Acquisition of control of a corporation can trigger a number of negative tax consequences, such as a deemed year-end, denial of loss carryforwards, and denial of various other carryforwards of deductions and credits.
It is generally understood that there is no acquisition of control where the shares of the corporation are received by the estate of the controlling shareholder on death. This rule applies whether or not the estate’s executors (sometimes referred to as estate trustees or administrators) are related to the deceased shareholder. However, where controlling shares of the corporation are transferred from an estate to a testamentary trust (which is a trust created in one’s Will, separate from the estate itself), there will be an acquisition of control of the corporation unless all the trustees of the testamentary trust are related to the deceased shareholder. On the transfer from either the estate or the testamentary trust to a beneficiary, there is no acquisition of control provided the beneficiary was related to the deceased shareholder.
Where, in the course of administering either the estate or the testamentary trust, an executor or a trustee is replaced due to either death or incapacity, the CRA’s administrative policy is that there is no acquisition of control of a corporation controlled by the trust. However, where there is a change of an executor or a trustee for other reasons (such as removal due to disagreement or voluntary resignation), and the newly-appointed executor or trustee is unrelated to the deceased shareholder, the CRA’s administrative policy is that there is an acquisition of control.
The CRA has announced that it is considering withdrawing its current administrative position and may begin taking the view that a change of control occurs where there is a change of trustees for any reason (including death or incapacity of a trustee) unless the replacement trustee is related to the deceased shareholder.
This problem is not limited to testamentary trusts. Replacement or appointment of trustees in an inter-vivos trust (such as one used in an estate freeze) can also cause an unintended acquisition of control.
It is uncertain whether the CRA’s policy is correct, as it has not been challenged in court. However, the CRA’s views must be considered in any planning involving trusts or estates.
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