2022-0928191C6 STEP 2022 – Q 6 - Acquisition of control

Principal Issues: Acquisition of control and change of trustee(s).

Position: See response below.

Reasons: Previous positions, in particular 2011-0401931C6.

Author: Witteveen, Tobias
Section: 256(7)

2022 STEP CRA Roundtable – June 15, 2022

Question 6. Acquisition of Control

Assume a Canadian corporation is wholly owned by a trust. Assume also that the trust document provides that the trustees of the trust can exercise discretionary power in the distribution of income and capital from the trust such that paragraph 256(7)(i) of the Income Tax Act (the “Act”) will not apply to deem there not to have been an acquisition of control if there is change to the trustees of the trust. Is there an acquisition of control (giving rise to a loss restriction event for the Canadian corporation) in the following circumstances?

(a) The trust has one trustee, A, who resigns. B, who is related to A, takes over as trustee.

(b) The same circumstances as (a) except that A and B are not related.

(c) The trust has two trustees, D and E. The trust document requires unanimous decision making. E resigns and is replaced by F. E and F are related.

(d) The trust has two trustees, D and E. The trust document requires unanimous decision making. E resigns and is replaced by G. E is not related to G.

(e) The trust has three trustees, H, I and J. The trust requires majority decision making. J resigns and is replaced by K. Each of H, I, J and K are not related.

Response:

Paragraph 256(7)(i) of the Act applies in circumstances in which a trust, at a particular time after September 12, 2013, controls a particular corporation and the trustee or other legal representative (the trustee) having ownership or control of the trust property (i.e., including shares of the capital stock of the particular corporation held by the trust) changes. Paragraph 256(7)(i) of the Act deems control of the particular corporation not to be acquired solely because of the change, provided that two additional conditions are met. The first additional condition requires that the change in trustees not be part of a series of transactions or events under which beneficial ownership of the trust property changes. The second additional condition requires that no amount of the income or capital of the trust to be distributed at or after the change in trustees be subject to a discretionary power.

Where paragraph 256(7)(i) of the Act does not apply, the Canada Revenue Agency’s position provided in response to a similar question at the 2011 STEP CRA Roundtable (footnote 1) would continue to apply. Specifically, based on the decision in M.N.R v. Consolidated Holding Company Limited, where the majority of the voting shares of a corporation are held by a trust, it is the trustees of the trust who have the legal ownership of the shares, who have the right to vote those shares, and who, therefore, control the corporation. Where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts, including the terms of the trust document. However, in the absence of evidence to the contrary, we would consider there to be a presumption that all of the trustees would constitute a group that controls the corporation.

Given our position as summarized above, we would generally take the position that there would be an acquisition of control in each of the situations described in paragraphs (b), (d) and (e) of the question. With respect to paragraphs (a) and (c) of the question, paragraph 256(7)(a) of the Act may apply, where shares are acquired by a person related to the former trustee, to deem that there be no acquisition of control provided that the replacement trustee is appointed concurrently with the resignation of the former trustee.

Tobias Witteveen
2022-092819

FOOTNOTES

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

1 See 2011 question 17, CRA document 2011-0401931C6.

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