//
Continuity of shareholding of shares owned by trustees

A company can only carry forward imputation credits where at least 66% continuity of shareholding is maintained.  The policy behind this is to limit the availability of imptation credits to the shareholders who bore the tax liability that gave rise to the credit.

Where continuity is breached, any imputation credits that are not attached to a dividend paid prior to the loss of continuity will be lost.

However, where a change in shareholding occurs as a result of a change in trustee, special rules provide that there will not be a loss of continuity for tax purposes unless the anti-avoidance provision applies and the change of shareholding has the effect of defeating the continuity rules.

Resettlement

A resettlement, whereby the assets of one trust (including any shares) are resettled onto a new trust, will give rise to a breach of continuity even if there is no change in the class of beneficiaries. 

Anti-avoidance provision

A change of beneficiary will not cause a loss of continuity.  However, where a change in beneficiary occurs under an arrangement that has the purpose of avoiding the continuity rules, a specific anti-avoidance provision provides that a deemed disposition and reacquisition occurs for tax purposes that has the effect of causing a loss of continuity.  A change of beneficiaries could could comprise an arrangement that has the purpose of avoiding the continuity rules if the beneficiaries who will effectively enjoy the imputation credits are not the beneficiaries who were subject to the tax liability that gave rise to the credits.  In this regard it is noted that although the focus is on the beneficiaries when applying the test, at law it is the trustee shareholder that enjoys the imptation credits at law.

Continuity provisions also apply to losses

To carry forward losses a company must maintain a minimum 49% continuity of ownership.  As trustees are treated as a notional person for the purposes of the continuity provisions, a change of trustee will not, by itself, lead to a loss of continuity.  However, as there are anti-avoidance provisions and exceptions to the “notional person” provisions, care is required to establish whether any tax consequences might arise from the appointment and removal of trustees.

References:

  • Income Tax Act 2007, s GB 5, YC 9
  • Vicki Ammundsen, Taxation of Trusts, ed 2 (2011), chapter 17

Discussion

9 thoughts on “Continuity of shareholding of shares owned by trustees

  1. Regarding paragraph below:

    Continuity provisions also apply to losses

    To carry forward losses a company must maintain a minimum 49% continuity of ownership. Unlike the position with imputation credits, these rules are not modified in respect of trustee shareholders.

    Does this therefore mean that if there is a change in trustee it will affect loss of continuity regarding tax losses?

    Thanks

    Posted by Louise Amundsen | May 29, 2012, 1:15 pm
    • Thanks for your question Louise. The continuity provisions that apply for imputation credits and tax losses are dealt with separately in the legislation. However, s YC 9(1), which provides that trustees are treated as a “notional single person” applies to both continuity provisions (see s YA 1 definition “continuity provisions”). This means that provided an avoidance provisions doesn’t apply (eg s. GB 5) then a change of trustee will not, by itself, affect continuity regarding tax losses. That said, care is still required as the ambit of the avoidance provisions, and the exception to s YC 9(1) in s YC(9)2, are wide.

      Posted by vickiammundsen | May 29, 2012, 11:51 pm
  2. In the case where a married couple are the trustees and beneficiaries (along with their child) of a family trust that owns a 67% share in a company that has tax losses carried forward, and they divorce and the man wants to buy out the former wife and remove her as a trustee/or she resigns and is no longer a beneficiary also – how can this be done without losing the continuity

    Posted by Dale | November 12, 2013, 4:33 pm
    • Continuity will not be lost only becuase there is a change of trustee. Further, subject to the anti-avoidance provisions (see below) a change of beneficiary will not cause a loss of continuity.

      In the circumstances that you describe it would be important to consider whether the change of shareholding has the effect of defeating the continuity rules such that the anti-avoidance provisions could apply. Note that although there are special income tax rules that apply to relationship property splits to ensure the result is generally tax neutral, these provisions do not apply when the property is held by the parties to the relationship as trustees, rather than personally.

      Posted by vickiammundsen | November 19, 2013, 9:13 am
  3. OK, so given that the trustees own the assets of the family trust, and both trustees are settlors and ex married couple, how should the ex-wife be paid out so to speak. It is proposed that an annual non-taxable capital payment be made over the next 12 years from myself to her however I don’t own the assets personally and neither does she, they are owned as the trustees……and if she is removed/resigns as trustee and no longer a beneficiary, the Family Trust cannot distribute funds to her either is my understanding? Alternatively, if the trust assets are resettled this could breach the continuity rule? Any suggestions well received, thanks

    Posted by Dale | November 19, 2013, 2:23 pm
    • You raise a number of issues. A trust was settled for the benefit of the beneficairies. Now that the settlors’ marriage is over the trustees want to divide up the trust’s assets in the same way as relationship property assets might be. The difficulty is that there are no comprable tax provisions and no necessary symetry. Keeping in mind the fact that a loss of continuity is often only a matter of timing, or that smaller changes in shareholding will not affect continuity, if there is still a desire on the part of the trustees to make provision for your former wife, the simplest solution might be for her to remain, or to be re-appointed, as a beneficiry of the trust (presuming a power to do so).

      Posted by vickiammundsen | November 20, 2013, 9:58 am
  4. Interesting commentary. Based on the above scenario with Dale do you think there’s any way of effecting a transfer from the family trust to the parties without having her remain on the trust as a beneficiary or trustee and not breaching the continuity rules or GB 5? Lets assume that a transfer over 50% is required and it’d be advantageous for both parties to not breach the continuity rules. I was thinking of relying on FB 10 or something similar.

    Posted by GustavoMcKeurten | June 26, 2014, 6:12 pm
  5. If a company has two individual shareholders owning 50 shares each then transfers 98 shares to a trust where the same two individuals are trustees (along with another independent trustee) and the same two individuals are beneficiaries, is continutiy lost? i.e. is there a look through test and if yes is it the trustees or the beneficiaries that applies?

    Posted by Sharlene | April 1, 2015, 12:45 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: