In Vefghi Holding Corp. v R, 2023 TCC 135, the court provided the following answers to a Rule 58 Question:
Where a trust designates a portion of a taxable dividend (the “Amount”) received on a share of the capital stock of a taxable Canadian corporation (the “Issuer”), pursuant to subsection 104(19) of the federal Income Tax Act (the “Act”), such that the Amount is deemed to have been received by a beneficiary (the “Beneficiary”), the determination of whether the Issuer is connected with the Beneficiary is made at the time that the taxable dividend was, as a question of fact, received by the trust provided that the Beneficiary is deemed under subsection 104(19) to have received the Amount in the same taxation year as the taxable dividend was, as a question of fact, received by the trust.
However, if the Beneficiary is deemed under subsection 104(19) to have received the Amount in a taxation year that is subsequent to its taxation year in which the taxable dividend was, as a question of fact, received by the trust, then the determination of whether the Issuer is connected with the Beneficiary is made in the subsequent taxation year of the Beneficiary.
Two similar sets of facts were before the court. In one set, the trust and beneficiary corporation (the “benco”) both had December 31 year-ends. The shares of the corporation owned by the trust (the “opco”) were sold on July 1 immediately after opco had paid a dividend to the trust, which allocated the dividend to the benco that day. The court held that benco and opco were connected for Part IV tax purposes even though the opco shares were sold before December 31 that year.
In the other set of facts, benco had an August 31 year-end. Opco paid a dividend on June 30, a portion of which was payable to the trust that held shares in its capital. The trust allocated a dividend to benco on July 1. The shares of opco were then sold on July 1. In this case, the court held that opco and benco were not connected because the determination needed to be made in the taxation year of benco that followed the year in which the sale occurred.
Cf the following on this point: