Steve Fron, CPA, CA, TEP
Manager Trust Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislation Policy and Regulatory Affairs Branch

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