Trust Planning: Beware Association
When designing a corporate structure involving two or more CCPCs,
planners normally seek to avoid association; the objective is to ensure
that each corporation has its own $500,000 business limit so that it is
eligible for the maximum small business deduction. However, the addition
of a trust to this type of structure may inadvertently create
association, with a consequent sharing of the $500,000 limit. The
examples below show how association can occur through the trust’s
beneficiaries, settlor, or trustees.
Association Through the Beneficiaries
Two potential association problems can arise for beneficiaries of any age:
In a hybrid situation—that is, if a taxpayer has a discretionary
interest in a trust with a maximum cap (for example, 24 percent)—the
taxpayer will still be deemed to own 100 percent of the shares (CRA
document no. 2003-0052261E5, January 6, 2004).
if a trust is discretionary, subparagraph 256(1.2)(f)(ii) deems each beneficiary to own all the shares of a trust; or
if a trust has fixed interests, subparagraph 256(1.2)(f)(iii)
deems each beneficiary to own the fixed percentage of the shares that
corresponds to the beneficiary’s fixed percentage interest.
Consider the situation of a discretionary trust set up to hold more than
50 percent of the shares of a corporation for a beneficiary (Trustco).
If the beneficiary is the owner-manager of a different corporation
(Beneco) that controls more than 50 percent of the shares, then Trustco
and Beneco will become associated by virtue of the rule set out above
(because the beneficiary is considered to control both corporations). In
a situation such as this, the beneficiary may not even know that a
trust is being planned to be put in her name. Further, she may be only
one of several beneficiaries, and because the trust is discretionary,
she may never derive a benefit out of the trust.
Even more troublesome is the rule in subsection 256(1.3), which provides
that if beneficiaries are minor children, then both parents of any
minor beneficiaries are deemed to own 100 percent of the shares held in
trust for those children, as illustrated in figure 1. This rule gives
rise to unexpected consequences because it arises without any
cross-shareholdings between Parentco 1 and Parentco 2; in addition, its
application is—surprisingly—unaffected by the separation or divorce of
the parents (CRA document no. 9923125, December 23, 1999). The result
can be avoided only if “it can reasonably be considered that the child
manages the business and affairs of the corporation and does so without a
significant degree of influence by the parent” (subsection 256(1.3)).
Association Through the Settlor
Subsection 75(2) applies to a particular trust to attribute business
income or losses and capital gains or losses to a settlor of a trust
when the terms of the trust deed contemplate that a settlor “may” have a
reversionary or controlling interest in the trust. If the subsection
applies, subparagraph 256(1.2)(f)(iv) will also apply to deem the
settlor to own all of the shares held in the trust that were purchased
with settlement property or property substituted therefor.
A settlor may settle a trust with nominal consideration that is used to
subscribe for shares in a corporation (Trustco). However, if the trust
deed is not carefully drafted to ensure that subsection 75(2) does not
apply, not only may the trust’s income or losses be attributed to the
settlor, but any corporations that the settlor controls may become
associated with Trustco pursuant to the deemed ownership rule in
Association Through a Trustee
Subsection 104(1) provides that a reference to a trust is a reference to
its trustee. Thus, as illustrated in figure 2, if a trustee is a
shareholder in a corporation and the trustee’s duties will include
having a controlling interest in a different corporation, the two
corporations will be associated (because the trustee/trust controls both
corporations): see CRA document no. 2005-0111731E5 (July 4, 2006).
Moreover, if the trust has multiple trustees, each trustee owns
100 percent of all the shares (because trustees own property jointly,
and parties who own property jointly each own it 100 percent).
Further consequences follow unless subsection 256(4) (discussed below)
applies. If a trustee or co-trustees control two or more corporations
under the same trust, these corporations will be associated pursuant to
paragraph 256(1)(b). And, more unexpectedly, association will result if a
trustee controls two separate corporations under two separate trusts,
as depicted in figure 3.
The result described above will occur even if beneficiary 1, beneficiary
2, and the trustee were unrelated before trust 1 and trust 2 are
settled and if both Trustco 1 and Trustco 2 were unassociated before
being settled under trust 1 and trust 2 (CRA document no. 9510645, June
29, 1995). Association will still arise if the trustees of both trust 1
and trust 2 are an identical group of co-trustees instead of sole
trustees (because subsection 104(1) provides that a reference to a trust
is a reference to its trustee).
It is possible to avoid association of the type illustrated in figure 3
by having two groups of co-trustees oversee trust 1 and trust 2, so long
as those groups are not identical (that is, by having one less person
or one more person in one of the two groups)—although if the co-trustees
control corporations, then the association problems illustrated in
figure 2 may arise.
The only exception to this type of association is in subsection 256(4),
which provides that corporations will not be associated solely by their
common trustee controller so long as
Finally, special issues arise when the trustee is a corporation.
Ordinarily, paragraph 256(1)(a) would associate the corporate trustee
with a corporation that it controlled. However, subsection 256(5)
provides that, in the ordinary course, association will not arise unless
the settlor controlled the corporate trustee (or is a member of a
related group that controlled the corporate trustee).
the trust or trusts are testamentary, and
the corporations were unassociated before the trustee acquired control.
Jason R. Pisesky
Felesky Flynn LLP, Edmonton