By: Florence Marino B.A., LL.B., TEP | Vice President, Tax & Estate Planning
Notifiable transactions regime
The enhanced mandatory disclosure rules received Royal Assent on June 22, 2023. In addition to beefing up the already existing reportable transaction rules, a new notifiable transaction regime was added to the framework. Basically, if a transaction is designated by the Canada Revenue Agency (CRA) with the concurrence of the Minister of Finance as a notifiable transaction, reporting of the transaction or one that is substantially similar to it is mandatory within 90 days of the earlier of entering or being contractually obligated to enter the transaction. Taxpayers, promoters and advisors have an obligation to report and there are significant penalties for not reporting. On November 1, 2023, the CRA published its list of 5 notifiable transactions.
On the list is: “Avoidance of deemed disposal of trust property” and described are three versions –
- Roll-out of capital property to Holdco, a beneficiary of Old Trust, where New Trust owns Holdco;
- Roll-out of capital property from a trust to Holdco, a beneficiary of the trust, where Holdco is owned by individuals who are beneficiaries of a trust and some of those beneficiaries are non-resident; and
- Old Trust holds shares of Opco that are redeemed; the redemption dividend is allocated to Holdco, a beneficiary of Old Trust, and treated as an inter-corporate dividend received by Holdco; New Trust owns Holdco.
Before the existence of the notifiable transaction regime, these types of transactions were called out by the CRA as subject to the general anti-avoidance rule (GAAR). (See, for example: #2016-0669301C6 2016 CTF Roundtable, #2017-0693321C6 STEP Roundtable; #2017-0724301C6 CTF Roundtable; #2019-0823581C6 CTF Roundtable; #2020-0839981C6 STEP Roundtable). Presumably, with the reporting, the CRA will be alerted to these transactions and will assert that GAAR applies. GAAR application has new meaning with a stronger GAAR in the wings. (A new GAAR – Pretty chilly right now), (Tax Legislation tabled – Some highlights).
Underlying rationale and possible use of insurance
Use of these strategies is a symptom of a bigger issue. Distributing trust property with unrealized gains directly to individuals who are capital beneficiaries of a trust that are resident in Canada can defer tax but it will not solve for the beneficiary’s ability to responsibly handle the property. Such a distribution may also have a profound effect on the succession of a family business and have the potential to dis-equalize the estate. Also, where individual beneficiaries have creditors or family law concerns, outright distributions may become problematic. And, not a small point – if a beneficiary is a non-resident, there’s no ability roll-out at cost to them.
Is there a way to treat the symptom and cure the illness? Life insurance can play a role. If there is a concern in distributing trust property to a beneficiary (for example, if they are non-resident), life insurance may be used as an alternate source of wealth rather than a distribution of trust property outright to that individual. Or, if the property is shares of a corporation, and shares are distributed to a beneficiary, corporate-owned life insurance may be used to redeem the shares on the death of the freezor from the beneficiary, leaving the corporation in the hands of active family members and cashing-out inactive ones.
While each situation is different, consider where life insurance could help resolve planning problems arising from CRA positions.
FOOTNOTE:
This publication is protected by copyright. Tompkins Insurance is not engaged in rendering tax or legal advice. TOMPKINSights contains a general discussion of certain tax and legal developments and should not be construed as tax or legal advice.
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