TOSI and Valuing a Discretionary Interest in a Trust
Consider a common corporate structure that entails shares of Opco being
wholly owned by a discretionary family trust with beneficiaries who are
all related to one another. Dividends paid by the corporation to the
trust and allocated to beneficiaries who have attained the age of
17 years before the year starts may be subject to TOSI unless the
dividends are not derived directly or indirectly from a related
business. Practitioners may be surprised that it is unclear whether a
related business exists in this circumstance. The answer may depend in
part on whether a discretionary interest in a trust has a nominal value.
It is hoped that the CRA will provide guidance on this question.
A related business, in the context of a corporation, may exist if a
source individual is actively engaged on a regular basis in the
activities of the corporation (subparagraph 120.4(1)(a)(ii)). If that is
not the case, such as for a corporation with only passive investments, a
related business might still exist. One must make the determination
using a further two-part test under which both parts must be satisfied
for TOSI to apply (paragraph 120.4(1)(c)).
This part of the test is satisfied where a source individual owns either
Where the corporation is wholly owned by a trust, condition (1) cannot
be satisfied since trusts are specifically excluded from the definition
of "source individual." However, condition (2) may be satisfied if the
beneficiaries are considered to hold property that derives, directly or
indirectly, all or part of its FMV from the underlying property of the
- shares of the capital stock of the corporation; or
- property that derives, directly or indirectly, all or part of its
fair market value from shares of the capital stock of the corporation.
The CRA's view is that a discretionary interest in a trust is property
(APFF CRA round table, question 10, October 5, 2018) and thus
condition (2) is satisfied. This argument is particularly persuasive if
the trust assets consist only of shares of the corporation; in that
case, there are no other assets that would contribute to the value of
the discretionary interest.
The second part of the test is satisfied where the FMV of a source
individual's discretionary interest in the trust constitutes at least
10 percent of the FMV of all of the issued and outstanding shares of the
corporation. However, a difficult exercise must be undertaken to
ascertain the FMV of a discretionary interest in a trust. If a nominal
valuation is supported, this condition will not be met. The CRA takes no
position on this point in the APFF round table, noting only that the
valuation of a discretionary interest in a trust is a question of fact.
However, in a different context, the CRA has taken issue with the
nominal valuation and supported instead an even-handed principle (CRA
ruling 2001-0111303, 2002), which would allow this condition to be met:
It would be unreasonable to conclude that the FMV of an
interest [in] a discretionary trust holding property with significant
value has no value simply because it is difficult to measure. In absence
of any term of the trust that would direct the trustees to favour one
beneficiary over another, the even handed principle would suggest that
value of each beneficiary's interest was approximately equal.
Kakkar CPA Professional Corporation, Vaughan, ON