Section 105

In the course of commenting on common audit issues for trusts, CRA stated:

In one audit that we dealt with, the taxpayer had been the sole shareholder and director of OPCO. The taxpayer settled a trust, purportedly for employees of OPCO, and was the sole trustee. Both taxpayer and the trust subscribed for new common shares of OPCO for a nominal amount. When an offer was received from an arm's length party to buy OPCO several years later, the taxpayer and OPCO entered an agreement to allow OPCO to redeem the shares held by the trust (which now had a significant fair market value) for the nominal amount originally paid for them. This effectively inflated the value of the remaining OPCO shares held by the taxpayer, and thus the amount received by him on the sale of the company. CRA took the position that there was a benefit pursuant to subsection 105(1) in respect of the taxpayer. Furthermore, because the taxpayer, the trust and OPCO were all persons not dealing at arm's length, the trust could be assessed pursuant to subparagraph 69(l)(b)(i) in respect of the disposition of shares.

Father and Y were the trustees of a Quebec family trust, whose beneficiaries included father and his three children. Distributions made by the Trust to the children's bank accounts were, in large part, immediately "returned" out of the bank accounts to father, to reimburse him for expenses (both specific and general) which he claimed were their responsibility and for their benefit.

After finding that the amounts returned to the father were income to him under s. 104(13), CRA went on to indicate (TaxInterpretations translation) that such amounts should not be included in his income under s. 105(1):

[N]o benefit was conferred on Father "from or under a trust" …when each Child paid the sums to him in his personal capacity. The Trust assets were not diminished by reason of the reimbursements of the amounts by the Children to Father.

An estate sold personal-use real estate to one of its beneficiaries for a price less than the property's fair market value, so that s. 69(1)(b)(i) applied. The capital gain to the estate was payable to a beneficiary other than the purchaser.

CRA rejected a submission that the exception in s. 107(1)(a) applied to exclude a taxable benefit to the purchaser because later in the same year the purchaser sold the property at a capital gain which was increased by the amount of the purchaser's reduced cost for the property. Accordingly, that difference represented a taxable benefit to the purchaser, but such amount was required to be added to the purchaser's adjusted cost base under s. 52(1) – with a resulting reduction in the capital gain on the subsequent sale.

A taxable Canadian corporation (Holdco) which is wholly-owned by a trust of which Mr. A is the sole trustee and is a discretionary beneficiary, makes an interest-free loan to another taxable Canadian corporation (Investco) of which Mr. A is the sole shareholder. In finding that this did not give rise to a taxable benefit, CRA indicated that as there have been no relevant changes since Cooper, s. 105(1) "would not be considered favourably as a ground for including a foregone interest benefit in the income of Mr. A."

The questioner noted that ITTN No. 11 had been archived, and obtained CRA's confirmation (per the summary) that:

It is still the CRA's position that although a taxable benefit does arise from the rent-free use of trust property, such a benefit will not generally be assessed in the case of personal-use property owned by a trust, that is used by a beneficiary under the trust or any person related to the beneficiary.

The body of the response noted that although ITTN No. 11 referred to personal use property of a beneficiary (TaxInterpretations translation):

...the CRA has expanded its administrative position to the case where the property is utilized by a person who is related to a beneficiary as the property is, in that situation, a personal use property of the trust.

Proposed transactions

The trustees of a listed REIT will implement a distribution reinvestment plan (the "Plan") under which Canadian-resident unitholders may enroll. Because of foreign securities legislation non-residents will not be eligible. The Plan provides that the REIT shall pay to the Agent (a trust company) all cash distributions paid on Units owned by Unitholders who participate in the Plan and the Agent will use such funds to purchase additional Units directly from the REIT. Additional Units purchased under the Plan will be registered in the name of the Agent, as agent for a Unitholder who participates in the Plan. The price at which Units of the REIT will be purchased by the Agent with cash distributions will be the "Average Market Price," namely XX% of the weighted average price of Units of the REIT on the applicable exchange for the five trading days immediately preceding the relevant Distribution Date. The right to participate in the Plan may not be transferred by a Unitholder without the approval of the REIT and the applicable securities regulatory authorities.

Rulings

A. By virtue of the provisions of subsection 105(1) of the Act, the amount by which the fair market value on the date of purchase of any Units of the REIT exceeds the purchase price paid for such Units pursuant to the provisions of the Plan… shall be included in computing the income of the Unitholder on whose behalf the Units are purchased.

B. By virtue of subsection 52(1)… the amount added to a Unitholder's income pursuant to ruling A shall be added in computing the cost to the Unitholder of such Units of the REIT except to the extent that such amount is otherwise added to the cost or included in computing the adjusted cost base to the Unitholder of such Units.

Comment in Summary

: "The issue was considered by the Policy Review Committee and it was decided that it would not be appropriate to extend our long-standing favourable administrative position concerning dividend reinvestment plans of corporations to income distribution reinvestment plans of trusts. This is consistent with E9321283 in which we concluded that the proposed discounts of 10% to 15% would result in a benefit under 105(1)."

A beneficiary generally will not be assessed a taxable benefit for her rent-free use of personal-use property owned by the trust.

S.105(1) does not apply to a distribution of property to which s. 107(2) is applicable.

The favourable administrative position applying to personal-use property of an individual that is held by a trust will also apply where a house is owned by a trust and used by parents of a beneficiary.