Recently, I encountered a scenario where the trustees of a family trust were planning an allocation of proceeds from a share sale transaction to the beneficiaries of trust using the lifetime capital gains exemption but it appeared that the allocated amounts would physically end up in the hands of other individuals including the trustees of the trust. It appeared in fact that certain beneficiaries would only see their allocation on paper. I am told by fellow professionals that this is not an unusual occurrence.

If the Canada Revenue Agency (“CRA”) were to audit the trust and the share transaction, the CRA would likely review the flow of funds in some detail to determine if the allocations made to the beneficiaries were in fact received by the beneficiaries i.e. look for proof of receipt from bank records etc. In the event, the CRA discovers that the allocated proceeds were received by other than the designated beneficiaries, it is highly likely the CRA will re-assess the actual recipient of funds on the basis that they actually benefited from the allocations.

In late 2017, I wrote about these issues as contained in a case before the Tax Court of Canada trust-allocations-gifts-family-members 

In that case, Justice Ouimet concluded that the series of transactions entered into by the trustees which allocated the proceeds of a share sale to various beneficiaries but it appeared that the funds ended up back with the owner/trustee amounted to a”sham”, and the CRA was correct in issuing re-assessments accordingly and was permitted to do so, even though the reassessments were outside the normal re-assessment period. Since my blog in 2017, this case went to the Federal Court of Appeal (Daniel Laplante v. the Queen 2018 CAF 193). Justice Boivin of that Court found that Justice Ouimet did not err in his decision, that M. Laplante was in fact the true beneficiary of the share sale proceeds, not the beneficiaries reflected in the legal documents to designate the trust allocations.

Notwithstanding the recent changes to tax legislation for small business owners and their families, capital gain splitting as these schemes are often called continues to be a valuable tool for tax planning purposes. However, the beneficiaries of a trust who are designated an allocation of proceeds from a share sale and stand to benefit from applying the capital gains exemption to minimize tax, must actually receive and keep the proceeds.

Happy Reading.