Opco wishes to redeem low-low preference shares held by a family trust, which proposes to allocate the resulting deemed dividend to a beneficiaryco (Benco). Will Part VI.1 tax apply to Opco?
If the preference shares are subject to a price adjustment clause, then, per the CRA (document number 59342 May 15, 1990), the 191(4) exception will not apply (the redemption price cannot exceed the consideration for which they were issued).
What about the substantial interest exception? It appears that, for the purposes of Part VI.1, both the trust and the Benco must meet this exception (they both receive the dividends).
If the Benco owns shares of Opco directly (ie not just through the trust) and is related to Opco, then the substantial interest exception should apply.
For the trust, the CRA agrees that a trust is related to a person if the person is related to all trustees of the trust (2009-0311891I7 and 2002-0117885).
In addition, every beneficiary must be related to every other beneficiary (other than registered charities). What if the trust instrument allows another trust to be created that will be a beneficiary? This could be problematic, even if the other trust does not yet exist, because of “beneficially interested” (248(25)) and because one of its trustees might be an unrelated person.
Austin del Rio, “Part VI.1 Tax on Dividend Paid Through Family Trust” /Tax for the Owner Manager/ 19:3 (July 2019)
