BENEFICIAL OWNERSHIP IN CANADIAN INCOME TAX LAW

Author: Mark D. Brender

TABLE OF CONTENTS

INTRODUCTION
I. HARMONIZATION of benefical ownership
II. Beneficial Ownership Explored
2.1 Beneficial Ownership of Property Held In Trust
2.1.1 Beneficial Ownership in the Common Law Provinces
2.1.1.1 Change in Beneficial Ownership
2.1.2 Beneficial Ownership in Québec
2.1.3 Deemed Beneficial Ownership in Québec
2.1.3.1 Default Beneficiaries
2.1.3.2 Potential Appointees/Discretionary Beneficiaries
2.1.3.3 Contingent or Absolute Rights Under the Trust
2.2 Beneficial Ownership of Property Held Directly
2.3 Issues Arising from the Concept of Beneficial Ownership and Change in Beneficial Ownership
2.3.1 Trusts
2.3.2 "Controlled" in Subsection 186(2)
2.3.3 Foreign Share for Share Exchanges
2.3.4 Tax Treaties
2.3.5 Foreclosures
2.4 Subsection 248(3)
2.5 Construction Bérou and Wardean Drilling
III. PREVIOUSLY PROPOSED SOLUTIONS
3.1 Neutral Terms, Defined Terms, "Duet"
3.2 Subsection 248(3)
IV. RECOMMENDATIONS
4.1 Transfers to Trusts for the Sole Benefit of the Settlor and Deemed Dispositions
4.1.1 Transfers to Self-Benefit Trusts
4.1.2 Qualifying Dispositions
4.1.3 Exceptions to Dispositions
4.1.4 Inadequate Consideration and Security Trusts
4.1.5 Deemed Dispositions
4.2 Foreclosures
4.3 Share for Share Exchanges
4.4 Advertising Expenses
4.5 Other Contexts
CONCLUSION


INTRODUCTION
The Income Tax Act[1] frequently uses the concept of "beneficial ownership." This concept
originates from the common law and has no equivalent in civil law. This can render the
application in Québec of certain provisions of the ITA somewhat problematic. The concept of
beneficial ownership is used in the ITA in a variety of contexts, including, inter alia,
dispositions, acquisitions, transfers of property to a trust, share-for-share exchanges,
foreclosures and guarantees. As well, the concept is used in many of the bilateral tax treaties
entered into by Canada.
The term beneficial ownership is used in common law to distinguish the rights enjoyed by
persons with a beneficial interest in property from those enjoyed by the legal titleholder to that
property. Whether or not those beneficial rights constitute an actual ownership right is the
subject of much debate. Under Québec civil law, there is no such fragmentation of the right of
ownership. While dismemberments of ownership exist, i.e., usufruct, use, servitude and
emphyteusis, these dismemberments limit or expand rights enjoyed in property but do not
convey ownership itself.[2] Furthermore, none of these dismemberments of the right of
ownership can be precisely analogized to the common law concept of beneficial ownership.
Subsection 248(3), in effect, attempts to equate certain Québec private law institutions with the
common law trust. In particular, paragraphs 248(3)(a) to (d) deem certain institutions to be
trusts ("deemed trusts") for purposes of the application of the ITA in relation to the Province of
Québec. Paragraph 248(3)(e) deems a person in Québec who has a right, whether immediate
or future and whether absolute or contingent, to receive any of the income or capital of one of
these deemed trusts to be "beneficially interested" in the trust. Paragraph 248(3)(f) deems
property in relation to which a person in Québec has the right of ownership, a right as lessee of
an emphyteutic lease or a right as a beneficiary under a trust, to be "beneficially owned" by the
person.
Subsection 248(3) was enacted with a view to harmonizing, inter alia, the treatment of
beneficial ownership in property with various institutions unique to the civil law of Québec.[3]
The fundamental policy objective underlying this provision is to promote fair and equitable
treatment and application of the ITA throughout Canada, regardless of the unique features of
Québec private law. Whether or not this policy objective is achieved is disputed both as a
result of the unique features of Québec’s civil law and the lack of certainty as to the meaning of
beneficial ownership in common law.
In addition, subsection 248(3) does not address all of the income tax issues that can arise from
Canadian bijuralism, as was demonstrated by the Construction Bérou[4] decision, discussed
below, wherein the Federal Court of Appeal interpreted the ITA as overriding the civil law,
using a common law rationale to avoid giving the ITA narrower scope within Québec than it
would have had in the common law provinces.
The harmonization project implemented by the Minister of Justice of Canada aims to ensure that
all Canadians will have access to federal legislation that is respectful of the legal tradition existing
in the province in which they reside. With that objective in mind, the harmonization process
strives to ensure that federal legislation is consistently applied throughout Canada with full
respect for and recognition of civil law concepts, institutions and terminology. From an income
tax standpoint, the objective and, accordingly, the challenge of harmonization is to concurrently
promote horizontal equity throughout Canada in the application of the provisions of the ITA and
preserve the tax policy objectives underlying the particular provisions of the ITA.
I. HARMONIZATION OF BENEFICIAL OWNERSHIP
Having regard to the fact that the concept of beneficial ownership is not recognized in Québec,
difficulties can arise in applying provisions of the ITA that rely on the application of the concept
to certain transactions having a nexus to Québec. For example, one of the requirements to
effect a tax deferred transfer of property to a trust for the benefit of the transferor (i.e., a trust
that meets the requirements of subparagraphs 73(1.01)(c)(ii) and 73(1.02)(b)(ii)), is that there is
no change in the beneficial ownership of the property as a consequence of the transfer As will
be illustrated below, absent harmonization measures, the tax consequences of this transaction
and others like it in the Québec context are, at best, replete with uncertainty or, at worst,
inconsistent with the tax consequences that would arise in any other Canadian province.
There are, essentially, two contexts in which the expression "beneficial ownership" or "beneficial
owner" is applied in the ITA. The first context relates to the identification of the person who is
the "beneficial owner" of a particular property. The second context involves an assessment of
whether there has been a change in the beneficial ownership of property. These two concepts
will be examined in both the common and civil law contexts as will the application of these
concepts in certain provisions of the ITA in which they are used. A comparison of the results
arising from the application of those provisions in the province of Québec and the common law
provinces will illustrate that the ITA need be amended to ensure or promote consistent
application of the ITA throughout Canada in these contexts.
II. Beneficial Ownership Explored
2.1 Beneficial Ownership of Property Held In Trust
2.1.1 Beneficial Ownership in the Common Law Provinces
Paragraph 248(3)(f) provides that in applying the provisions of the ITA in relation to the
province of Québec, a property in relation to which any person has certain rights, such as the
right of ownership or a right as a beneficiary, is deemed to be beneficially owned by that person.
The paragraph, therefore, is intended to ensure that the person having a right contemplated by
that paragraph is in the same position for tax purposes in relation to that property as a person in
a common law province having a substantively similar right. This, of course, presupposes that
there is a conceptual framework in the common law for the identification and determination of
beneficial ownership in property. However, as will be discussed below, there is a lack of
consensus as to the meaning of "beneficial ownership" in the common law as well as a
framework for analyzing same.
The discussion which follows will examine whether and in what circumstances a beneficiary of a
trust governed by common law may be considered to be the beneficial owner of trust property.
This determination is significant because it allows one to compare the status of a beneficiary of a
trust governed by common law in a particular set of circumstances to that of beneficiary of a
trust governed by civil law in the same circumstances. For harmonization to be achieved, it is
imperative that if a given set of circumstances results in a beneficiary of a Québec trust being
deemed to be the beneficial owner of the trust property under subparagraph 248(3)(f), a
beneficiary of a common law trust in similar circumstances also be regarded as the beneficial
owner of the trust property. By extension, the determination of the beneficial owner of trust
property will enable or facilitate the analysis and determination of whether and in what
circumstances a change in the beneficial ownership of property arises.
The determination of who, generally, will be considered a beneficial owner of trust property may
be explored in the context of an example. Assume the settlor of a self-benefit trust retains a
power of appointment exercisable on death and that the trust deed provides for certain persons
(the "default beneficiaries") to receive the remaining trust property in default of the exercise of
the power (or if the power is not fully exercised).
The default beneficiaries have a beneficial interest in the trust assets. [5] Consequently, they
may be considered beneficiaries of the trust.[6] The question of whether these default
beneficiaries are beneficial owners of the trust property is contentious both at common law and
for tax purposes. The controversy, though, is not limited to whether default beneficiaries are
beneficial owners of property for common law and tax purposes. It is much broader in that it
goes to the very nature of beneficial ownership and whether such terminology reflects a true
ownership relationship or whether it is a commonly used misnomer for a relationship where
ownership of property, as the term is otherwise used, and most of the incidents thereof are
vested in one person, and beneficial enjoyment of property is vested or is to be vested in
another.
In Roman law, the concept of ownership was assimilated to a right in rem, i.e., exercisable
directly against property without the need for the intervention of a person as an intermediary.
This is to be contrasted with rights in personam, i.e., personal rights exercisable against a
person who owes some obligation and/or duty. Both of these concepts were intended to
elucidate a civilian approach to property. It was Austin who incorporated them into common
law thought and who, in doing so, stirred up much debate about the nature of the ownership
relationship in common law, particularly in the area of trusts.[7] The area of trusts was fertile
ground for this debate because the relationship between beneficiary and trust property, when
viewed through the in rem/in personam lens, fits into both categories. The beneficiary has a
remedy against the trustee personally for breaches of the trust. Where appropriate, this remedy
secures to the beneficiary compensation for the loss caused by the breach. The beneficiary also
has a right to recover wrongly alienated or misappropriated trust property.[8] Waters is of the
opinion that the use of the in rem/in personam dichotomy in common law creates confusion
and is likely inappropriate.[9] In particular, those concepts cannot accommodate the common
law trust that divides the attributes of ownership – vesting the right of management and
disposition in the trustee and the right of enjoyment in the beneficiary.[10] The common law
trust blends both the notion of a personal right with a proprietary interest in the trust fund.[11] It
is therefore argued that it is the context in which a trust issue arises that will dictate which of
these two facets of the trust/beneficiary relationship will be paramount.
Waters undertakes a detailed analysis of the jurisprudence that addresses the nature of
beneficiary rights and demonstrates that at times it opts for the personal right of the beneficiary
approach and at other times it couches decisions in terms of the proprietary rights that a
beneficiary enjoys over trust property. Waters concludes that where the circumstances are such
that it is not the working of the trust that is before the Courts but, for example, it is the
beneficiary’s liability for tax that is at issue, it is more correct to engage in a proprietary rights
analysis. That analysis, maintains Waters, will look to the facts of the particular case with a view
to assessing whether the beneficiary has a "sufficiently direct interest" in the trust fund such that
the beneficiary can be said to have more than a personal right.[12] While Waters enumerates
some of the factors to be examined in determining whether a beneficiary has a "sufficiently direct
interest," e.g., Has the trust been settled? Has a trustee been appointed? Has the beneficiary’s
interest vested?, he stops short of elucidating exactly what will constitute a "sufficiently direct
interest" in the trust in order to consider someone a beneficial owner of trust property for
income tax purposes.
Oosterhoff and Gillese seem to concur with Waters. They adopt a proprietary approach to
trust property in the context of trust taxation issues and cite the decision of the Exchequer Court
and the subsequent decision of the Supreme Court of Canada in Minister of National Revenue
v. Trans-Canada Investment Corp. Ltd.[13] as illustrative of the application of that
approach.[14] In that case, Trans-Canada Investment Corp. Ltd., the respondent, purchased
common shares in selected Canadian companies and endorsed those shares over to the trustee
of a unit trust. The trustee would then give the respondent certificates representing unit interests
in the trust. The respondent would, in turn, sell those certificates to the public. The terms of the
trust were such that the number of shares of each of the underlying companies to which holders
of trust units were entitled was fixed at the time certificates were purchased and remained the
same throughout. Furthermore, certificate holders could demand physical possession of the
shares of the underlying companies. Finally, the trustee took meticulous care to ensure that the
shares of the underlying companies represented by each trust unit were kept separate from
other shares in its possession. Dividends received by the trustee on these shares were
immediately placed in a segregated trust account and all distributions of these dividends were
made from that same account. The respondent retained some such certificates for itself. When
it received a distribution from the trust representing dividends received by the trustees from the
shares that were the trust property, the respondent sought to treat that distribution as a tax-free
inter-corporate dividend rather than as an income distribution from the trust. The Minister of
National Revenue challenged the respondent’s categorization of the distribution and disallowed
the deduction. Cameron J. of the Exchequer Court concluded that, based on the facts of the
case (i.e., the structure of the trust and, in particular, the rights of the beneficiaries just
described), the holder of the trust unit was the beneficial owner of the underlying shares
represented thereby. As such, the income distribution could be treated as a receipt of
dividends.[15] Though the decision of the Supreme Court of Canada was a 3-2 split, the
majority of the Court concurred with the decision of Cameron J. In recognizing that, for certain
purposes, the beneficiary of a trust could be treated as an owner of trust property, the
Exchequer Court and the Supreme Court of Canada acknowledge that the term beneficial
ownership, though the subject of much debate, has a place in Canadian law.
Oosterhoff and Gillese go on to conclude that those who will take in complete or partial default
of the exercise of a reserved power of appointment may be considered among the equitable
owners (i.e., beneficial owners) of the trust property, whereas potential appointees may not be
considered as such until the appointer’s discretion is exercised in their favour. [16] In other
words, adopting Waters’ terminology, the default beneficiaries of a trust have a sufficiently
direct interest in the trust whereas objects of a power only acquire such an interest on the
exercise by the appointer of its discretion in their favour. Recall, both Waters and Oosterhoff
and Gillese suggest that beneficial ownership (i.e., a proprietary approach to trust property), is
an appropriate approach when it is the beneficiary’s liability for tax that is at issue. Thus, the
determination that default beneficiaries are among the beneficial owners of trust property as
described above, is applicable for tax purposes.
Not all jurists agree with these conclusions. Catherine Brown states that outside a specific
finding of a Court or specific deeming rule, it is inaccurate to describe the beneficiary of a trust
as having ownership of the trust property. She views the term beneficial ownership as merely "a
short form for describing the beneficiary’s right to enforce the trust against the trustee and any
third party other than a bona fide purchaser for value without notice of the trust."[17]
Finally, the CCRA adopts the position that "a power with a gift over to named heirs in default of
the exercise of the power would mean that the [settlor] has not retained all of the beneficial
ownership of the property as those who will take in default are contingent beneficiaries under
the trust."[18]
Thus, the person who will receive trust property in default of the exercise of a power of
appointment may be considered beneficially interested in trust property.[19] The ITA includes
a person beneficially interested in a trust to be a beneficiary thereof.[20] While there is much
debate surrounding whether the beneficiary of a trust is the beneficial owner of trust property, it
has been suggested that when the issue is one other than the working of a trust and when the
issue has a financial aspect to it, beneficial ownership of trust property is an appropriate
perspective from which to view the problem. This approach, however, is subject to the
requirement that for property to be beneficially owned by a beneficiary, a factual analysis must
yield the result that the beneficiary enjoys a sufficiently direct interest in the trust property.[21]
Although the ITA is meant to overlay the private law of the jurisdiction in which it applies,[22] it
is not surprising that the legislature has sought to add at least some certainty to an area of law
that would seem otherwise uncertain. This is achieved in subsection 248(25). While the
subsection does not remove the doubt and controversy surrounding beneficial ownership and
whether or not there has been a change thereto, it at least provides a framework for establishing
who is beneficially interested in a particular trust. The subsection states that a person
beneficially interested in a trust includes "any person that has any right (whether immediate or
future, whether absolute or contingent or whether conditional on or subject to the exercise of
any discretion by any person) as a beneficiary under a trust…" This is consistent with the
conclusion reached by Oosterhoff and Gillese. Clearly the default beneficiaries are within the
ambit of this provision. As such, subsection 248(25) removes the first analytical hurdle, namely,
the determination of who, in common law, is beneficially interested in a trust.[23]
Subsection 248(25) differs from subsection 248(3), which reflects an attempt by the legislature
to import the notion of beneficial ownership into Québec, in that the latter creates a legal fiction
whereas the former represents the legislature taking a position on the issue of who is beneficially
interested in a trust for the purpose of lending some certainty to the application of the provisions
of the ITA that employ the concept of beneficially interested.
2.1.1.1 Change in Beneficial Ownership
The ITA contains various provisions which look to whether there has been a change in
beneficial ownership. There are two analytical approaches to determining whether there has
been a change in the beneficial ownership of property. Both approaches are discussed below.
If either analytical approach leads to a determination that there has been a change in beneficial
ownership, then such determination is sufficient to conclude that there has been such a change.
The first analytical approach looks to whether persons who were not beneficial owners of the
property prior to the transaction enjoy beneficial owner status after the transaction (the
"beneficial owner status" approach). In analyzing whether there has been a change in beneficial
ownership using this approach, one must identify and establish who, prior to the transaction, are
the beneficial owners of the property in question as well as identify who, subsequent to the
transaction, are the beneficial owners of the property in question. If the beneficial owners
before and after the transaction are not identical, then under this approach, there has been a
change in beneficial ownership.
The second analytical approach to the question of whether there has been a change in the
beneficial ownership of property involves a comparison of the settlor’s rights over and
obligations in respect of the property prior to and following the transaction (the "settlor’s rights
approach"). This approach examines whether, in effecting the transaction, the settlor has given
up rights or has been relieved of obligations associated with beneficial ownership. If the answer
is yes, then under this approach, there has been a change in the beneficial ownership of the
property. For example, in the context of a principal residence, the Canada Customs and
Revenue Agency (the "CCRA") has commented on what rights and obligations it considers to
flow from beneficial ownership. These rights are the right to possess the property, to collect
rents therefrom (i.e., to collect fruits from the property), the right to call for the mortgaging of the
property, and the right to transfer title of the property by sale or will. The obligations that flow
from beneficial ownership in the context of a principal residence are the obligations to repair and
to pay property taxes. While a person need not be vested with all of these rights nor subject to
all of these obligations to be the beneficial owner of property, a transfer thereof will be indicative
of a change in beneficial ownership.[24] Similarly, in the context of transactions that are sales of
property, the CCRA has stated "possession, use and risk are the primary attributes of beneficial
ownership."[25] Accordingly, a change in any of these rights and obligations would suggest a
change in beneficial ownership under this approach.
As has been illustrated, beneficiaries with a sufficiently direct interest in a trust are regarded as
enjoying some sort of ownership right, referred to as beneficial ownership, in trust
property.[26] While potential appointees do not enjoy such an interest, the default beneficiaries
do.[27] As such, they will be considered, together with the settlor of a self-benefit trust, to be
among the beneficial owners of the trust property.[28] Given that the default beneficiaries
enjoyed no such status prior to the constitution of the trust and that, at that time, it was the
settlor who enjoyed full ownership – both legal and beneficial – of the trust property, in
constituting the trust, from the "beneficial owner status" approach, the settlor has effected a
change in the beneficial ownership of the trust property.
The settlor of the trust, in the example discussed, in naming default beneficiaries in the trust
deed, has tempered his or her right to dispose of the subject property. As such, the settlor has
given up some of the rights enjoyed over the property and, using the "settlor’s rights approach"
has similarly effected a change in the beneficial ownership thereof. The same result would arise
in the absence of default beneficiaries where the settlor retained a specific power of appointment
exercisable on death.[29] In such circumstances, the settlor’s ability to dispose of the property
to whomever he or she desires is restricted; the settlor may only dispose of the property to
persons contemplated in the specific power of appointment. Consequently, a change in
beneficial ownership arguably results. Where there are no default beneficiaries and a settlor
retains a general power of appointment exercisable on death, a change in beneficial ownership
does not result as the settlor has not limited the class of persons to whom the property may be
disposed of on his or her death.[30] The CCRA is of the same position.[31]
This change in beneficial ownership of the trust property is of significance in assessing the tax
consequences of the constitution of the trust. Both subsections 73(1.02) and 107.4(1) prevent
transfers resulting in a change in beneficial ownership from benefiting from rollover treatment.
As a result, in a common law province, the settlor in the example under review will be
considered to have disposed of the property at the time the trust is constituted and will be
subject to all the tax consequences that result from that disposition.
2.1.2 Beneficial Ownership in Québec
In the case of a trust established under the laws of Québec, where the settlor is the sole
beneficiary, the "beneficial owner status" approach to determining whether there has been a
change in beneficial ownership renders it necessary to determine first whether the property to be
transferred to the trust is beneficially owned, within the private law meaning of that term, by the
settlor and, second, whether there has been a change in the beneficial ownership of the property
as a result of the transfer.
Although under Québec civil law there is, strictly speaking, no concept of beneficial ownership,
it is not unreasonable to regard the right of ownership of property as tantamount to beneficial
ownership. It is, however, more difficult to regard the settlor of a self-benefit trust as having
beneficial ownership of the property immediately after the transfer to the trust. The rights of a
beneficiary of a trust in Québec civil law are set out in the Civil Code of Québec ("C.C.Q.").
Neither the settlor, the trustee nor the beneficiary enjoy any real rights in the trust property.[32]
While the trust is in effect, the beneficiary has the right to require, according to the constituting
act, either the provision of a benefit granted to him or her or the payment of both the fruits and
revenues and the capital or of only one of these.[33] As such, the beneficiary’s right is not
framed in terms of the actual property of the trust but is instead framed in terms of what legal
actions the beneficiary can take. One common law author describes the beneficial owner of
property as he who holds the right of enjoyment of the property.[34] The right of enjoyment is
recognized in the C.C.Q. as an aspect of the right of ownership.[35] The right of ownership, in
turn, is recognized in the C.C.Q. as a real right.[36] Given that the beneficiary of a Québec
trust does not enjoy any real rights in the trust property[37] and that the right of enjoyment is a
dismemberment of the real right of ownership, it cannot be said that the beneficiary of a Québec
trust has a right of enjoyment in the trust property. Thus, the beneficiary of a Québec trust does
not meet that description of a beneficial owner.
It would seem that, without regard to paragraph 248(3)(f), there has been a change in the
beneficial ownership of the property even where the Québec trust to which property is
transferred has only the settlor as a beneficiary – the settlor is a beneficial owner of the property
prior to the transfer but not afterwards. However, this is predicated on an assimilation of the
rights that come with full ownership in Québec civil law to beneficial ownership. As stated
above, there is no concept of beneficial ownership in the civil law. As such, the question of
whether, from a strictly civil law perspective, a transfer of property to a trust of which the settlor
is the sole beneficiary results in a change in beneficial ownership cannot be answered, as there is
no analytical framework in the civil law from which an argument either for or against can be
crafted.
To compensate for this absence of any analytical framework, and to lend meaning to the
provisions of the ITA that rely on a change in beneficial ownership as a criterion for determining
the tax consequences of a particular transaction, the legislature enacted paragraph 248(3)(f).
Subparagraphs 248(3)(f)(i) and 248(3)(f)(ii) effectively deem property in which a person has a
right of ownership or a right as a lessee in an emphyteutic lease to be beneficially owned by the
person. Thus, prior to the settlement of the trust, the settlor is considered to have beneficial
ownership of the trust property. Further, subparagraph 248(3)(f)(iii) states that property in
relation to which a person has at any time a right as a beneficiary in a trust is deemed to be
beneficially owned by the person. Arguably, the settlor of a self-benefit trust is within the ambit
of that subparagraph. Thus, where that settlor is the sole beneficiary, there is no change in
beneficial ownership of the property for income tax purposes. Given that under Québec civil
law the beneficiary of a trust does not enjoy real rights in the trust property, absent the deeming
rule in subparagraph 248(3)(f)(iii), it would be difficult to regard the settlor of a self-benefit trust
as the beneficial owner, in the common law sense, of the property held in trust.
While the subparagraph 248(3)(f)(iii) deeming rule may seem to alleviate, albeit in a somewhat
superficial manner, certain problems inherent in applying the ITAin Québec, this, as will be
described below, may not always be the case. Indeed, paragraph 248(3)(f) may in some
circumstances, yield a result that conflicts with the result that would ensue in relation to the
common law provinces.
2.1.3 Deemed Beneficial Ownership in Québec
The determination of whether, in relation to the Province of Québec, a person is to be regarded
as having beneficial ownership of trust property is addressed in subparagraph 248(3)(f)(iii).
Subparagraph 248(3)(f)(iii) provides that "property in relation to which any person has, at any
time, a right as a beneficiary in a trust shall […] be deemed to be beneficially owned by the
person at that time." However, the somewhat vague wording of the statute does not lend itself
to a determination of the matter with any degree of certainty. Instead, the wording raises two
fundamental questions. What does it mean to have a "right as a beneficiary in a trust"? What
category or class of persons enjoy this sort of right such that they are deemed to be beneficial
owners of the trust property?
The potential application of subparagraph 248(3)(f)(iii) to a given factual situation necessarily
involves a two-stage analysis. The first stage involves characterizing the nature of the rights of
the beneficiary. While this is a relatively straightforward exercise in the context of a non-
discretionary trust or where the rights of the beneficiary have vested, it is more difficult to
characterize the rights, if any, of a default or discretionary beneficiary. Once the rights of a
beneficiary have been characterized, the second stage involves determining whether those rights
are rights contemplated by subparagraph 248(3)(f)(iii). That is to say, the first stage of the
analysis involves characterizing the rights of the beneficiary and the second stage involves an
application of that characterization to the ITA.
Consider the scenario put forth earlier. Assume the settlor of a self-benefit trust retains a power
of appointment exercisable on death and that the trust deed provides for certain persons (the
"default beneficiaries") to receive the remaining trust property in default of the exercise (or if the
power is not fully exercised).
2.1.3.1 Default Beneficiaries
The rights of the default beneficiaries are not absolute; rather, their rights are contingent or
conditional in that the right to receive trust property will arise only as a consequence of the
defaults or partial exercise of the power of appointment. The issue then becomes whether such
contingent or conditional rights are the kind of rights contemplated by subparagraph
248(3)(f)(iii).
The phrase "right as a beneficiary in a trust" is not used frequently in the ITA. The phrase is
used in subparagraph 73(1.02)(b)(ii), paragraph 107.4(1)(e), subsection 248(25) and
subparagraph 248(3)(f)(iii). Consequently, there is very little interpretative assistance available.
The reference in subparagraph 248(3)(f)(iii) to a "right," unqualified as it is, may refer to any
type of right, i.e., immediate or future, absolute or contingent, dependent on the exercise of
someone else’s discretion, or it may refer only to rights absolute and exercisable at the time
subparagraph 248(3)(f)(iii) is relied on to make the determination as to whether a taxpayer is
the beneficial owner of property.[38] In the author’s view, where the phrase "right as a
beneficiary" is not coupled with the expansive words used elsewhere in the ITA, such as in
subsection 248(25), it would be inappropriate to read-in those expansive words to extend the
particular provision to future, contingent and discretionary rights. The French version of
subsection 248(25), however, arguably leads to a different conclusion. That subsection deems
a person having a contingent right as a beneficiary, such as a default beneficiary, to have "un
droit de bénéficiaire dans une fiducie" which, translated literally, means a right as a beneficiary of
a trust. Therefore, according to the French version of subsection 248(25), any person having a
right as a beneficiary, whether immediate or in the future, whether absolute or contingent, and
whether conditional on or subject to the exercise of any discretion by any person or partnership,
is deemed to have a "right as a beneficiary" for purposes of the ITA. The French version of
paragraph 248(3)(f) deems property in relation to which a person has "un droit de bénéficiaire
dans une fiducie" to be the beneficial owner of the property. Based on this analysis, in relation
to the Province of Québec, a contingent default beneficiary may be regarded as a person having
a "right as a beneficiary" for purposes of paragraph 248(3)(f) and would be deemed to be the
beneficial owner of the trust property. With respect to the common law provinces, a contingent
default beneficiary is, as a matter of common law and by extension for income tax purposes, to
be regarded as the beneficial owner of the trust property.
If, in relation to the Province of Québec, it were concluded that the default beneficiaries enjoy
the type of right encompassed by subparagraph 248(3)(f)(iii), then there will clearly be a change
in beneficial ownership as a result of the settlement of the self-benefit trust described above.
Both the settlor and the default beneficiaries would be deemed to be beneficial owners of the
property pursuant to paragraph 248(3)(f), whereas prior to the transfer to the trust only the
settlor was deemed to be the beneficial owner of the property. However, the conclusion that, in
relation to the Province of Québec, there is a change in beneficial ownership is by no means
certain. If, conversely, it were concluded that the default beneficiaries by virtue of the
contingent nature of their rights do not enjoy a "right as a beneficiary in a trust," they would not
be deemed to be beneficial owners of the trust property, unless the French version governs.
Under a narrow interpretation of the English version, the paragraph 248(3)(f) deeming rule
would only apply to the settlor of the trust and there would be no change in the beneficial
ownership of the property as a result of the transfer since no person other than the settlor
would, after the transfer, be considered to have a "right as a beneficiary" and thus be deemed to
be a beneficial owner of the trust property. Furthermore, provided the power retained by the
settlor is general in nature, the settlor’s ability to choose the person to whom the property is
disposed of is not tempered. Accordingly, if the English version governs, the results are
conflicting: the same transaction that in common law gave rise to a change in beneficial
ownership would not give rise to such a change in relation to the Province of Québec. Different
results may therefore ensue depending, in part, on whether the French or English version of
paragraph 248(3)(f) applies.
According to Krishna,[39] unless one of the versions produces a result or interpretation that is
incompatible with the legal system in that particular part of Canada, the general rule of
interpretation is to give preference to the version that, according to the true spirit, intent and
meaning of the statute, best ensures the attainment of its objectives. Here, we have seen that
when the French versions of subsection 248(25) and paragraph 248(3)(f) are applied to a
default beneficiary in relation to the Province of Quebec, that beneficiary is deemed to be the
beneficial owner of trust property for purposes of the ITA. In relation to the common law
provinces, a default beneficiary will also generally be regarded as the beneficial owner of trust
property and, accordingly, consistency is achieved using the French version. However, as will
be discussed below, the application of the French version of subsection 248(25) could, in
certain circumstances, such as those involving discretionary beneficiaries, lead to inconsistent
results.
2.1.3.2 Potential Appointees/Discretionary Beneficiaries
The nature of a discretionary beneficiary’s interest in trust property, at common law and in a tax
context, is uncertain. The rights afforded to discretionary beneficiaries individually differ from
those afforded discretionary beneficiaries as a class and this leads to confusion when analyzing
the nature of an individual discretionary beneficiary’s interest in trust property. For example,
"the beneficiaries of a discretionary trust are not entitled to any specific part of the trust assets
until the trustee exercises his or her discretion in their favour. In that respect, their position is
very similar to that of an object of a power. However, if all the beneficiaries of a discretionary
trust are sui juris, they may join together, terminate the trust, and obtain the trust property.
And, if a trustee of a discretionary trust fails to exercise his or her discretion, the class of
beneficiaries will take."[40] Arguably, at common law and for tax purposes, an individual
discretionary beneficiary does not have a sufficiently direct interest in trust property to be
considered the beneficial owner thereof. As such, from the "beneficial owner status" approach,
there does not appear to be a change in the beneficial ownership on the constitution of a trust
with only discretionary beneficiaries (i.e., and no default beneficiaries).
The "rights as a beneficiary" approach may yield a different result. Recall, this approach
requires that one determine whether the settlor has tempered its rights to a sufficient extent so as
to result in a change in beneficial ownership. The answer to this question lies in the breadth of
the class of discretionary beneficiaries created by the settlor. A review of the law relating to the
permitted breadth of a class of discretionary beneficiaries is beyond the scope of this paper.
Generally, the class of discretionary beneficiaries of a discretionary trust must be structured in
such a way that it can be said with certainty whether any given individual is or is not a member
of the class. This is subject to the requirement that the class of discretionary beneficiaries
cannot be so wide as not to form anything like a class so that the trust is administratively
unworkable.[41] Thus, how "general," to borrow terminology from the concept of powers, can
a class of discretionary beneficiaries be such that the discretionary trust is valid and the settlor’s
rights are not tempered to the extent that, for tax purposes, a change in beneficial ownership can
be said to occur?
In Québec, the common law distinction between a power to appoint and a discretionary trust
does not exist. Article 1282 of the C.C.Q. contemplates the reservation of a power to appoint
beneficiaries. Although the "power to appoint" terminology is used, if the article were referring
to a true power of appointment, in the common law sense, the term appointee would be a more
appropriate way to describe the person who, in article 1282 C.C.Q., is described as a
beneficiary. It is submitted that despite the "power to appoint" terminology, article 1282, in
fact, envisions a discretionary trust and not a power of appointment. Guy Fortin seems to
endorse this submission when he speaks of a settlor’s reservation of a power of appointment as
creating a discretionary trust.[42] As such, we will alter the example for the Québec context.
Instead of potential appointees, assume the trust has discretionary beneficiaries. In describing
the rights of beneficiaries under such a discretionary trust, Fortin is of the view that the rights of
discretionary beneficiaries are more limited than those of non-discretionary beneficiaries.[43]
Discretionary beneficiaries have only the right to demand that the trustee be compelled to
exercise the discretionary powers granted to it in the constituting act whereas non-discretionary
beneficiaries have the right to compel the provision of a benefit, the payment of fruits and
revenues, and the payment of capital where the provision or payment is in accordance with the
constituting act.[44] Are the rights enjoyed by the discretionary beneficiaries sufficient in scope
to be considered a "right as a beneficiary in a trust," as the term is used in subparagraph
248(3)(f)(iii)? It is unclear whether the discretionary beneficiaries would be deemed beneficial
owners of trust property under subparagraph 248(3)(f)(iii) as it is uncertain what is meant by the
phrase "right as a beneficiary in a trust." If the expression "right as a beneficiary in a trust"
includes a right that is dependent on the exercise of a discretion by any person, either by virtue
of a broad interpretation of that expression or if the French version of subsection 248(25)
applies[45], the discretionary beneficiaries would be within its ambit, would be deemed
beneficial owners of the trust property, and a change in beneficial ownership would arise. This
result is different than the result that would ensue at common law and arises solely as a
consequence of the subparagraph 248(3)(f)(iii) deeming rule. Indeed, the result is peculiar, if
not ironic, in that a rule, namely paragraph 248(3)(f), that was brought into the ITA as a
measure intended to put a beneficiary of a Québec trust on equal footing with a beneficiary of a
common law trust in regard to the question of beneficial ownership of trust property, could
cause a beneficiary of a Québec trust to be a beneficial owner of trust property in circumstances
where the common law might not view the beneficiary as a beneficial owner of trust property.
If, however, the phrase "right as a beneficiary in a trust" is interpreted narrowly, or the French
version does not govern, the discretionary beneficiaries may be excluded from its ambit, with the
result that there would not be a change in beneficial ownership and the ITA provisions utilizing
the no change in beneficial ownership concept would be applied harmoniously throughout
Canada.
Property may be transferred to a trust on a rollover basis if, inter alia, the transfer does not
result in a change in beneficial ownership and no person other than the transferor has an
absolute or contingent right, determined with reference to subsection 104(1.1), as a beneficiary
or the trust. Having analysed the change in beneficial ownership question, one must now
examine whether potential appointees under a power of appointment or discretionary
beneficiaries have any contingent or absolute right as a beneficiary under a trust determined with
reference to subsection 104(1.1).
From a common law perspective, potential appointees are not beneficiaries under a trust; they
are merely potential appointees under a power. As such, it is incorrect to speak of them as
having contingent or absolute rights as a beneficiary under a trust.
It is unclear whether the constitution of a Québec trust with discretionary beneficiaries results in
the creation of absolute or contingent rights of a person other than the settlor. In fact, this issue
arises in relation to a discretionary beneficiary under either a common law or civil law trust if one
takes the position that a contingent right does not include a right that is conditional on or subject
to the exercise of any discretion by any person. Put differently, the issue is whether a
"contingent right under a trust" include the rights of discretionary beneficiaries. The specific
reference in paragraph 248(25)(a) to "any right … whether conditional or subject to the
exercise of any discretion by any person" and the lack of such a reference in either
subparagraph 73(1.02)(b)(ii) or paragraph 107.4(1)(e) suggests, perhaps, that the right of a
discretionary beneficiary is not to be regarded as a contingent right under the ITA.
The foregoing example is interesting in the sense that the transfer, when made to a common law
trust, would result in a change in beneficial ownership whereas if the transfer were made to a
civil law trust, it might not result in a change in beneficial ownership if subparagraph 248(3)(f)(iii)
does not apply to deem the discretionary beneficiaries to be beneficial owners of the trust
property. However, the transfer to the Québec trust might not qualify for rollover treatment
under subsection 73(1) or subsection 107.4(1) because of the requirement that no person other
than the settlor have an absolute or contingent right as a beneficiary, determined with reference
to subsection 104(1.1). That is to say, rollover treatment may be available in respect of the
transfer to the Québec trust or it may be denied. If denied, the reason for denial may be
different than under the common law. There are other situations where issues or anomalies are
encountered in applying specific provisions of the ITA with respect to property held in trust in
relation to the Province of Québec.
2.1.3.3 Contingent or Absolute Rights Under the Trust
Subparagraph 73(1.02)(b)(ii) and paragraph 107.4(1)(e) both provide, additionally, that
rollover treatment for property transferred to a trust is only available where immediately after the
transfer no person other than the settlor has an absolute or contingent right as a beneficiary
[except for certain rights described in subsection 104(1.1)] under the trust. This may serve to
disallow rollover treatment in Québec, resulting in consistent tax treatment of the transfer in both
common and civil law. However, such a result is by no means certain. At the root of this
uncertainty are the same fundamental questions described earlier in the context of beneficial
ownership. What does "an absolute or contingent right as a beneficiary" mean? Does a default
or discretionary beneficiary enjoy such a right? Is the phraseology in subparagraph
73(1.02)(b)(ii) and paragraph 107.4(1)(e), respectively, meant to be narrower than that in
subsection 248(25) or is it simply the result of different individuals with different drafting styles
drafting at different times?[46] Does the English or French version govern?
One CCRA statement on the matter indicates that default beneficiaries, from a tax perspective
at least, are contingent beneficiaries under the trust.[47] As such, they would have contingent
rights as contemplated by subparagraph 73(1.02)(b)(ii) and paragraph 107.4(1)(e) and the
rollover would be denied. However, the weight of this CCRA statement must be considered
before relying on it completely to resolve the matter. In particular, the statement appears in a
technical interpretation letter from the CCRA and is not stated to be expressly applicable in
Québec civil law.
2.2 Beneficial Ownership of Property Held Directly
Section 2.1 examined the concept of beneficial ownership in relation to the rights of a
beneficiary of a trust. The other context in which the concept of beneficial ownership is used in
the ITA is in relation to the person that is entitled to the benefits from the property and to the
property itself. In the latter context, the inquiry involves identifying the real or true owner of the
property in question. For example, subsection 85.1(2) provides that an exchange of shares for
shares of the acquiring corporation will not qualify for a rollover under subsection 85.1(1) where
immediately after the exchange the vendor alone or together with the persons with whom the
vendor does not deal at arm’s length beneficially own more than 50% of the fair market value of
all the shares of the capital stock of the acquiror. Subsection 19(5) provides that a newspaper
will not qualify as a "Canadian newspaper" where, inter alia, the right to produce and publish
issues of the newspaper is held by a corporation at least 75% of the votes and value of which
are beneficially owned by Canadian citizens. Subsection 79(2) provides that "property is
surrendered at any time by a person to another person where the beneficial ownership of the
property is acquired or reacquired at that time from the person by the other person…".
Where the arrangement is such that the person entitled to the benefits to the property is not the
legal or registered titleholder, the task then is to identify the beneficial owner of the property. In
certain circumstances, this determination is straightforward. For example, the shares of a
corporation held in "street name" would be considered to be beneficially owned by the true
owner, namely the person entitled to the benefits from the property and the property itself such
as the right to receive dividends on the shares, receive the proceeds from the sale of such shares
and the right to exercise the voting rights attached to the shares. In this example, the titleholder
only holds the property as an agent, mandatary, trustee, or other legal representative who does
not have any right to enjoy the benefits from the property, and accordingly is not the beneficial
owner. However, when a person holds the property otherwise than as a mere agent, mandatary,
trustee or other legal representative, the question to be determined is whether one looks through
such person for purposes of determining the "beneficial owner" of the property.
For example, in the tax treaty context, discussed below, decisions of non-Canadian Courts
suggest that the notion of "beneficiary" or "beneficial owner" of a particular payment is an anti-
treaty shopping measure and have, in this respect, ignored what they regard as mere conduit or
intermediary entities where such entities lacked "dominion and control" over the particular
payment. This approach to the meaning of beneficial ownership is not inconsistent with the
approach taken by Canadian Courts in identifying persons "beneficially entitled" to property in
the succession and estate duties context. The Supreme Court of Canada decision in Jodrey
Estate v. Nova Scotia (Minister of Finance)[48] examines the meaning of the term
"beneficially entitled" in the context of the Nova Scotia Succession Duty Act.[49] In this case,
the testator bequeathed the property to a subsidiary of a holding corporation of all the shares of
which were owned by the children of the testator. The issue before the Court was whether the
holding corporation could be considered to be "beneficially entitled" to the property bequeathed
by the testator to the subsidiary, thereby rendering the children, as shareholders of the holding
corporation, liable for succession duties under subsection 2(5) of the Succession Duty Act.
At the relevant time, subsection 2(5) of the Succession Duty Act read as follows:
2(5) Where a corporation which is not resident in the Province, other than a corporation
without share capital, by reason of the death of a deceased acquires or becomes beneficially
entitled to property of the deceased,
(a) the corporation shall be deemed not to be the successor of the property except to the
extent that the value of the shares of the shareholders of the corporation is not increased in value
by the corporation acquiring or becoming beneficially entitled to the property; and
(b) each of the shareholders of the corporation shall be deemed to be a successor of property
of the deceased to the extent of the amount by which the value of his shares in the corporation is
increased by the corporation acquiring or becoming beneficially entitled to the property.
[underscore added]
Under this subsection, where a corporation that is not resident in Nova Scotia "acquires or
becomes beneficially entitled to property of the deceased", each of its shareholders is deemed
to be a successor to the property of the deceased, to the extent that the value of his or her
shares in the corporation is increased by the corporation acquiring or becoming beneficially
entitled to the property.
In a four to three decision, the Supreme Court held that the children were subject to the
Succession Duty Act, on the grounds that the parent corporation was beneficially entitled to the
property bequeathed to the subsidiary. The majority of the Court was of the opinion that the
words "beneficially entitled", as used in the statute, should not be given the interpretation
developed by the courts in connection with trusts. In the Court’s view, because the parent
corporation had total control over the subsidiary, it was in a legal position to compel the
subsidiary to deal with its assets.
On the surface, one might conclude that the Court pierced the corporate veil to conclude that
the parent was beneficially entitled to property owned by the subsidiary. However, Martland J.
expressed the view that this was not the case because the Succession Duty Act contemplated
the situation where a testator’s property was bequeathed to another person for the benefit of the
corporation:
"I do not think that in order to support the judgments below it is really necessary to "lift the
corporate veil". Subsection 2(5) comes into operation not only when a corporation "acquires"
property of the deceased but also when it "becomes beneficially entitled" thereto. This last
expression, coming as it does after the word "acquires", clearly contemplates that the property
has gone to another person for the benefit of the corporation. It would undoubtedly cover the
case of property bequeathed to a trustee for the benefit of the corporation. It cannot be denied
that in this situation the corporation would become "beneficially entitled" to the property.
However the statute does not restrict the application of the provision to such a case. In my
view, the corporation is no less "beneficially entitled" when the property is held by its wholly-
owned subsidiary as when it is held in trust for it. Its legal entitlement is even more immediate as
it does not have to call upon a third party to perform its obligation as trustee. It only has to
exercise its rights as sole shareholder of its subsidiary. Nothing in the context of subsection 2(5)
justifies giving a restricted meaning to the expression "beneficially entitled", which ought to be
read according to the meaning of the words in ordinary language. I cannot find that it has
acquired a technical meaning to which it must be restricted in this statute.
In my opinion, in considering the application of subsection 2(5) to the unusual facts of this case,
this Court should not feel itself rigidly bound, in interpreting the words "beneficially entitled", by
rules of equity evolved in the courts of chancery in connection with trusts. This approach was
manifested by this Court in Minister of Revenue for the Province of Ontario v McCreath et
al, [1977] 1 S.C.R. 1, [1976] C.T.C. 178." [underscore added]
In the end, it seems that the Court looked through the corporations because that was the object
and spirit of the law and because the transactions envisaged by the deceased were aimed at
avoiding the Succession Duty Act:
"The clear intention of the testator was to divide the residue of his estate among his
grandchildren. The codicil, plus the scheme of corporate arrangement with the parent company
owning all the shares of the subsidiary company, accomplished the same result, but involved the
residue passing through the hands of two corporations before finally reaching the intended
beneficiaries.
[…]
This is eminently a case in which the Court should examine the realities of the situation and
conclude that the subsidiary company was bound hand and foot to the parent company and had
to do whatever its parent said. It was a mere conduit pipe linking the parent company to the
estate.
In the circumstances, it is my view that the parent company was beneficially entitled to the
residue of the estate within the meaning of subsection 2(5). Although it is not a named
beneficiary under the will, the corporate scheme evolved by the deceased has clothed it with
total control over the named beneficiary, the subsidiary company, and has enabled it legally to
compel the subsidiary company to turn the residue of the estate to it."
It is interesting to note that Dickson J., writing for the minority, stated that the meaning attached
to the phrase "beneficially entitled" was closely linked to the meaning of the word "beneficiary"
and that such phrase was a term of art. He added that in the absence of earlier authority, a
court could be inclined to accept that the expression "beneficially entitled" had a broader
connotation. However, in light of the uniform jurisprudence to the contrary, he concluded that it
was impossible to accept such submission:
"In sum, the legal meaning of "beneficially entitled" is firmly imbedded in the concrete of earlier
adjudication. However unenamoured one may be with the conduct of the testator in this case, I
do not think it is open to this Court to jettison trust law and give a broad, non-technical meaning
to the phrase "beneficially entitled", based upon (i) the supposed intent of the legislature to catch
transactions of this nature or (ii) the proposition that one is beneficially entitled to property if at
some time in the future he can exercise powers (not drawn from the will) by which he may
ultimately acquire an interest in the property. Here the Court is not being asked to introduce
words into the Act in order to cure an ambiguity, but rather to introduce a new section to
provide for a situation not captured by it. To do so would be tantamount to changing the rules
after the game has been played." [underscore added]
Having regard to the tax treaty cases interpreting the meaning of "beneficial owner", discussed
infra, and to the meaning of "beneficially entitled" under the succession duty cases, the question
that arises is whether there is a basis for adopting a similar approach to interpreting or applying
the concept of "beneficial ownership" in the ITA where that concept is used outside of the trust
context. In the author’s view, it is arguable that such an approach is inappropriate. The scheme
of the ITA is such that absent a specific deeming provision, property held by a corporation or a
trust is considered to be owned by that corporation or trust unless the corporation or trust is
acting as agent or nominee or the trust is a bare trust. Furthermore, absent sham or fraud, in
income tax matters, the Courts have generally been reluctant to pierce the corporate veil.
Support for applying a limited meaning of the concept of "beneficial ownership" outside of the
trust context can be found in the ITA itself. For example, paragraph (e) of the definition
"Canadian newspaper" in subsection 19(5) provides that for the purposes of determining
whether at least three quarters of the votes and value of shares of a corporation are beneficially
owned by Canadian citizens, where shares of a corporation are owned at any time by another
corporation, each shareholder of the other corporation is deemed to own a pro rata number of
shares of the corporation based on fair market value. The use of such a deeming provision
demonstrates that, absent sham or fraud, the scheme of the ITA is such that intermediary entities
will generally be respected from a "beneficial ownership" standpoint, notwithstanding that such
entities may be subject to the control and dictates of another person.[50]
2.3 Issues Arising from the Concept of Beneficial Ownership and Change in
Beneficial Ownership
The discussion that follows is not intended to be an exhaustive review of all of the possible
problems that could be encountered when applying the provisions of the ITA in which the
concept of beneficial ownership is used in relation to the Province of Québec. Rather, the
analysis is intended to highlight some of the issues that can arise when applying certain
provisions of the ITA to certain transactions having the requisite nexus to the Province of
Québec.
The ITA often refers to the concept of "beneficial ownership" and to the phrase "does not result
in a change in beneficial ownership". These terms are referred to in the context of advertising
expenses[51], foreclosures[52], the self-benefit trust[53], share for share exchanges,[54]
qualifying dispositions[55] and the definition of "disposition".[56] Related concepts such as
"owned"[57] and "belong to"[58] are also used in the ITA. Some of the issues that can arise
from the application of certain provisions of the ITA in the province of Québec are discussed
below.
2.3.1 Trusts
The civil law and the common law treat the trust institution differently. Under common law, an
analytical framework exists to justify the treatment of the beneficiary of certain trusts as a
beneficial owner of the trust assets. Admittedly, the application of this analytical framework is
contentious. Under civil law, the trust is a separate patrimony and a beneficiary does not have
any rights against the assets of the trust. The only rights afforded to a beneficiary are personal
rights against the trustees.[59]
A deeming rule is required to treat the beneficiaries of a civil law trust as beneficial owners of
the assets of the trust. For this reason, paragraph 248(3)(f) was enacted.[60] Recall that the
effect of this paragraph is to deem property in which a person has a right of ownership, a right
as a lessee in an emphyteutic lease, or a right as a beneficiary in a trust to be beneficially owned
by the person. This latter category appears to be intended to allow, through the interaction with
paragraphs 248(3)(a), (b), (c), (d) and (e), a person who does not have the full right of
ownership of property at civil law to be treated as having "beneficial ownership" of property for
purposes of the ITA. For example, paragraph 248(3)(a) deems a usufruct to be a trust and by
virtue of paragraph 248(3)(e) the usufructuary, as well as the naked owner, is deemed to be
beneficially interested in that deemed trust. Although, arguably, the ITA intends to treat the
usufructuary and the naked owner as beneficial owners of the property subject to the deemed
trust, paragraph 248(3)(e) does not, in and of itself, produce that result. In particular, it does
not follow automatically that because the usufructuary, for example, is deemed to be beneficially
interested in a trust, that the usufructuary is the beneficial owner of the property deemed held in
trust.
The preceding discussion of the concept of beneficial ownership in common law when coupled
with Canadian income tax law demonstrates that a beneficial interest in property gives rise to
beneficiary status assuming a sufficiently direct connection and that, arguably, beneficiary status
may give rise to beneficial ownership as the term is used in Canadian income tax law. These
links between concepts are non-existent and have no basis in civil law. In this respect,
paragraph 248(3)(f) is required to deem the property held by the deemed trust to be beneficially
owned by the beneficiary. Although beneficial interest may give rise to beneficiary status, given
that there is no concept of beneficial ownership in Québec, it does not follow that beneficiary
status in Québec gives rise to beneficial ownership.[61] This is where subparagraph
248(3)(f)(iii) becomes necessary. However, can the usufructuary, who is deemed to be
beneficially interested in the trust, be considered to have "a right as a beneficiary in a trust" and
thereby be deemed to be the beneficial owner of the property subject to usufruct pursuant to
subparagraph 248(3)(f)(iii)? That is to say, does the reference to "trust" in subparagraph
248(3)(f)(iii) include an institution deemed to be a trust in either of paragraphs 248(3)(a), (b),
(c) or (d) and, if so, can the usufructuary who is deemed to be beneficially interested in a trust
by virtue of paragraph 248(3)(e) be said to have a "right as a beneficiary" in a trust? The
answer to both questions appears to be yes. Firstly, the trust referred to in subparagraph
248(3)(f)(iii) includes the deemed trusts referred to in paragraphs 248(3)(a) to (d). Secondly,
the usufructuary and the naked owner, each of whom is deemed to be beneficially interested in a
trust under paragraph 248(3)(e) may be treated as a "beneficiary".[62] Consequently, as a
usufructuary is to be regarded as a beneficiary in a trust, the usufructuary should be deemed to
be the beneficial owner of the property subject to the usufruct, by virtue of subparagraph
248(3)(f)(iii). Although the English version of the ITA suggests that there may be a technical
issue[63] in arriving at this result, the French version of paragraph 248(3)(e) and (f) make clear
that a person deemed by paragraph (e) to be beneficially interested in a trust is intended to be
deemed to by paragraph (f) to be the beneficial owner of the trust property. The French
version of paragraph 248(3)(e) deems any person with an absolute or contingent right in a
deemed trust to have a "droit de bénéficiaire sur la fiducie…" The French version of paragraph
248(3)(f) deems any person having a "droit de bénéficiaire sur la fiducie…" to be the beneficial
owner of the trust property. This also appears to be the result intended by Parliament having
regard to the May 1991 Technical Notes to subsection 248(3) which suggest that paragraph
248(3)(f) was not intended to change the meaning of the predecessor version of subsection
248(3) which stipulated that a reference to any property that is or was beneficially owned by
any person shall be read as including a reference to property in relation to which any person has
or had […] a right as a usufructuary […].
A related issue that arises from the concept of beneficial ownership in relation to the Province of
Québec is the application of the concept of "change in beneficial ownership". While there is a
deeming provision in connection with the concept of beneficial ownership itself, there is no
equivalent for the concept of "change in the beneficial ownership" and there has not been any
attempt by Parliament to define, in relation to the Province of Québec, the circumstances in
which there has or has not been a change of beneficial ownership. Thus, although it is possible
to identify the circumstances in relation to the Province of Québec in which a person has a
beneficial interest in a trust or is to be regarded as a beneficial owner of property, there is no
guidance as to the determination of whether there has been a change in beneficial ownership.
The concept is particularly relevant in the context of trust transfers, namely, the definition of
"disposition" in subsection 248(1), which is now linked to the concept of change in beneficial
ownership, and rollovers involving trusts, such as the self-benefit trust in section 73 and the
qualifying disposition in section 107.4.
2.3.2 "Controlled" in Subsection 186(2)
The term "connected" is defined for the purposes of Part IV in subsection 186(4). Paragraph
186(4)(a) provides that a payer corporation (of dividends) is connected with a particular
corporation if the payer corporation is controlled by the particular corporation. Paragraph
186(4)(b) sets out other criteria that may render one corporation connected with another, but
those criteria are not germane to this study. "Controlled," for the purposes of Part IV, is
defined in subsection 186(2) as follows:
For the purposes of this Part, other than for the purpose of determining whether a corporation is
a subject corporation, one corporation is controlled by another corporation if more than 50% of
its issued share capital (having full voting rights under all circumstances) belongs to the other
corporation, to persons with whom the other corporation does not deal at arm’s length, or to
the other corporation and persons with whom the other corporation does not deal at arm’s
length. [Emphasis added.]
The dissimilar treatment in common law and in civil law of the relationship between trustees and
beneficiaries on the one hand and trust property on the other, could give rise to inconsistency in
outcomes where a trust is implicated.
Consider the following example involving a split-up butterfly reorganization: A, B, C, and D are
brothers. A and B each own ten common shares of Opco. There are no other Opco common
shares. A testamentary trust (the "Trust") created under the will of their deceased father holds
5,000 voting preferred shares. C and D are the income and capital beneficiaries of the trust,
and the trustee is a person dealing at arm’s length with the brothers.
A and B wish to proceed with a split-up butterfly transaction. Accordingly, they transfer their
common shares to holding companies, Aco and Bco, respectively. In the course of the butterfly
transaction, Opco will repurchase the common shares of its capital stock from Aco and Bco for
cancellation. This repurchase transaction will result in dividends being deemed to be paid by
Opco to each of Aco and Bco. Unless Opco is connected with Aco and Bco, the deemed
dividends received by Aco and Bco will be subject to Part IV tax.
Given the number of voting shares held by the Trust, Opco is not controlled by Aco and Bco.
The question arises, though, as to what is meant by the words "belongs to" in subsection
186(2). Can the voting preferred shares held by the Trust be considered to "belong to" the
Trust?
If the Trust is a common law trust, all debate aside, the trustee is considered to have legal
ownership and the beneficiary is considered to have beneficial ownership. If the shares held by
the Trust are regarded as belonging to the beneficial owners (i.e., the beneficiaries), then each of
Aco and Bco would be connected with Opco since C and D do not deal at arm’s length with A
and B.
If the shares are considered to belong to the trustee, then pursuant to paragraph 251(1)(b), the
trustee (reading the term "personal trust" in paragraph 251(1)(b) as including a reference to the
trustee having ownership or control over the trust property) would be deemed to not deal at
arm’s length with A and B because of A and B’s relationship with the beneficiaries, being C and
D. Accordingly, each of Aco and Bco would be connected with Opco. Query, though,
whether reading the term "personal trust" in paragraph 251(1)(b) as including a reference to the
trustee having ownership or control over the trust property is a correct reading of the term.
If the shares held by the Trust are not considered to "belong to" the trustee or the beneficiaries,
but instead are considered to belong to the trust arrangement itself, then the trust would be a
person who does not deal at arm’s length with either of Aco or Bco for the reasons described in
the immediately preceding paragraph. The result would be that each of Aco and Bco would be
connected with Opco. In either scenario, the voting preferred shares held by the Trust would
be aggregated with the shares held by Aco and Bco, thereby rendering Opco connected with
Aco and Bco for the purposes of Part IV.
If the trust is governed by the civil law of Québec, it is more difficult to establish to whom the
property of the trust belongs given that the trust patrimony is "ownerless".[64]
It is clear under Québec civil law that the property of the trust does not belong to the trustee or
the beneficiaries as neither of them has any real rights in and to the trust property.[65] The trust
patrimony is autonomous and distinct from that of the trustees and beneficiaries and the property
of the trust is thus ownerless. It may, therefore, not be possible to attribute to the trust
ownership of the preferred shares. The trust is a non-arm’s length person through the combined
operation of subsection 104(1) and paragraph 251(1)(b). Although a trustee of a civil law trust
cannot be regarded as having ownership of the trust property, the trustee may properly be
regarded as having control of the trust property. Subsection 104(1) provides that, unless the
context otherwise requires, a reference to a trust shall include, among others, the person having
control of the trust property. Paragraph 251(1)(b) deems the trustee to not deal at arm’s length
with the beneficiaries, being C and D, and by extension, to not deal at arm’s length with Aco
and Bco because each of those corporations do not deal at arm’s length with C and D.
However, while it is possible to create a non-arm’s length relationship between the trustee, the
beneficiaries and Aco and Bco, through the combined operation of subsection 104(1) and
paragraph 251(1)(b), the question that remains to be determined is whether the shares are
considered to "belong to" the trust (or the trustee) for purposes of subsection 186(2). Clearly,
from a civil law perspective the trustee does not have ownership of the property. Paragraph
248(3)(f) does not apply to the trustee because it only deems a person having a right as a
beneficiary of a trust governed by the laws of Québec to be the beneficial owner of the trust
property. Assuming C and D each have a "right as a beneficiary" under the Trust for purposes
of subparagraph 248(3)(f)(iii), the question then becomes whether the property that is deemed
to be beneficially owned by the beneficiary is considered to "belong to" that beneficiary for
purposes of subsection 186(2).
If the property that is deemed to be beneficially owned by virtue of paragraph 248(3)(f) may
not be considered as belonging to the beneficiary for purposes of subsection 186(2), and having
regard to the fact that the trustee does not have real rights in the trust property, the only other
"person" to whom the shares may belong is the trust patrimony. As noted, neither the settlor,
the trustee nor the beneficiary exercise any real rights in the property held by the trust. The trust
patrimony is ownerless and, therefore, in a technical sense it cannot be said that the shares
belong to the trust. Clearly, this is an unintended result. The term "belongs to" was present in
subsection 186(2) and elsewhere in the ITA long before the creation of the patrimony by
appropriation in the C.C.Q. In the context of the example under review, it would clearly be
appropriate to consider the preferred shares as belonging to the Trust. However, a strict
application of Québec private law to the question of whether the property belongs to the trust
patrimony would lead to the conclusion that the shares do not belong to the Trust and,
therefore, Aco and Bco would not be connected with Opco.
A Court would likely not strictly apply private law principles of ownership in determining
whether the property "belongs to" a Québec civil law trust. In the author’s view, a Court would
take a liberal approach to the interpretation of the words "belongs to" to connect Aco and Bco
with Opco, a result that is consistent or harmonious with the result that would ensue if a
common law trust were involved. This bijural harmonization approach to the interpretation of
words in the ITA that are susceptible of different meanings depending on the province in which
the provision is being applied was taken in the Construction Bérou case, discussed infra. The
result in Construction Bérou may not be desirable in that Québec civil law is, essentially,
disregarded. As such, a more appropriate resolution to the problem contemplated herein would
be for the legislator to resolve the uncertainty that surrounds the interpretation that ought to be
given to "beneficial ownership" in Québec.
2.3.3 Foreign Share for Share Exchanges
Subsection 85.1(6) denies a rollover on a foreign share for share exchange where one of five
circumstances is met. The circumstance set out in paragraph 85.1(6)(b) is as follows:
(b) immediately after the exchange the vendor, persons with whom the vendor did not deal
at arm's length or the vendor together with persons with whom the vendor did not deal at arm's
length,
(i) controlled the foreign purchaser, or
(ii) beneficially owned shares of the capital stock of the foreign purchaser having a fair
market value of more than 50% of the fair market value of all of the outstanding shares of the
capital stock of the foreign purchaser;
Again, the question of what is meant by "beneficially owned" arises. Consider two
corporations, Forco I and Forco II. Fifty percent of the shares of Forco I, worth $300 million,
are owned by X. The remaining fifty percent of Forco I shares are held by a discretionary
trust. The beneficiaries of the discretionary trust are X’s children. The shares of Forco II are
widely held and have a combined value of $500 million. X and the trust wish to transfer their
respective shares of Forco I to Forco II. Query whether a rollover is available to X and the
trust on the basis that immediately after the exchange the vendor together with persons with
whom the vendor did not deal at arm's length beneficially owned shares of the capital stock of
the foreign purchaser having a fair market value of more than 50% of the fair market value of all
of the outstanding shares of the capital stock of the foreign purchaser?
From a common law perspective, as already submitted, it is unlikely that an individual
discretionary beneficiary can be said to beneficially own trust property, but it may be possible to
consider the entire class of discretionary beneficiaries, assuming they are all sui juris, as
beneficial owners of that property.[66] Query, then, who beneficially owns the Forco II shares
acquired by the trust? If the discretionary beneficiaries, as a whole, can be said to beneficially
own the Forco II shares, then immediately after the transfer X and a class of persons all of
whom are not at arm’s length with X beneficially own more than 50% of the Forco II shares, in
which case the rollover would not be available to X or the trust. However, if it is incorrect to
say that the discretionary beneficiaries beneficially own the trust property, then who does?
If the Forco II shares are considered to be beneficially owned by the trust itself, the same result
as above arises. X is not at arm’s length with the trust by virtue of paragraph 251(1)(b) and,
consequently, X and a person not dealing at arm’s length with X together own shares of the
capital stock of Forco II having more than 50% of the fair market value of all of the outstanding
shares of its capital stock immediately after the exchange.
If, as some maintain, beneficial ownership is in suspension, i.e., no person or entity can be
qualified as the beneficial owner until the trustee exercises its discretion, then the rollover will be
available. Immediately after the exchange, X and persons that do not deal at arm’s length with
X together beneficially own shares representing less than 50% of the fair market value of all the
Forco II shares.
From a civil law perspective, the discretionary beneficiaries of a Québec trust will not be
regarded as beneficial owners of the trust property, unless they are deemed to be by virtue of
subparagraph 248(3)(f)(iii). If they are within the ambit of subparagraph 248(3)(f)(iii), X’s
family would be deemed to beneficially own the shares of Forco II received by the trust on the
foreign share for share exchange. The aggregate fair market value of the Forco II shares
beneficially owned by X and X’s children would be greater than 50% of the fair market value of
all the Forco II shares immediately after the exchange, and thus the rollover would not be
available to X or the trust. While the same result may be obtained if subparagraph
85.1(6)(b)(ii) was being applied in relation to a common law province, consistent treatment is a
mere possibility and not, as it should be, a certainty.
2.3.4 Tax Treaties
Many of Canada's tax treaties refer to beneficial ownership in the context of treaty-shopping
and anti-avoidance rules.[67] To benefit from the reduced rate provided by the treaty, the
taxpayer must be the beneficial owner of the income. Because of this requirement, any amount
paid to a bare trust, agent or nominee must not be taken into account for the purposes of the
treaty. A conduit vehicle that is resident in a country with whom the source country has a
favourable tax treaty may be disregarded. For example, paragraph 2 of article X of the
Canada-United States Income Tax Convention (1980) provides that the withholding tax rate
applicable to dividends paid by a company which is a resident of a contracting state to a
resident of the other contracting state cannot exceed a fixed amount where a resident of the
other contracting state is the beneficial owner of such dividends.
The expression "beneficial ownership" is not defined in the O.E.C.D. Model Tax Convention,
and thus does not provide any guidance as to the meaning of such term. There have, however,
been jurisprudential attempts by non-Canadian Courts to define the concept in the tax treaty
context.
First, there is the Aiken Industries, Inc.[68] case, a decision of a U.S. Tax Court, that denied
a zero withholding tax rate on interest paid by a U.S. person to a treaty country corporation,
where the interest income was immediately paid out by that corporation by way of matching
interest payments to a shareholder (or affiliate thereof) that resided in a non-treaty country (vis-
à-vis the U.S.). The treaty benefit was denied on the basis that the recipient-lending
corporation did not have "dominion and control" over the interest it received because of the
immediate repayment by way of interest.
However, a careful reading of this case indicates that the Court was intent on not allowing an
ultimate recipient or beneficiary of the U.S. source interest payment, which did not itself reside
in a country which provided U.S. treaty benefits, to utilize a stepping-stone country in a
mechanical-like three-country arrangement.
The Court noted the fact that the arrangement "ostensibly conformed to the literal requirements
of the withholding regulations" (not requiring any, in this case, treaty country party). The Court
also noted that, although the U.S. Supreme Court has approved efforts by taxpayers to
minimize tax burdens by tax planning, it was necessary, in a treaty arrangement, to consider the
expectations of the contracting countries and, where an arrangement has no "valid economic or
business purpose" other than "to obtain the benefits of the exemption established by the treaty",
it is appropriate to consider an inserted party as a mere "collection agent".
The elasticity of the concepts employed by the Court in Aiken Industries and the manner in
which support could be found for the decision clearly must be viewed in light of the clear bias of
the Court against the efficacy of an arrangement which saw a non-treaty country party accessing
a treaty benefit through the formality of what was termed "a mere exchange of paper between
related corporations to come within the protection of the exemption". The Court found that the
only purpose for the creation and existence of the treaty country corporation and for the
transaction was to obtain treaty benefits and while such a tax avoidance motive is not inherently
fatal, such a motive in and of itself is not a business purpose which is sufficient to support a
transaction for tax purposes.
In the Aiken Industries case, the Court considered it appropriate, in light of the blatant treaty
shopping context, to find that the interest received by the "intermediary" was not received by it
as its own, as there was an obligation to transmit that interest to a third party (i.e., the originating
lender). It was in such context that the recipient of the interest was considered not to have
dominion and control over the interest.
Second, there is the more recent case of Re VSA[69], where a Swiss company paid a dividend
to a Luxembourg company, which paid the dividend out in the form of an interest payment to a
shareholder who had loaned funds to the Luxembourg company, to enable it to purchase the
shares of the Dutch company. Similar to Aiken Industries, the Swiss authorities refused the
5% withholding rate with respect to the dividend to the Luxembourg company on the basis that
the Luxembourg company was not the beneficial owner of the dividend as it was merely a
conduit, the dividends received having been immediately paid out in the form of an interest
payment. There were sufficient indicators to allow the Court to conclude that the Luxembourg
company was "only a shadow company" interposed to permit a person who is not a resident of
Luxembourg to benefit from the double tax convention.
As in the case of Aiken Industries, the context in which this decision arose must be noted.
Again the Court makes clear that it is perturbed with what is in effect paper shuffling intended to
provide a party that would not otherwise enjoy benefits under the Swiss treaty to nonetheless
obtain such benefits through an interposed Luxembourg company. The decision is framed and
couched in terms of "abuse", as follows:
"After all, when the advantages of a double taxation convention benefit the nationals of third
countries, there is an abuse of the convention, and Switzerland may adopt anti-abuse measures
in a unilateral fashion to assure itself that the benefits of the convention do not profit nationals or
states who have no such right …."
With that bias in mind, it is not difficult to see how the Court in Re VSA goes about referring to
"legal form", arrangements that are "inappropriate" and the notion of these type of arrangements
permitting "a person who is not a resident of Luxembourg to benefit, wrongly, from a double
taxation convention".
In that context the Court had no problem in utilizing the notion of beneficial owner to conclude
that, in those circumstances, the Luxembourg company was not the beneficial owner of the
dividend.
"[T]hus, a company which transferred to a third person dividends received without being able
actually to dispose of them cannot be considered as the ‘beneficiary’."
Interpreted out of context, the determination of the Court in Re VSA could be seen to deny
beneficial ownership status in a wide variety of arrangements. For example, an obligation of a
landlord to use rents to pay a third party secured mortgage could be seen as meaning that the
landlord is not the beneficial owner, but that would obviously not be a normative determination.
However, in the author’s view, the proper application of the decision is to restrict it to situations
where it is required to support a conclusion based on context, such as treaty shopping by a non-
resident to a third country.
Indeed, one commentator[70] notes that, in a non-offensive context, the Court’s approach
probably would not stand up to scrutiny:
"The obligation to transfer some receipts to a third party is crucial to the finding that the recipient
is not the beneficial owner. A nominee, agent or a trustee is under a legal obligation to transfer a
sum received to its principal or beneficiary. An intermediate holding [company] is likely to pay
on sums received to its parent, however, it is not necessarily under an obligation to do so. If the
intermediate holding company became insolvent before paying on the sum received, the sum
would be available to its creditors and would not belong to its parent."
2.3.5 Foreclosures
Sections 79 and 79.1 set out rules governing the tax consequences for a debtor and creditor
when a creditor has acquired property held by the debtor (for example, by way of the seizure of
mortgaged or hypothecated property or where ownership is acquired under a conditional sales
agreement) as a consequence of the debtor’s failure to pay an amount to the creditor. The rules
are intended to ensure that the amount due to the creditor (plus accrued interest) is recognized
in computing the debtor’s proceeds of disposition with respect to the property. In addition, the
creditor is deemed to have acquired such property at a cost equal to the cost of the creditor’s
claim and cannot subsequently claim any loss or deduction in respect of its claim.
The use of the expression "beneficial ownership" in sections 79 and 79.1 appears to be
intended to ensure that these provisions will not apply where legal title has been transferred to
the creditor as a guarantee (mortgage/equity of redemption). However, such transfers of legal
title do not occur under civil law.
The expression may also be used to ensure that it is not possible to defer the tax consequences
of a foreclosure by transferring beneficial ownership of an asset, but not legal ownership, to the
creditor.
Title to property is divisible under common law into legal title and beneficial title (also referred to
as equitable title). This possibility of dividing title may be used for the purpose of securing the
right or interest of a creditor. Protection of this same sort is not available in Québec. A creditor
may, in certain specific cases, acquire a real right in the debtor’s property, but the Québec civil
law does not contemplate a fragmentation of title.
2.4 Subsection 248(3)
Parliament enacted subsection 248(3) as an interpretative aid to promote harmonization of
certain common law concepts with Québec civil law concepts. Subsection 248(3) provides that
property in respect of which a person has certain rights under the laws of the Province of
Québec is deemed to be beneficially owned by that person for the purposes of the ITA.
Furthermore, subsection 248(3) contains rules that deem certain relationships or arrangements
created under those laws to be trusts for the purposes of the ITA.
Paragraphs 248(3)(a), (b) and (c) provide that usufructs, rights of use or habitation and
substitutions under Québec civil law are deemed to be trusts, and that property subject to such
institutions is deemed to be held in trust and not otherwise.
Paragraph 248(3)(e) provides that a person who has a right (whether immediate or future and
whether absolute or contingent) to receive all or part of the income or capital in respect of
property that is deemed to be held in trust under either of paragraphs (a), (b), (c) or (d) is
deemed to be beneficially interested in such trust. Finally, subparagraph 248(3)(f)(iii) deems
property in relation to which a person has, at any time, a right as a beneficiary of a trust, to be
beneficially owned by the person at that time.
Essentially, the purpose of subsection 248(3) is to provide taxpayers in the Province of Québec
with the same benefits that beneficial ownership gives taxpayers in the common law
provinces.[71] While this may have been the purpose, at least one author is of the opinion that
this is not the effect.[72] In fact, the author holds that subsection 248(3) puts Québec
taxpayers in a better position than taxpayers in other Canadian provinces. The explanation for
this position is that, in common law, it is unclear whether the beneficiary of a trust is the
beneficial owner of the trust property. If, in Québec, a deeming provision is applicable, then
beneficial ownership becomes a certainty. Persons seeking to avail themselves of subsection
248(3) need not go to great lengths to establish beneficial ownership whereas this may not be
the case under common law.
Even if it is accepted that the purpose and effect of subsection 248(3) is to provide taxpayers in
the Province of Québec with the same benefits that beneficial ownership gives taxpayers in the
common law provinces, it is not completely satisfactory. The subsection does not define what
beneficial ownership means; it only deems certain things to be beneficially owned. Furthermore,
the subsection does not indicate that only those situations caught by the deeming provision will
be considered as situations where beneficial ownership exists in Québec. As such, situations
may arise in Québec other than those listed where the beneficial ownership relationship is an
appropriate analytical approach to take, but no criteria for determining the existence of such a
relationship are provided. Significantly, as discussed above, it does not describe what
constitutes a change in beneficial ownership.
In addition, as illustrated earlier, the wording of subparagraph 248(3)(f)(iii) leaves ambiguous
the types of beneficiaries that are intended to be within its ambit. The nature of the right that a
beneficiary need enjoy to be deemed a beneficial owner of trust property is left unclear.
The Construction Bérou decision, discussed in detail infra, relies on subsection 248(3) to
overcome the absence of the beneficial ownership concept in Québec civil law. Consequently,
some might cite it as support for the position that subsection 248(3) successfully deals with
harmonization issues that arise in the context of the beneficial ownership concept. This may not
necessarily be the case. The Court uses the subsection as a justification for treating the rights
created by the leasing contracts in question as beneficial ownership rights. In doing so, it took a
broad approach to interpreting the subsection. While the result may be appropriate from a tax
policy perspective, it is questionable whether the approach is otherwise appropriate. The
language of subsection 248(3) at the time of the Construction Bérou decision was such that
certain enumerated civil law property interests were assimilated to beneficial ownership for the
purposes of the ITA. With respect to leases, only emphyteutic lessees were referred to in the
subsection. The failure to refer to lessees under ordinary leases with purchase options suggests
that such a property interest was not intended to be treated as beneficial ownership.[73] Thus,
it is possible that the Federal Court of Appeal gave subsection 248(3) too broad a scope.
2.5 Construction Bérou and Wardean Drilling
Construction Bérou, M.N.R v. Wardean Drilling[74] and Olympia & York Developments
Ltd v. The Queen[75] illustrate the issues that may arise when private law concepts are applied
in interpreting the ITA.
The issue in the Construction Bérou case was whether a transaction in the form of an
equipment lease with a bargain purchase option could be recharacterized as a purchase by the
lessee of such equipment for purposes of the ITA.
The taxpayer corporation agreed to lease certain trucks from financial institutions that had
purchased the trucks at the request of the taxpayer. Each lease had a term of 65 months. At
month 60, the taxpayer had an option to purchase each truck for a purchase price equal to 10%
of the original cost. At the inception of the lease, it was estimated that on the purchase option
date the fair market value of the truck would be about 50% of its original cost. If the taxpayer
did not exercise the purchase option at month 60, the rent payable by the taxpayer for the
remaining 5 months of the lease slightly exceeded the purchase option price, and, therefore, it
was reasonable to expect that the taxpayer would exercise the purchase option from the outset.
The taxpayer, on the basis of Interpretation Bulletin IT-233R,[76] treated the transaction as a
purchase of the trucks instead of a lease. It therefore claimed capital cost allowance and
investment tax credits with respect to the cost of the trucks and deducted a portion of the rent
paid under the lease as interest due on the deferred purchase price of the trucks. The Minister
reassessed the taxpayer on the basis that it did not acquire the trucks and therefore was only
permitted a deduction for the rent paid.
The Federal Court of Appeal, in a 2-1 decision, found that the taxpayer had acquired the trucks
for the purpose of claiming capital cost allowance and investment tax credits and deducting the
interest expense. All three judges agreed that in order for a taxpayer to be considered to have
acquired property for the purposes of the ITA, the taxpayer must obtain beneficial ownership of
the property. The majority of the Court relied on the definition of "disposition", which indicated
that a change of legal ownership without a change of beneficial ownership is not a disposition,
and on the Wardean Drilling and Olympia cases. These cases stand for the proposition that in
a conditional sales context, a purchaser acquires property for the purposes of the ITA when it
acquires all the incidents of ownership, being use, possession and risk, notwithstanding that legal
ownership may be reserved by the vendor to ensure full payment of the purchase price.
In the opinion of the majority of the Court, the difficulty created by the absence in the C.C.Q. of
the concept of beneficial ownership was resolved by subsection 248(3). For the years under
appeal, subsection 248(3) read as follows:
"In its application in relation to the Province of Québec, a reference in this Act to any property
that is or was beneficially owned by any person shall be read as including a reference to
property in relation to which any person has or had the full ownership whether or not the
property is or was subject to a servitude, or has or had a right as a usufructuary, a lessee in an
emphyteutic lease, an institute in a substitution or a beneficiary in a trust and a reference in this
Act to the beneficial owner of any property shall be read as including a reference to a person
who has or had, accordingly as the context requires, such ownership as a right in relation to that
property".
The Court concluded that the intent and effect of subsection 248(3) was to include, within the
meaning of beneficial ownership for the purposes of the ITA, various property rights recognized
by the C.C.Q.:
"Subsection 248(3) of the Income Tax Act ("the Act") evidences a valuable effort by
Parliament to treat beneficial ownership in property in the same way as various forms of
ownership recognized in the civil law of Québec so as to obviously offer to the taxpayers in
Québec the same benefits that this concept affords the taxpayers in the common law provinces.
This was not an easy task to perform at the time because the concepts of ownership were
different in the two legal systems, and the divisions of the ownership right, more limited in civil
law than in common law, were not conceptually necessarily identical to those of the common
law. Yet, the attempt by Parliament to harmonize the two systems with a view to providing fair
and equal treatment to all Canadian taxpayers cannot be doubted. Hence, the necessity for a
judicial interpretation which allows for the implementation of this legislative intent". [77]
In Wardean Drilling and Olympia, the Courts had to analyze the word "disposition" and in
both instances concluded that it should be given the widest possible meaning, at least with
regard to capital cost allowance provisions of the ITA. As long as ownership or the normal
incidents thereof, i.e. possession, use, and risk are transferred, there has been a disposition.
In Olympia, which was subject to the laws of the Province of Québec, the Court accepted the
view that where the parties to a transaction had expressly deferred the passage of title, there
was no immediate sale; however, a disposition for tax purposes could occur earlier than the
sale.
The Wardean Drilling case, which was subject to the laws of the Province of Alberta,
examined whether there was an "acquisition" for income tax purposes. The issue was whether,
for the purposes of claiming capital cost allowance, the taxpayer had acquired equipment in the
year in question or only in a subsequent year. The contract stipulated that title would pass only
upon delivery of the goods. The analysis involved a determination of whether the taxpayer
became the owner of the property before year-end. In this particular case, the taxpayer did not
have physical possession of the property before year-end, but the sale contract was signed
before year-end. Mr. Justice Cattanach wrote that:
"As I have indicated above, it is my opinion that a purchaser has acquired assets of a class in
Schedule B when title has passed, assuming that the assets exist at that time, or when the
purchaser has all the incidents of title, such as possession, use and risk, although legal title may
remain in the vendor as security for the purchase price as is the commercial practice under
conditional sales agreements. In my view the foregoing is the proper test to determine the
acquisition of property described in Schedule B to the Income Tax Regulations".[78]
The application of Québec civil law to the facts analyzed in the Olympia and Wardean Drilling
cases would result in a different conclusion, as the transfer of ownership occurs on the signature
of the agreement (or when stipulated in the agreement, as in Olympia), and possession is not
relevant, except with respect to the assumption of risk.[79]
Arguably, there is nothing inherently wrong with associating the transfer of the incidents of
ownership in a property with the concept of beneficial ownership. However, the link between
incidents of ownership and beneficial ownership merits explicit recognition in the ITA so as to
avoid the necessity of relying on provincial private law, as was done by the Courts in Wardean
Drilling and Olympia. There are many instances where the ITAdeems a set of circumstances
to be a distinct set of circumstances for income tax purposes. In a slightly different vein, there
are also instances where the ITA dissociates a private law concept from the private law and
endeavors to define it for tax purposes.[80] If this were done with beneficial ownership, the
results may be acceptable subject to the discussion of this solution, infra. However, given that,
at present, the term beneficial ownership is not defined in the ITA, Courts have no choice but to
find its meaning in the private law of the relevant province.[81] Although the term "beneficial
ownership" has found its way into Québec business parlance, and it is commonly used in
Québec contractual matters, the concept itself is non-existent in Québec private law. The
Court’s error in Construction Bérou lay in its recourse to the private law of a common law
province to determine the meaning of the term.
In light of Construction Bérou, the necessity of harmonization is more pressing. In that case,
the Court concluded that there was an acquisition of property for tax purposes, notwithstanding
the fact that ownership had not been transferred as a matter of civil law. Moreover, the Court
based its conclusion on the principles established in Wardean Drilling, a decision rendered in a
province governed by the common law. The Court’s decision, while commendable from a
policy perspective, gives rise to uncertainty for Québec taxpayers as it suggests that the
determination of the tax consequences arising from a transaction governed by Québec civil law
might be based on common law principles. The conflicting objectives of applying legal
principles consistently across the country and accounting for differences between the private law
of the various provinces is well illustrated by the following comments made by Létourneau J.A.:
"I have undertaken this analysis of the leasing contract at the time because it indicates the
difficult position in which Revenue Canada was placed, especially at the period in question,
namely 1982. The Interpretation Bulletin issued by Revenue Canada sought, because of the
legal uncertainty surrounding the idea of the leasing, to introduce a salutary degree of certainty in
tax matters in which is necessary for the economic development resulting from these financial
and commercial transactions. In operational terms, it also allowed Revenue Canada to plan and
adopt a uniform and equitable approach at the national level for such transactions, whatever
might be the disparities in private law produced by the special features of one legal system as
compared to another".[82]
III. PREVIOUSLY PROPOSED SOLUTIONS
3.1 Neutral Terms, Defined Terms, "Duet"
Several solutions have been considered in relation to the concept of beneficial ownership in the
ITA, including the use of neutral terms, defined terms and a duet of civil and common law
terms. The neutral terms solution consists of replacing all references to beneficial ownership
with neutral terms, i.e., terms that have a common meaning in both civil and common law, such
as rights and powers. The defined terms solution consists of removing the references to
beneficial ownership and replacing them with a new defined term such as economic ownership.
Under the latter approach, economic ownership would be defined, in relation to the Province of
Québec, as possessing the incidents of ownership (possession, use and risk) but would exclude
nominal ownership. This expression would be defined, in relation to the other provinces, as
beneficial ownership. Finally, the "duet" approach would use common and civil law terms in
each provision that relies on the concept of beneficial ownership. The concept of beneficial
ownership would be retained and civil law terms would also be used with a view to achieving
the same substantive effect.
Effective implementation of each of these proposed solutions would require identifying each
situation under civil law that should be treated as "beneficial ownership" under the ITA.
Paragraph 248(3)(f) attempts to do this by way of a deeming rule, but is not entirely effective,
as illustrated by the case of Construction Bérou. Furthermore, the meaning of beneficial
ownership is not entirely clear under common law and such uncertainty would remain should this
approach be adopted. It would be difficult, if not impossible, to develop a definition that
achieves a perfect parallel between common law and civil law on a continuous basis, and to
contemplate every situation in which the concept of beneficial ownership might be relevant under
the ITA. The concept of beneficial ownership, being a creature of common law, is non-static
and may evolve over time. Accordingly, a definition specific to Québec may not provide
Québec taxpayers with the full benefits of any jurisprudential developments regarding the
concept of beneficial ownership. For these reasons, any approach that attempts to equate
certain rights or relationships in the Province of Québec with the common law concept of
beneficial ownership is not, in the author’s view, the preferred approach. Although the defined
term and duet approaches would maintain the status quo for common law taxpayers, the
retention of the concept of beneficial ownership in the ITA would not promote the objectives of
harmonization, as beneficial ownership is not recognized by Québec private law.
3.2 Subsection 248(3)
The interpretative rules in subsection 248(3) may generally be effective with respect to
determining when a Québec taxpayer is considered to be the beneficial owner of property, or to
be beneficially interested in a trust, for purposes of the ITA. However, notwithstanding the
deeming provisions in subsection 248(3), there is no guidance in the ITA as to the
circumstances in which a change in the beneficial ownership of property occurs. The common
law has, at least, developed the terminology to cope with beneficial ownership and changes
therein. There is, of course, no such terminology in Québec civil law and it would, therefore, be
incumbent upon civilians to analyze the question from a common law perspective, an approach
or result that is inconsistent with one of the fundamental objectives of harmonization, being
respect for the civil law tradition of the Province of Québec.
IV. RECOMMENDATIONS
An effective solution to promote harmonization while preserving the integrity of the tax policy
underlying the relevant provisions of the ITA may be to remove all references to beneficial
ownership and specify, to the greatest extent possible, in neutral phraseology used elsewhere in
the ITA, the conditions required to achieve the tax policy objective of the particular provision.
Our analysis of the ITA reveals that the use of the concept of beneficial ownership can be
broadly grouped into two categories:
(i) in relation to the rights of a beneficiary under a trust; and
(ii) in relation to the person that is entitled to the benefits (fruits) from the property and
the property itself.
To promote uniformity of application of the provisions of the ITA, the use of concepts or terms
that are unique to common law, such as the concept of "beneficial ownership", should be
avoided. Rather, the underlying tax policy of provisions using the term "beneficial ownership"
could be preserved by adopting terminology that yields the same substantive effect. Highlighted
below are various examples of this approach.
4.1 Transfers to Trusts for the Sole Benefit of the Settlor and Deemed
Dispositions
4.1.1 Transfers to Self-Benefit Trusts
In the context of trusts, the ITA is primarily concerned with whether there has been a change in
beneficial ownership. A good example of that concern is in new subparagraph 73(1.02)(b)(ii).
Subsection 73(1) generally provides for a tax-free disposition of property by an individual to his
or her spouse, a "spousal trust", an "alter ego trust" or a "joint spousal trust". New subsection
73(1.02) limits the application of section 73 by imposing certain additional conditions in order to
obtain a rollover to a so-called self-benefit trust. Previously, subparagraph 73(1.02)(b)(ii) read
as follows:
No person (other than the individual) or partnership has any contingent or absolute right as a
beneficiary under the trust (determined with reference to subsection 104(1.1))
It was amended in the 2001 Technical Bill to provide the following:
The transfer does not result in a change in beneficial ownership of the property and there is
immediately after the transfer no absolute or contingent right of a person (other than the
individual) or partnership as a beneficiary (determined with reference to subsection 104(1.1))
under the trust [underscore added].
One of the purposes of the amendment to subparagraph 73(1.02)(b)(ii) to add the requirement
that no change in beneficial ownership occur as a result of the transfer is to ensure that in the
case of a self-benefit trust the settlor does not reserve a specific power of appointment
exercisable under a will. In particular, the Technical Notes accompanying the 2001 Technical
Bill provide that "no change in beneficial ownership would be expected to result from a transfer
of property to a trust where the power to appoint beneficiaries under the trust is reserved by the
contributor and is a general power of appointment." The CCRA took the same view when it
commented on the then draft legislation in a Technical Interpretation.[83] The CCRA wrote
that "the retention of a general power of appointment by the … [settlor] on the transfer of
property to such a trust [i.e., a self-benefit trust settled by an individual less than 65 years of
age] would not be expected to result in a change in beneficial ownership of the property for the
purposes of the transfer described in subparagraph 73(1.02)(b)(ii). However, if property is
transferred to a trust in which the individual is the sole income and capital beneficiary during his
or her lifetime and the individual retains a specific or hybrid power of appointment, it is our view
that a change in beneficial ownership would arise as a result of the transfer."
Subsection 104(1.1) provides that for the purposes of subparagraph 73(1.02)(b)(ii), a person is
deemed not to be a beneficiary under a trust where the person is beneficially interested in the
trust solely because of any one, or a combination of, the following:
(a) a right that may arise as a consequence of the terms of the will or other
testamentary instrument of an individual who, at the particular time, is a beneficiary under the
trust;
(b) a right that may arise as a consequence of the law governing the intestacy of an
individual who, at the particular time, is a beneficiary under the trust;
(c) a right as a shareholder under the terms of the shares of the capital stock of a
corporation that, at the particular time, is a beneficiary under the trust; or
(d) a right as a member of a partnership under the terms of the partnership agreement,
where, at the particular time, the partnership is a beneficiary under the trust.
Prior to the 2001 Technical Bill, the effect of subsection 104(1.1) in the context of a trust where
the settlor retains a general power to appoint in his or her will was to allow for subsection 73(1)
or subsection 107.4(3) rollover treatment. In other words, the general power of appointment
retained by the settlor for exercise in his or her will did not give rise to absolute or contingent
rights under the trust for anyone but the settlor. Subsequent to the 2001 Technical Bill, the
combined effect of the no-change-in-beneficial-ownership and the no-absolute-or-contingent-
rights requirements of subparagraph 73(1.02)(b)(ii) (and paragraph 107.4(1)(e)), and the
deeming rule in subsection 104(1.1), is to deny rollover treatment to those trusts where the
settlor retains a specific power of appointment exercisable in his or her will.
Subsection 104(1.1) does not exclude the right of a potential beneficiary named in a will
pursuant to a specific power of appointment. Accordingly, it is the condition in subparagraph
73(1.02)(b)(ii) and paragraph 107.4(1)(e) that there be no change in beneficial ownership that
ensures that only a general power of appointment may be reserved by the settlor. Paragraph
104(1.1)(a) currently provides an exception to the no-absolute-or-contingent-right rule in
subparagraph 73(1.02)(b)(ii) for persons who may be potential appointees under a power of
appointment. Subparagraph 73(1.02)(b)(ii) was amended to require that the transfer of
property cannot result in a change in the beneficial ownership of the property. This change, in
effect, requires that the power of appointment contemplated by paragraph 104(1.1)(a) be a
general power of appointment, meaning that the appointor must have the power to appoint to
whomsoever he or she chooses, including the estate of the appointor.
The CCRA considers that there is no change in the beneficial ownership of property if the
settlor of a self-benefit trust reserves a general power of appointment because the settlor’s
ability to dictate the ultimate disposition of the trust property is unlimited. This position is not
inconsistent with the common law view of the matter. In contrast, the CCRA views the
reservation of a specific power of appointment as resulting in a change in beneficial ownership,
which also is not inconsistent with the common law. The addition of the no change in beneficial
ownership requirement in subparagraph 73(1.02)(b)(ii) thus reflects, inter alia, a tax policy
objective to prohibit the reservation of a specific power of appointment in the context of a self-
benefit trust. However, this tax policy objective may be achieved without the use of the
expression "does not result in a change in beneficial ownership". An alternative approach might
involve the removal of the "does not result in a change in beneficial ownership" requirement, the
preservation and perhaps enhancement of the "no absolute or contingent right" test, and an
amendment to paragraph 104(1.1)(a) to include only the right of an appointee pursuant to a
general power of appointment exercised in the last will and testament or other testamentary
instrument of the settlor. This solution uses more neutral terms or concepts such as "power of
appointment" and "absolute or contingent right as a beneficiary".
The terms appear to have the same meaning in both civil and common law. According to
professor Marc Jolin, a general power of appointment is null and void in civil law.[84]
However, his view is not shared by Diane Bruneau in her draft paper to the Department of
Justice (Chapter 1, p. 10) and this author agrees with the view expressed by Me Bruneau. In
particular, article 1282 C.C.Q. provides that "the settlor may reserve for himself the power to
appoint the beneficiaries or determine their shares, or confer it on the trustees or a third person.
[…] In the case of a personal or private trust, the power to appoint may be exercised by the
trustee or the third person only if the class of persons from which he may appoint the beneficiary
is clearly determined in the constituting act." The drafting merely suggests that a general power
of appointment cannot be exercised if it is conferred on a person other than the settlor.
Alternatively, if there is any doubt or inconsistency as to what constitutes a general power of
appointment under common law or civil law, a specific definition of general power of
appointment could be developed for this purpose. It is interesting to note that the regulations
enacted under the United States Internal Revenue Code define a general power of
appointment as one that allows the holder of the power to appoint to "the decedent, his estate,
his creditors or the creditors of his estate".
In addition to the foregoing, subsection 104(1.1) could be amended as follows:
"[…]
(a) A right that may arise as a consequence of the exercise of a general power of
appointment that may only be exercised in the will or other testamentary instrument of an
individual who, at the particular time, is a beneficiary under the trust".
This proposed amendment to paragraph 104(1.1)(a) would also be applicable for purposes of
paragraphs 104(4)(a.4) and 107.4(1)(e), discussed below, although those provisions would
also need to be amended to remove any reference to the phrase "does not result in a change in
beneficial ownership", which references are also intended to ensure, among other things, that the
transferor does not retain a specific power of appointment.
Another purpose of the amendment to subparagraph 73(1.02)(b)(ii) to provide the requirement
that no change in beneficial ownership occur as a result of the transfer was to require the settlor
of a self-benefit trust to receive an interest in the trust equal to the full value of the property
transferred to it.
Prior to the amendment, the following scenario could have arisen. An individual, X, owns
depreciable property with a low undepreciated capital cost but a high fair market value. X
transfers the property to a self-benefit trust under the terms of which X is the income
beneficiary, the trustee is empowered to encroach on capital in X’s favour and X retains a
power of appointment exercisable in his will. X relies on subsection 73(1) to receive rollover
treatment on the transfer – X meets the necessary criteria (appointees under a will are not
considered to have contingent or absolute rights as they are within subparagraph 104(1.1)). On
X’s death, there is no deemed disposition of his income interest as it is not capital property.
Since X did not have a capital interest in the trust, there is no capital interest to speak of, there is
no deemed disposition thereof in accordance with subsection 70(5) and neither the increase in
value of the trust assets from the time they were acquired by X to the time they were rolled into
the trust nor the increase in value of the capital interest in the trust from the date of settlement to
the date of X’s death are taxable.
Catherine Brown posits that the effect of requiring that the transfer not result in a change in the
beneficial ownership of property in order to take advantage of a rollover of property to a trust
curtails the perceived abusive structure described above. Essentially, if X did not have a capital
interest in the trust, the transfer would result in a change in the beneficial ownership of the
property transferred to the trust and X would realize recapture and a capital gain at the time of
the transfer.[85] A viable alternative to the no change in beneficial ownership concept in
subparagraph 73(1.02)(b)(ii) should address this concern.
The no change in beneficial ownership requirement may be abandoned without the fisc
completely and permanently losing tax revenues that would otherwise arise on the death of an
individual who is the settlor of a self-benefit trust. Under current income tax law, when the
settlor of a self-benefit trust dies, the trust is deemed to dispose of all of the trust assets for fair
market value at the end of the day on which the death of the settlor occurs and is further
deemed to reacquire those assets immediately after that day for an amount equal to their fair
market value at that time.[86] Recall that the property was transferred by the settlor to the trust
on a rollover basis. As such, the capital gains realized by the trust on this deemed disposition
will reflect accrued gains in the property from the time it was acquired by the settlor.
Current income tax law also provides that the settlor’s capital interest in the trust is deemed
disposed of for proceeds of disposition equal to its fair market value immediately before the
settlor’s death.[87] The capital gain realized on this deemed disposition is calculated as the
difference between the fair market value of the interest and the greater of (1) its adjusted cost
base ("ACB") and (2) its cost amount less certain prescribed deductions.[88] Assume the cost
of the capital interest to the settlor was nil in accordance with paragraph 107(1.1)(b). The cost
amount of the capital interest in the trust to the settlor is determined in accordance with the
definition of cost amount in subsection 108(1). Paragraph (a.1) of the definition of cost amount
sets out that, in circumstances where paragraph 104(4)(a.4) applies, the cost amount of the
settlor’s capital interest is the cost amount determined under paragraph (b) of that definition as if
the taxpayer had died on the day immediately preceding the time immediately before the death
of the taxpayer. Finally, paragraph (b) sets out a formula for computing the cost amount of a
settlor’s capital interest that takes into account the beneficiary’s proportionate share of the value
of the underlying capital assets less the trust’s liabilities. The interaction of these provisions is
illustrated with the following example.
X settles a self-benefit trust with land. The land has an ACB of $1M. X dies 20 years later at
2:00 p.m. on Wednesday; the fair market value of the land during the week that X dies remains
constant at $2M. Paragraph 104(4)(a.4) deems the trust to have disposed of the land for its
fair market value at the end of Wednesday and deems the trust to reacquire the land at its fair
market value at the beginning of Thursday. The trust realizes and is liable for tax on a capital
gain of $1M. Subsection 70(5) deems X to have disposed of his capital interest in the trust
immediately before his death, i.e., 1:59 p.m. on Wednesday. Subsection 107(1) is relevant to
determine the capital gain realized on this deemed disposition. Assuming the ACB of the capital
interest was nil, X’s cost amount is used to determine those capital gains. Given that X’s capital
interest represents 100% of the capital interests in the trust, the cost amount to X of his capital
interest is the cost amount of the land, computed as if X had died on the day immediately
preceding the subsection 70(5) deemed disposition of capital property. The subsection 70(5)
deemed disposition of capital property took place at 1:59 p.m. on Wednesday. Applying the
definition of "cost amount" in subsection 108(1), if X were to have died on Tuesday, his capital
interest would have been disposed of and reacquired on that day with the result that the cost
amount of the land to X at the beginning of the day on Wednesday would be equal to $2M. As
such, at the time the cost amount of X’s capital interest would need to be determined for
purposes of the subsection 70(5) deemed disposition, i.e., 1:59 p.m. on Wednesday, the cost
amount of the underlying property would be stepped up to the fair market value at that time.
The fair market value and cost amount of the capital interest would, in consequence, be equal
and the capital gain realized on the deemed disposition would be nil.
The intended effect of the interaction between subsection 70(5), paragraph 104(4)(a.4), and the
definition of "cost amount" in subsection 108(1) is to provide a step up in the cost amount of the
settlor’s capital interest and to eliminate the double taxation that would otherwise arise as a
result of the death of the settlor. This is recognized in the March 2001 Technical Notes that
accompany the 2001 amendments to the definition of cost amount.
If the no change in beneficial ownership requirement were removed from subsection
73(1.02)(b)(ii), the fisc could collect tax on the capital gains realized on the paragraph
104(4)(a.4) deemed disposition by the trust. Admittedly, some tax revenues may be lost or,
alternatively, too much tax may be assessed as the trust and the settlor may have different
marginal rates. The beneficial ownership concept is not absolutely necessary to ensure that the
appropriate tax liability is triggered on the death of the settlor of a self-benefit trust. The no
change in beneficial ownership requirement is in place to ensure that fair market value of the
settlor's interest in a self-benefit trust is equal to the fair market value of the property transferred
thereto.[89] If this is so, the Department of Finance may wish to consider addressing this
objective in a more direct manner. For example, one of the conditions for a rollover to a self-
benefit trust under section 73 (or section 107.4) could be a requirement that immediately after
the transfer, and at all times thereafter, the fair market value of the capital interest of the settlor
be equal to the net fair market value of all properties of the trust. There is precedent in
subsection 107.4(4) for this valuation based approach, admittedly in a different context, which
could be adapted as the context requires.
4.1.2 Qualifying Dispositions
Subsection 107.4(3) provides for a rollover where there has been a "qualifying disposition" of
property. A qualifying disposition is defined in subsection 107.4(1) as a disposition that does
not result in any change in the beneficial ownership of the property and that otherwise meets the
conditions enumerated in that subsection. Subsection 107.4(2) is designed to allow, in certain
cases, for the division among trusts of property or a group of identical properties where the
beneficial ownership of the properties is unchanged. In particular, where a trust disposes of a
property to another trust, there is deemed to be no change in beneficial ownership of the
property if:
· the transferor trust receives no consideration for the disposition; and
· as a consequence of the disposition, the value of each beneficiary’s beneficial
ownership at the beginning of the period under the transferor trust in each particular property of
the transferor trust is the same as the total value of the beneficiary’s beneficial ownership at the
end of the period under the transferor trust and the other trust.
Amendments to paragraph 107.4(1)(a) and subsection 107.4(2) would be required in order to
remove any reference to a change in beneficial ownership as follows:
107.4(1)(a)
"[…]
(a) If the contributor is a trust, other than a trust to which paragraph (j) applies, the
property is transferred in circumstances to which subsection (2) applies
(b) [...]"
Any reference to "beneficial ownership" in subparagraph 107.4(2)(a) would be replaced by a
reference to "beneficial interest", which expression can be interpreted by reference to the
definition of "beneficially interested" in subsection 248(25).
Section 107.4(2) would also be amended as follows:
"[…]
(a) Except where paragraph (b) applies, where a trust [...] disposes of one or more
properties in a period to one or more other trusts,
(i) [...]; and
(ii) As a consequence of the disposition, the value of each beneficiary’s beneficial interest at
the beginning of the period [...] is the same as the value of the beneficiary’s beneficial interest at
the end of the period [...] [underscore added]; and
(b) Where a trust (the "transferor") governed by an RRSP or an RRIF transfers a property
to a trust (the "transferee") governed by an RRSP or an RRIF, the annuitant of the plan or fund
that governs the transferor is also the annuitant of the plan or fund that governs the transferee"
The definition of beneficially interested in paragraph 248(25)(a) is inclusive in that it "includes"
any person or partnership having any right as a beneficiary described in that paragraph. The
implication arising from this inclusive definition is that it extends, as well, to persons beneficially
interested in a particular trust under common law. To achieve the goal of harmonization,
"beneficially interested," for the purposes of the ITA, should be defined in an exclusive manner.
That is to say, the word "means" should be substituted for the word "includes" in paragraph
248(25)(a). In the author’s view, the ambit of subsection 248(25) is so far reaching that the
suggested amendment would not, as a practical matter, give rise to abuse.
Finally, the same potential abuse identified above with respect to the removal of the no change
in beneficial ownership requirement in the context of subparagraph 73(1.02)(b)(ii)[90] arises in
the context of a qualifying disposition under subsections 107.4(1). Absent the no change in
beneficial ownership requirement, a transferor could take back only an income interest in the
settled trust. See the discussion supra for further comments and suggested solutions to this
concern.
4.1.3 Exceptions to Dispositions
An analysis of the ITA reveals that the concept of "change in beneficial ownership" is intended
to exclude the situation where a person obtains nominal title (as agent, mandatary, administrator
or nominee) or legal ownership in common law. The use of the expansive notion of the "no
absolute or contingent right" requirement as reflected in paragraph 248(25)(a), with appropriate
contextual changes, coupled with an exception for nominal ownership may be an effective
means of achieving the tax policy objective underlying paragraph (e) of the definition
"disposition" in subsection 248(1). It would accordingly be possible to remove the reference to
change in beneficial ownership in that provision as follows:
"disposition […] does not include
(e) Any transfer of the property by a person where, immediately after the transfer, no
person other than the transferor has any right, (whether immediate or in the future, whether
absolute or contingent or whether conditional on or subject to the exercise of any discretion by
any person or partnership), in or to the income or capital in respect of the property or property
substituted therefore (excluding, for greater certainty, nominal ownership), except where the
transfer is […]"
One potential drawback associated with this solution is the possible effect in the common law
provinces. Catherine Brown describes the following situation: property is transferred in
circumstances where no absolute or contingent rights are created other than rights of the nominal
owner. The property is subject to a specific power of appointment such that there is a resultant
change in the beneficial ownership of the property. Consequently, the property is considered
disposed of in accordance with the subsection 248(1) definition of disposition. According to
Brown, the potential appointee is not afforded any "rights" at the time the property is made
subject to the power of appointment.[91] Other authors agree with Brown that a potential
appointee under a mere power enjoys no right to the property that is the subject of the power.
[92] However, one should bear in mind that these potential appointees do have the right to
bring the appointer under the power before the Courts if the power is exercised in a manner that
is contrary to its terms.[93] The suggested amendment would, however, appear to extend to
the potential future right of an appointee under a specific power of appointment. Of course,
alternative language could be employed if there is any doubt as to its application in that context.
4.1.4 Inadequate Consideration and Security Trusts
Subparagraph 69(1)(b)(iii) stipulates that where a taxpayer disposes of property to a trust in
circumstances that do not result in a change of beneficial ownership, then, unless one of the
rollover provisions applies, the taxpayer will be deemed to have disposed of the property for
proceeds equal to fair market value. Paragraph 69(1)(c) provides a corresponding rule that
deems a person who acquires property in such circumstances to have acquired the property at
its fair market value. In the author’s view, these provisions could achieve the intended results by
substituting the no change in beneficial ownership requirement with a broadly designed no
absolute or contingent right concept. As suggested with respect to the definition of "disposition"
in subsection 248(1), perhaps wording similar to the broad language used in paragraph
248(25)(a), which extends to any person who has "a right (whether immediate or in the future,
whether absolute or contingent or whether conditional on or subject to the discretion of any
person or partnership ...)", could be an effective means of preserving the integrity of these
provisions, without embracing the concept of beneficial ownership.
Similar language could be employed with respect to subsection 248(25.2), which deems a trust
to deal with property as agent of the transferor throughout the period that begins at the time of
the transfer and ends at the time of the first change in beneficial ownership of the property.
4.1.5 Deemed Dispositions
Other provisions relating to trusts may similarly be amended. Paragraph 104(4)(a.4) was
introduced to provide the first deemed disposition day in respect of an inter vivos trust to
which property was transferred by a taxpayer who is an individual (other than a trust) in
circumstances in which section 73 or subsection 107.4(3) applied. The Technical Notes
released with the 2001 Technical Bill explain that "where the transfer does not result in a change
in beneficial ownership of the property and no person (other than the taxpayer) has any absolute
or contingent right as a beneficiary under the trust [determined with reference to subsection
104(1.1)], the first deemed disposition date of the trust property is the day on which the
taxpayer dies."
For reasons similar to those discussed at sections 4.1.3 and 4.1.4 with respect to the definition
of "disposition" in subsection 248(1) and subparagraph 69(1)(b)(iii), the reference to "does not
result in a change in beneficial ownership" in paragraph 104(4)(a.4) could be deleted, as the
intended substantive effect could be achieved by utilizing the expansive notion of the no absolute
or contingent right requirement in paragraph 248(25)(a). Under this approach paragraph
104(4)(a.4) would read as follows:
"[…]
(a.4) where the trust is a trust to which property was transferred [...] in circumstances in which
section 73 or subsection 107.4(3) applied and no person (other than the individual) or
partnership has any right (whether immediate or in the future, whether absolute or conditional or
whether conditional on or subject to the discretion of any person or partnership) as a beneficiary
under the trust (determined with reference to subsection (1.1)), the day on which the death of
the taxpayer occurs."
Alternatively, instead of repeating the requirement established by subparagraph 73(1.02)(b)(ii)
and paragraph 107.4(1)(e), paragraph 104(4)(a.4) could be amended in such a way so as to
make explicit reference to that subparagraph and paragraph (as amended in accordance with
the suggestions made in this paper) specifically instead of the more general section references
currently in the legislation. Under this approach, paragraph 104(4)(a.4) could read as follows:
"[…]
(a.4) where the trust is a trust to which property was transferred [...] in circumstances in which
the conditions set out in subparagraph 73(1.02)(b)(ii) or paragraph 107.4(1)(e) are satisfied,
the day on which the death of the taxpayer occurs."
4.2 Foreclosures
In the author’s view, the expression "beneficial ownership" used in subsection 79(2) is arguably
not required. The terms "acquired or reacquired" and "acquisition or reacquisition" have been
interpreted by the Courts in a manner that produces satisfactory results. In the context of
subsection 79(2), property would only be surrendered by one person to another person if the
other person "acquires" the possession, use and risk of the property, as such term has been
interpreted by the relevant jurisprudence (Wardean Drilling, Olympia, Construction Bérou).
The reference to "beneficial ownership" would be deleted. However, since there is a risk that a
future Supreme Court of Canada decision could overturn the position taken by the Courts to
date as to the meaning of the term "acquired", the appropriate solution may be to adopt a
specific definition of the term "acquired" which could reflect elements of the Construction
Bérou, Wardean Drilling and Olympia decisions as well as the CCRA’s administrative
positions. In doing so, the Department of Finance should be careful to address situations that
should amount to an acquisition even though not all of the incidents of ownership identified in the
case law are acquired. For example, a trustee who acquires property may not itself acquire
use, possession and risk of the property. Nonetheless, it may be desirable to regard the
trustee’s acquisition as a surrender of property by the debtor. Similarly, property acquired may
be subject to a usufruct in which case the acquirer would not obtain the use and enjoyment of
the property. Again, it may nonetheless be desirable to regard the acquisition as a surrender of
property. A definition of "acquired" or "acquisition" could be developed that would allow all
Canadian taxpayers to be on an equal footing without having to embrace the common law
concept of beneficial ownership.[94]
Alternatively, subsection 79(2) could be amended to provide that property is surrendered
where the property is transferred by one person to another person and, immediately after that
transfer, no person other than the transferee has a right (whether immediate or in the future,
whether absolute or contingent, or whether conditional on or subject to the exercise of any
discretion of any person or partnership) in or to the property and the transfer of the property
was in consequence of the person’s failure to pay all or part of a debt. The suggested language
might achieve the same objectives without requiring a determination of beneficial ownership.
These suggested amendments might also be used in the context of subsection 79.1(2).
4.3 Share for Share Exchanges
It is not evident to this author what the tax policy justification is for limiting share-for-share
exchanges under subsections 85.1(1) and 85.1(5) to persons dealing at arm’s length with the
acquiring corporation immediately before and after the exchange. In any event, the substantive
effect of subparagraphs 85.1(2)(b)(ii) and 85.1(6)(b)(ii) could be achieved by deleting the
reference to "beneficial" and providing an exception for nominal ownership, thereby eliminating
the issues associated with the term "beneficial ownership". In addition, a deeming rule for the
ownership of shares through a trust could be added to specifically deem shares held by a trust
to be owned, in the case of a non-discretionary trust, in proportion to the respective interest of
each beneficiary based on fair market value, and in the case of a discretionary trust, each
beneficiary would be deemed to own all of the shares held by the trust. There is precedent in
the ITA for such an approach to determining ownership of shares through a trust in paragraphs
(b) and (e) of the definition "specified shareholder" in subsection 248(1).
4.4 Advertising Expenses
In this context, the approach suggested with respect to share-for-share exchanges could be
used. See the discussion above under heading 4.3.
4.5 Other Contexts
In some contexts, the concept of no change in beneficial ownership ensures that the mere
transfer of nominal ownership does not result in a disposition of property.[95] This tax policy
objective may be achieved by using the "no absolute or contingent right" concept with an
exception for the right as nominal owner. Presumably, nominal ownership is easier to define
than beneficial ownership. A definition of nominal ownership could therefore be added to the
ITA, and would include a person who holds title as an agent, trustee, nominee, mandatary,
administrator of property of others, etc. The nominal ownership concept is also relevant in
circumstances where it is important to identify the person enjoying the benefits from the
property. The nominal ownership concept may therefore be useful in, for example, sections 79
and 79.1, subsections 19(5), 85.1(2), 85.1(6) and 133(8) to ensure that the person who has
nominal ownership of property is not considered the owner of such property. For example,
subsection 19(5) is intended to ensure that Canadian resident persons in fact control the
newspaper. A person who owns shares otherwise than as a nominal owner will be included in
determining whether there is sufficient Canadian ownership.
CONCLUSION
The primary objective and challenge of harmonization is to concurrently promote horizontal
equity throughout Canada in the application of the ITA and preserve the tax policy objectives
underlying the particular provisions of the ITA. In regard to the concept of beneficial
ownership, this study demonstrates that the provisions of the ITA that use the concept may
receive inconsistent application as between Québec and the common law provinces. The
inconsistency, or disharmony, is essentially due to 3 factors. First, there is considerable debate
in the common law as to the meaning of "beneficial ownership". Second, there is the unique
nature of Québec civil law which does not recognize the concept of beneficial ownership or
related concepts such as beneficial interest and beneficial entitlement. The third factor that
contributes to the potential inconsistent application of the provisions of the ITA in which
beneficial ownership is used is the current harmonization measure in subsection 248(3). The
application of this subsection could result in a person being deemed to be a beneficial owner of
property in circumstances that might not give rise to beneficial ownership of property under
common law. A discretionary beneficiary of a common law trust might not be considered to be
a beneficial owner of the trust property. Conversely, in relation to the Province of Québec, a
discretionary beneficiary may be deemed, by paragraph 248(3)(f), to be the beneficial owner of
trust property. For these reasons, there is a need to adopt a more systematic approach to the
treatment of ownership of property under the ITA, particularly with respect to the ownership of
property through a trust. A systematic approach to defining ownership in the ITA might involve,
inter alia, specifically defining the attributes of ownership, such as possession, use and risk, and
deeming property held in trust to be owned by the beneficiaries. The approach that has been
advanced is to develop neutral concepts, that, in effect, encompass the substantive effects of the
notion of "beneficial ownership" and "change in beneficial ownership" without actually
employing those concepts. The foundation of such neutral concepts could be based on the
requirement, in the appropriate contexts, that no person other than the transferor have any
absolute or contingent interest in the property, save and except for possession of nominal or
legal title. Under this approach, or a variation thereof, the tax policy objectives or concerns
underlying the various provisions of the ITA employing the concept of beneficial ownership
could be preserved while advancing the primary objective of harmonization to ensure that the
law is interpreted and applied uniformly throughout Canada.

[1] R.S.C. 1985 (5th Supp.) c.1, as amended (the "ITA"). Unless otherwise
indicated, all references are to the ITA.
[2] Laliberté v. Larue, [1931] S.C.R. 7 at 16. The facts in this case involve a transfer
of bondholder security to a trustee. When the transferor goes bankrupt, the issue of whether
ownership was transferred to the trustee arises.
[3] This objective was recognized by the Federal Court of Appeal in R. v.
Construction Bérou Inc., 99 DTC 5868 at 5870 (Fed. C.A.) [hereinafter Construction
Bérou].
[4] Ibid.
[5] B. HOVIUS & T.G. YOUDAN, The Law of Family Property (Toronto:
Carswell, 1991) at 264. See also A.H. OOSTERHOFF & E.E. GILLESE, Text,
Commentary and Cases on Trusts, (Toronto: Carswell, 1998) at 127.
[6] It is reasonable to qualify a person who is deemed to be "beneficially interested" in
a trust as a "beneficiary". It is acknowledged, however, that the definition of "beneficiary" in
section 108(1) includes a person who is beneficially interested in a trust and that the definition
applies only for purposes of subdivision k.
[7] D.W.M. WATERS, "The Nature of the Trust Beneficiary’s Interest" (1967) 45
Can. Bar Rev. 219 at 224.
[8] WATERS, D.W.M., Law of Trusts in Canada, (Toronto: Carswell, 1984) at chs.
25-26.
[9] Supra note 7 at 223.
[10] Ibid. at 225.
[11] Ibid. at 274.
[12] Ibid. at 275, 281.
[13] (1955) 55 DTC 1191, aff’g (1953) DTC 1227 [hereinafter Trans-Canada]. Note
that the effects of this decision have been reversed by statute in subsection 108(5).
[14] OOSTERHOFF & GILLESE, supra note 5 at 26, 28.
[15] Trans-Canada, supra note 13 at 1231.
[16] OOSTERHOFF & GILLESE, supra note 5 at 127.
[17] C. BROWN, "Canadian Bijuralism and the Income Tax Act : Concept of
Beneficial Ownership" (Draft Report No. 1) (May 15, 2002) Part II, Question 1(1) at 14-15
[hereinafter "Canadian Bijuralism and the Income Tax Act : Concept of Beneficial Ownership"].
[18] Technical Interpretation Letter 9830105, "Blind Trusts" (26 February 1999).
[19] Subsection 248(25).
[20] See subsection 108(1) "beneficiary".
[21] See note 7.
[22] R. v. Lagueux & Frères Inc., 74 DTC 6569 at 6572 (F.C.T.D.) [hereinafter
Lagueux].
[23] It is acknowledged that the analytical hurdle may not be entirely avoided because
the definition of "beneficially interested" in subsection 248(25) will also include persons who are
beneficially interested at common law.
[24] Interpretation Bulletin IT-437R, "Ownership of Property (Principal Residence)"
(21 February 1994) at para. 4.
[25] Interpretation Bulletin IT-170R, "Sale of Property – When Included in Income
Computation" (25 August 1980) at para. 8.
[26] Examples of beneficiaries with such a "sufficiently direct interest" include sole
beneficiaries of a fixed trust and beneficiaries of bare trusts.
[27] See note 16.
[28] See note 12.
[29] "Under a special [i.e., specific] power of appointment, the choice of appointees is
restricted by the donor of the power to a particular class…" OOSTERHOFF & GILLESE,
supra note 5 at 117.
[30] "Under a general power of appointment, the donee may appoint anyone in the
world." OOSTERHOFF & GILLESE, supra note 5 at 117.
[31] Department of Finance 2001 Technical Notes to subsections 73(1) to 73(1.02);
Technical Interpretation Letter 2000-0048735, "Power of Appointment Exercisable by Will"
(24 May 2001) [hereinafter TI 2000-0048735].
[32] Art. 1261 C.C.Q.
[33] Art. 1284 C.C.Q.
[34] Supra note 7 at 225.
[35] Art. 947 C.C.Q.
[36] It is implicit in art. 1119 C.C.Q. that ownership itself is a real right.
[37] Art. 1261 C.C.Q.
[38] Subsection 248(25) refers to the right of a beneficiary or person, whether
immediate or in the future, whether absolute or contingent or whether conditional on or subject
to the exercise of any discretion by any person or partnership. See also paragraph 248(3)(e)
which employs similar language with respect to the right to receive all or any part of the income
or capital in respect of certain property. The absence of such qualifying language in
subparagraph 248(3)(f)(iii) may signify Parliament’s intent to only deem a person having an
absolute right as a beneficiary to be a beneficial owner of trust property for income tax
purposes. See also paragraph 251(5)(b) with respect to "a right under a contract, in equity or
otherwise" and the definition of "beneficiary" in proposed subsection 94(1) which also uses the
expansive absolute or contingent language.
[39] Vern Krishna, The Fundamentals of Canadian Income Tax, Fifth Edition at
pages 66 and following.
[40] OOSTERHOFF & GILLESE, supra note 5 at 127.
[41] Ibid. at 154-155.
[42] G. FORTIN, "How the Province of Québec Absorbs the Concept of the Trust",
(1999) 18 Est. & Tr. J. 285 at 298.
[43] Ibid.
[44] Art. 1284 C.C.Q. See also FORTIN, ibid.
[45] See the discussion at Section 2.1.3
[46] Recall that subsection 248(25) refers to "any person or partnership that has any
right (whether immediate or future, whether absolute or contingent, or whether conditional on or
subject to the exercise of any discretion by any person or partnership)…" Arguably, it is more
certain that the default and discretionary beneficiaries enjoy a right contemplated in this
subsection than under subparagraphs 73(1.02)(b)(ii) and paragraph 107.4(1)(e).
[47] Technical Interpretation Letter, 9830105, "Blind Trusts" (26 February 1999).
[48] [1980] 2 S.C.R. 774 (SCC) [hereinafter Jodrey].
[49] S.N.S. 1972, c.17(the "Succession Duty Act"). See also Cowan v. Nova
Scotia (Minister of Finance) [1978] CTC 557 (SCNS).
[50] Additional support can be found in the definition of "specified shareholder" in
subsection 248(1), at paragraph (a) thereof, which deems the taxpayer to own shares of
corporations that are owned by a non arm’s length person.
[51] Subsection 19(5) "Canadian Newspaper" (e).
[52] Section 79.
[53] Paragraph 73(1.02)(ii).
[54] Paragraphs 85.1(2)(b) and 85.1(6)(b).
[55] Paragraph 107.4(1)(a).
[56] Subsection 248(1) "disposition" (e), (f) and (k).
[57] Subsection 19(5) "Canadian Newspaper" (e).
[58] Subsection 186(2).
[59] Art. 1261, 1284 C.C.Q.
[60] Subsection 248(3) is discussed at section 2.4, infra.
[61] See subsection 248(25). Note again, though, that in relation to Québec beneficial
interest gives rise to beneficiary status only because of a fiction created by the ITA. Certain
arrangements and institutions are deemed to be trusts and a person with an absolute or
contingent right to the income or capital from the property subject to the arrangement or
institution is deemed to be beneficially interested in the deemed trust. Furthermore, recall that
the subsection 108(1) definition of "beneficiary" includes, only for purposes of subdivision (k)
however, a person beneficially interested in a trust.
[62] See subsection 108(1).
[63] The issue is whether it is correct to qualify the usufructuary as a beneficiary having
regard to subsection 108(1) which defines beneficiary for purposes only of subdivision (k) as
including a person who is beneficially interested in a trust.
[64] G. FORTIN, supra note 43 at 292.
[65] Art. 1261 C.C.Q.
[66] See the discussion at Section 2.1.3.2 above.
[67] See, inter alia, Canada’s treaties with France, Germany, the UK, Brazil, China,
Japan and the US.
[68] Aiken Industries, Inc. v. Commissioner, 56 TC 925 (1971)[hereinafter Aiken
Industries].
[69] Case No. IAAC 65-86.
[70] International Tax Law Report, Editor Philip Baker of Grays Inn, Barrister
(U.K.).
[71] Construction Bérou, supra note 3 at 5870.
[72] "Canadian Bijuralism and the Income Tax Act: Concept of Beneficial Ownership",
supra note 17, Part II, Question 2(1) at 8.
[73] J. NITIKMAN, M.W.B. LOBSINGER, L.T. WONG & M. D. TEMPLETON,
"Current Cases" (2000) 48:1 Can. Tax J. 133 at 152.
[74] 69 DTC 5194 (Ex.Ct.) [hereinafter Wardean Drilling].
[75] 80 DTC 6184 (F.C.T.D.) [hereinafter Olympia].
[76] This interpretation bulletin has been cancelled by the Income Tax Technical News
No. 21, June 14, 2001.
[77] Construction Bérou, supra note 3 at 5870.
[78] Wardean Drilling, supra note 74 at 5198.
[79] Art. 1387, 1456 C.C.Q.
[80] See the definition of "disposition" in subsection 248(1). The problem with the
dissociation in the disposition definition is that, within the definition, reference is made to other
private law concepts that are undefined in the ITA. David G. DUFF, in "The Federal Income
Tax Act and Private Law in Canada: Complementarity, Dissociation, and Canadian Bijuralism"
(First Draft – Version 2) (July 9, 2002) discusses dissociation in more detail. He, though,
describes dissociation as dissociating a private law concept from the civil law of Québec, even
where the issue to be resolved arises therein, and instead using the concept’s common law
meaning. Where a Court engages in dissociation of that sort, the necessity of harmonization
becomes more evident. Dissociation, as it is used above, connotes removing a private law
concept from both civil and common law and entrenching a specific definition thereof for tax
purposes in the ITA.
[81] M.-P. ALLARD, "Effet rétroactif des obligations conditionelles en droit fiscal"
(2001) 49:5 Can. Tax J. 1338 at 1340 based on Lagueux, supra note 22. See also Technical
Interpretation Letter 2001-0066095, "Crédit-Bail" (10 May 2001).
[82] Construction Bérou, supra note 3 at 5873.
[83] TI 2000-0048735, supra note 31.
[84] M. JOLIN, "Les nouveaux types de fiducies et les possibilités de planification", in
Colloque no. 109, Les Fiducies, Association de planification fiscale et financière, May 22 and
23, 2001.
[85] C. BROWN, "Personal Trusts 2000: Taxation and Planning in the New
Millennium" Report of Proceedings of Fifty-Second Tax Conference, 2000 Tax Conference
(Toronto: Canadian Tax Foundation, 2001) 28:1 at 28:32 ff.
[86] Paragraph 104(4)(a.4).
[87] Subsection 70(5).
[88] Paragraph 107(1)(a).
[89] Catherine Brown shares this view. See "Canadian Bijuralism and the Income Tax
Act : Concept of Beneficial Ownership", supranote 17, Part II, Question 2(1) at 10.
[90] See the discussion at the text corresponding to footnote 80 and following.
[91] "Canadian Bijuralism and the Income Tax Act : Concept of Beneficial Ownership",
supranote 17, Part II, Question 2(1) at 11.
[92] OOSTERHOFF & GILLESE, supra note 5 at 127.
[93] OOSTERHOFF & GILLESE, supra note 5 at 127. See also HOVIUS &
YOUDAN, supra note 5 at 265.
[94] A similar solution would appear to apply in respect of insurer foreclosures [subs.
113(11.93)].
[95] See, for example, subparagraph 248(1) "disposition" paragraph (e).