Dividend Allocations to a Corporate Beneficiary Subject to Part IV Tax in a Share Sale Transaction

December 11, 2018


In Canada Revenue Agency (“CRA“) Technical Interpretation 2016-0647621E5, June 3, 2016, “Part IV Income Tax – Dividend Paid to a Corporate Trust Beneficiary”, the CRA held that Part IV tax would apply on an allocation of dividends received by a family trust (“Trust“), from an operating company (“Opco“), to a corporate beneficiary (“Holdco“) of the Trust, where the Trust sold all of its shares of Opco in the year.


The CRA considered the following facts:

  • Opco and Holdco are both Canadian-controlled private corporations.
  • Opco is wholly-owned by the Trust.
  • Holdco is a beneficiary of the Trust.
  • Opco has a May 31 year-end.
  • Holdco and the Trust have a December 31 year-end.
  • On May 31, Opco paid a $10,000 dividend to the Trust.
  • On May 31, the Trust distributed the $10,000 to Holdco pursuant to subsection 104(19) of the Income Tax Act (Canada) (the “ITA“).
  • Opco did not receive any refund of RDTOH for its taxation year.
  • On May 31, Opco and Holdco are “connected” pursuant to paragraph 186(4)(a) of the ITA.
  • On June 1, the Trust sold all of its shares of Opco to a third party.


The CRA was asked whether Holdco would be subject to Part IV tax on the facts at issue, and whether the CRA’s answer would be different if the Trust distributed the $10,000 on June 30 (instead of May 31).


The CRA confirmed that Part IV tax would apply whether the Trust distributed the $10,000 on May 31 or June 30.


For subsection 104(19) of the ITA to apply, a trust must be resident in Canada “throughout” the year. The CRA stated that an amount received by a beneficiary of a trust pursuant to subsection 104(19) cannot be deemed a dividend received by the beneficiary until the trust’s year-end – that is, on December 31. The CRA’s view is based on the rationale that the determination of a trust’s residency throughout the year, as well as the attribution of a dividend, cannot be made prior to the trust’s year-end. The CRA further stated that the relevant time for determining whether a dividend was received by a corporate beneficiary from a “connected” corporation is not at the time the dividend is paid, but rather, at the time the dividend is deemed to be received by the corporate beneficiary, which necessarily occurs at December 31 (the trust’s year-end). Therefore, the CRA concluded that Holdco would be deemed to receive the dividend as of December 31, at a time that Opco and Holdco would no longer be “connected” corporations as a result of the sale by the Trust of its shares of Opco to a third-party. Accordingly, the CRA held that Holdco would be liable to pay Part IV tax on the dividend attributed to it pursuant to subsection 104(19) of the ITA.

Lesson to be learned

It is not uncommon for safe income dividends to be paid as part of a pre-sale tax reorganization to purify an operating company for capital gains exemption purposes. Careful consideration must be given by tax advisors and counsel to structure such planning to ensure no unexpected taxes arise.

Related Expertise

Corporate Commercial