Change in Trustees and Control
In May of this year, the CRA issued a technical interpretation [Footnote 8] that could have widespread consequences for corporations that have trusts as shareholders. The technical interpretation deals with the question of whether there is an acquisition of control of a corporation on the replacement of one or more of three trustees of an inter vivos trust holding a majority of the voting shares of the corporation. The CRA essentially indicated that a change in any of the trustees of the trust would generally result in a new group of persons controlling the corporation so that the acquisition of control rules in the Act would apply, unless a saving provision in paragraph 256(7)(a) applied. The consequences of an acquisition of control could be quite onerous for the corporation. For example, the availability of its tax losses and other accounts could be restricted, and it would have a deemed taxation year-end that could have several adverse tax consequences. It does not seem appropriate that these results should arise when there has been no change in the beneficial ownership of the corporation.
Question 1
What is the legal basis for the CRA’s interpretation?
Response 1
The Supreme Court of Canada held, in M.N.R. v. Consolidated Holding Company Limited [Footnote 9] that 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 (subject to any restrictions on such right in the trust indenture) and who, therefore, control the corporation.
Question 2
The technical interpretation indicates that where only one of three trustees is replaced, there would be an acquisition of control by a group of persons. Why is that the case?
Response 2
The technical interpretation acknowledged that where a trust has multiple trustees, the determination as to which trustee or group of trustees controls the corporation can only be made after a review of all the pertinent facts, including the terms of the trust indenture. However, it went on to indicate that in the absence of evidence to the contrary, we would consider there to be a presumption that all of the trustees would constitute a group that controls the corporation. We took this view because we believed that the fiduciary obligation that each of the trustees would have to act in the best interests of the beneficiaries of the trust would make it unlikely that two trustees could properly act together to control a corporation, to the exclusion of a third trustee.
Question 3
Some commentators have suggested that the position in the technical interpretation contradicts the CRA’s position in paragraph 10 of IT-302R3. Do you agree?
Response 3
Paragraph 10 of IT-302R3 indicates only that control of a corporation will be regarded as remaining unchanged where the executor, administrator or trustee of an estate is replaced as a result of that person’s death or inability to fulfill his or her functions. Therefore, that position does not apply to the replacement of trustees of an inter vivos trust.
Question 4
Why will the CRA not extend the interpretation bulletin position to inter vivos trusts, given that it appears to be an administrative concession?
Response 4
The interpretation bulletin position was first adopted when a previous version of paragraph 256(7)(a) provided a legal basis for the position. A 1994 amendment to paragraph 256(7)(a) has removed the legal basis for the position. Therefore it cannot be extended, and consideration will have to be given to withdrawing the current bulletin position when the bulletin is next revised.
Question 5
Does the possibility of an acquisition of control of a corporation when there has been no change in its beneficial ownership present a policy issue?
Response 5
We have raised the matter with the Department of Finance and understand that Finance recognizes that there is an issue.