Tax Tip[] AOC

Acquisition of Control – Choose Your Trustees Carefully

“It is uncertain whether the CRA’s policy is correct, as it has not been challenged in court.”

Acquisition of control of a corporation can trigger a number of negative tax consequences, such as a deemed year-end, denial of loss carryforwards, and denial of various other carryforwards of deductions and credits.

It is generally understood that there is no acquisition of control where the shares of the corporation are received by the estate of the controlling shareholder on death. This rule applies whether or not the estate’s executors (sometimes referred to as estate trustees or administrators) are related to the deceased shareholder. However, where controlling shares of the corporation are transferred from an estate to a testamentary trust (which is a trust created in one’s Will, separate from the estate itself), there will be an acquisition of control of the corporation unless all the trustees of the testamentary trust are related to the deceased shareholder. On the transfer from either the estate or the testamentary trust to a beneficiary, there is no acquisition of control provided the beneficiary was related to the deceased shareholder.

Where, in the course of administering either the estate or the testamentary trust, an executor or a trustee is replaced due to either death or incapacity, the CRA’s administrative policy is that there is no acquisition of control of a corporation controlled by the trust. However, where there is a change of an executor or a trustee for other reasons (such as removal due to disagreement or voluntary resignation), and the newly-appointed executor or trustee is unrelated to the deceased shareholder, the CRA’s administrative policy is that there is an acquisition of control.

The CRA has announced that it is considering withdrawing its current administrative position and may begin taking the view that a change of control occurs where there is a change of trustees for any reason (including death or incapacity of a trustee) unless the replacement trustee is related to the deceased shareholder.

This problem is not limited to testamentary trusts. Replacement or appointment of trustees in an inter-vivos trust (such as one used in an estate freeze) can also cause an unintended acquisition of control.

It is uncertain whether the CRA’s policy is correct, as it has not been challenged in court. However, the CRA’s views must be considered in any planning involving trusts or estates.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Timing of Acquisition of Control

“The failure to elect out of subsection 256(9) can result in unintended results.”

Subsection 256(9) of the Income Tax Act is an often overlooked provision that deems control of a corporation to take place at the beginning of the day in which an acquisition of control occurs (even when the acquisition occurs later in the day). Corporations can elect out of this default timing and have the acquisition of control deemed to occur immediately prior to the actual acquisition of control. The election is to be made with the corporation’s tax return for the taxation year ending immediately preceding the acquisition of control.

The failure to elect out of subsection 256(9) can result in unintended results, both positive and negative.

For example, where an individual sells shares that would otherwise be qualifying small business corporation (“QSBC”) shares to a non-resident at the close of business on say, November 30th, subsection 256(9) could deem the non-resident to have acquired control of the private company at the beginning of November 30th. The result would be, technically, the sale by the taxpayer of a company that was not a QSBC at the close of business on November 30th. An election opting out of subsection 256(9) would solve this problem.

This interpretation has been confirmed by the CRA in a technical interpretation (2006-0214781E5).

Unfortunately, the CRA is not inclined to take this view when the results favour the taxpayer. In La Survivance v. R (2006 FCA 129), a public company sold its wholly-owned subsidiary to a private company at a loss. No election out of subsection 256(9) was made. Accordingly, the purchaser was deemed to have acquired the subsidiary at the beginning of the day. When the sale occurred later that same day, the Federal Court of Appeal confirmed that the subsidiary was deemed to be a small business corporation at the time of sale and the vendor’s capital loss qualified as a business investment loss.

Even after the court’s decision, the CRA has stated that it will continue to deny business investment losses in such cases.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.