TSG (Tax Specialist Group) - Change of Control - Trustees (Change of Control)

Change of Control - Trustees

Subject: Change of Control
Number: 05-28
Date: 10/28/2005

A change of trustees could result in a change of control

The CRA recently issued Technical Interpretation 2004-0087761E dealing with whether control of a corporation changes when the trustee of a trust holding the shares of that corporation is replaced. In the situation discussed, there were three unrelated trustees of an inter vivos trust that owned shares in a private company. According to the terms of the trust, a majority of trustees would make all decisions.

The technical interpretation dealt with the scenario where one trustee resigned and was replaced by another (unrelated) trustee. The CRA concluded that all three trustees constituted a group that controlled the company. Consequently, in the CRA's view, any change of trustee would result in a new group controlling the company and the stop-loss rules on change of control would apply.

The CRA added that, if the trustees were related and a related person replaced one trustee, the stop-loss rules on a change of control would not apply, by virtue of sub-paragraph 256(7)(a)(i).

This could be a significant ruling for both inter vivos trusts and estates. It is common for inter vivos trusts to have three trustees. Often, one or two of the trustees are at arm's length to the manager of the company. The CRA view means that, if one trustee were to resign or be replaced, any losses of the company could be lost because of the change of control rules.

In the case of an estate with arm's length trustees/executors, a change in any of the executors or trustees could result in a change of control, which could have a significant effect if the estate owned a company.

This CRA view does not appear to be in accordance with the intent of the change of control rules. However, until the Department of Finance acknowledges this issue and changes the rules, careful consideration and analysis is required when there is a change of trustee.

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