2023-0961291C6 STEP 2023 – Q8 – Trust and Related

Principal Issues: Can a corporation controlled by a trust be related to a corporation controlled by the trustees of that trust.

Position: Yes.

Reasons: The two corporations may be related to each other by virtue of subparagraph 251(2)(c)(i).

Author: McPherson, Ryan
Section: 251(2), 104(1)

2023 STEP-CRA Roundtable – June 20, 2023
Question 8. Trust and Related

In general, a trust is not related to another person because the definition of “related persons” in subsection 251(2) of the Income Tax Act (Act) does not specifically refer to a trust. However, specific provisions of the Act provide that a trust is related to a person for certain purposes. One example is paragraph 55(5)(e) of the Act.

CRA has previously stated that, 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. Thus, if a trust owns a controlling interest in a corporation, the trustees of the trust would be viewed as controlling the corporation.

Assume one corporation is controlled by A and B, as trustees of a trust and another corporation is controlled by A and B in their own right (not as trustees). In this situation, would the two corporations be related persons within the meaning of subsection 251(2)?

CRA Response

Subsection 251(2) contains the definition of “related persons” for purposes of the Act. There is no explicit reference to a trust in subsection 251(2). However, a trust, or the trustee(s) of a trust, may, in certain circumstances, be related to a corporation. Our views in this respect are set out in paragraphs 1.46 and 1.47 of Income Tax Folio S1 - F5 - C1, Related Persons and Dealing at Arm’s Length, which state:

1.46 Where a trust owns a majority of the voting shares of a corporation such that the trustee(s) of the trust control the corporation, the trust and the corporation will be related persons by virtue of subparagraph 251(2)(b)(i). Therefore, pursuant to paragraph 251(1)(a), the trust and the corporation will be deemed not to be dealing at arm's length.

1.47 Subsection 104(1) provides that a reference to a trust is to be read to include a reference to the trustee of the trust who has ownership or control of the trust property. This will be the case unless the context requires a different interpretation. Where the rule applies, the control of a particular corporation by a trust may also result in a trustee of the trust being related to the particular corporation because of that trustee's ownership of the shares of, and control of, the corporation.

Further to paragraph 1.47 of the above referenced folio, we recently confirmed at the 2022 CRA STEP Roundtable (Question 6) that, in cases where a trust controls a corporation, a change in the trustee, or in one of the trustees, may result in an acquisition of control of the corporation. In our response, we noted that 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.

Although subsection 251(2) of the Act does not explicitly refer to a trust in the definition of “related persons”, it is our view that, in applying that definition, the fact that the trustee(s) of the trust are the legal owners of any shares of a corporation held by the trust, should be taken into consideration.

Therefore, in the circumstances described above, assuming that A and B, under the terms of the trust, control one corporation and A and B, as a group of persons, control another corporation, we are of the view that the two corporations would be related to each other by virtue of subparagraph 251(2)(c)(i), which provides that two corporations are related to each other if they are controlled by the same group of persons.

Ryan McPherson
2023-096129

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