Case information

Taxation — Income tax — When determination to be made of whether two corporations are connected for the purposes of Part IV of the Income Tax Act when one corporation pays a dividend to a trust that allocates the dividend to a beneficiary corporation and makes a designation under s. 104(19) of the Act to deem the dividend as having been received by the beneficiary corporation — Income Tax Act, R.S.C. 1985, c. 1 (5th Supp), ss. 104(19), 186(1)(a), 186(4).

Case summaries are prepared by the Office of the Registrar of the Supreme Court of Canada (Law Branch). Please note that summaries are not provided to the Judges of the Court. They are placed on the Court file and website for information purposes only.

The applicants are not related corporations but engaged in transactions that led the Minister of National Revenue to assess them for tax under Part IV of the Income Tax Act (the “Act”). The Part IV tax was assessed on deemed dividends received by the applicants in their capacity as beneficiaries of trusts that owned the shares on which dividends were paid. The corporations paying the dividends were “connected” with the applicant corporations within the meaning of Part IV at the time the transactions occurred, but ceased to be so controlled prior to the trust’s year-end. A corporation receiving a dividend from a payor corporation to which it is connected is not liable for Part IV tax. The parties stated a question to the Tax Court to determine the point in time at which connectedness is determined for the purpose of Part IV.

The Tax Court judge determined that the connectedness of the relevant corporations is determined on the date the relevant trust receives the dividend from the payor corporation, unless the recipient corporation’s taxation year-end precedes that of the trust’s, in which case connectedness is determined in the subsequent taxation year of the recipient corporation.

The Federal Court of Appeal allowed the Minister’s appeal, holding that the words of s. 104(19) of the Act could not bear this dual interpretation. The connectedness of the relevant corporations is determined at the relevant trust’s taxation year-end, even if this appears to run contrary to the purpose of Part IV. In the result, both applicants were therefore liable for Part IV tax.