Part VI.1 tax can apply in respect of a dividend paid by a corporation to a trust that is allocated to a beneficiary even if the trust has a substantial interest in the corporation. The CRA takes the position that a beneficiary of a trust, as such, cannot have a substantial interest in a corporation because the beneficiary does not own shares that are held by the trust.
Redeeming freeze shares can be problematic if the shares are subject to a price adjustment clause (PAC). The CRA takes the position that, if a PAC is triggered,
- an increase in the redemption amount of shares entails that any excess of the amount over the specified amount will not be an excluded dividend, and
- any decrease entails that the entire amount of a deemed dividend will not be an excluded dividend.
If a new trust is established as part of a re-freeze, it will be important to ensure that the CRA cannot designate the new trust and the old one as a single trust under subsection 104(2) with a 21-year anniversary that is the same as the old trust’s.
Erica Hennessey “Do You Have Trust Issues? The Potential Application of Part VI.1 and Subsection 104(2) in Estate Freezes” Tax for the Owner-Manager 21:1 (January 2021)
