Canada: Variation Of Trust To Address Deemed Disposition

Pursuant to the Income Tax Act, an inter vivos trust is deemed to dispose of its capital property at fair market value on the 21st anniversary of its date of settlement and each 21st anniversary thereafter. To avoid the deemed disposition, a common planning step is to have the trust distribute and transfer appreciated capital property to the capital beneficiaries before the 21st anniversary. What happens, however, if the trust provides no authority or discretion to encroach on capital and distribute at this time?

This was the situation in Eaton v. Eaton-Kent 2013 ONSC 7985; the trustees addressed this issue by applying to the court to amend the trust under the Variation of Trusts Act. By court order, the trust was varied to add administrative and discretionary powers so that a reorganization could be implemented, leaving all beneficiaries economically whole and accelerating the distribution of capital. In addition, the trustees were empowered to require that a shareholders' agreement, acceptable to them, be entered into before any shares were distributed. (Although the trust deed contained an amendment clause, the trustees chose not to rely on it.)

In 1922, Harold Fishleigh, settled a trust for the benefit of his issue. The terms of the trust provided that Harold's two children (Wayne and Diana) were entitled to the income for life in equal shares. On the death of the first to die of Wayne and Diana, 50 percent of the net income was to be paid to the issue of the deceased beneficiary in equal shares per stirpes; upon the last to die of Wayne and Diana, the capital of the trust was to be distributed to the grandchildren on a per stirpes basis. In 2013, Wayne and Diana were still alive and the 21st anniversary was imminent. There was no provision for encroachment on capital during their lifetimes. The trust's main asset was 57 percent of the common shares of a private real estate corporation and these shares had a significant inherent gain. The remaining common shares of the corporation were held by Wayne, Diana, and their respective children.

The evidence indicated that the corporation declared dividends annually on its common shares. Wayne, Diana and their respective children received dividends by virtue of their direct ownership of shares. Wayne and Diana also received dividends as income beneficiaries of the trust.

The reorganization approved by the court involved the creation of two classes of preferred shares (class A preferred and class B preferred) and four equivalent classes of common shares (effectively one class for each of Diana, Wayne, Diana's children and Wayne's children). Diana, Wayne, Diana's children, and Wayne's children exchanged their respective common shares for a separate class of common shares. The trust exchanged its common shares for two separate classes of common shares and two classes of preferred shares. The proposal was that the trust would distribute one class of common shares to Diana's children and the other class of common shares to Wayne's children. Therefore, on its 21st anniversary, the trust would only hold the two classes of preferred shares.

The class A preferred shares held by the trust were non-voting, non-participating and provided for an annual aggregate six figure dividend. It appears that this amount was intended to equal the annual income distribution that Wayne and Diana received as income beneficiaries before the reorganization by virtue of the trust's ownership of common shares. The proposed shareholders' agreement included a covenant to declare this dividend. There was also a covenant to declare a dividend in a specified amount on each of the four classes of common shares, which appeared to be based on the dividend amount received by the particular person in the year preceding the reorganization. These dividend covenants were to continue until the death of both Wayne and Diana. In this manner, it appears that all beneficiaries were kept economically whole as they would receive the same dividends that they received in the year preceding the reorganization.

The class B preferred shares held by the trust allowed the trust to continue to control the corporation.

The trustees applied for an advance income tax ruling and asked for confirmation that the variation to accelerate the distribution of capital would not result in a resettlement of the trust, a deemed disposition of property held by the trust, or the disposition of an income or capital interest of any beneficiary of the trust. Canada Revenue Agency (CRA) ruled favourably in this respect.

On the 21st anniversary, the trust would have been subject to a deemed disposition at fair market value of the class A preferred shares and class B preferred shares. It appears to have been recognized that there was an inherent gain in respect of the class A preferred shares based on the fixed $1 per share redemption value. The class B preferred shares were non-participating voting shares with no dividend rights and a nominal redemption value, but they represented voting control of the corporation. A ruling was requested that the deemed disposition of these shares would not result in tax liability, but the CRA declined to rule because the matter was one of valuation. The valuation of so-called thin voting shares has been the subject of commentary in recent years, and the CRA's response has not been entirely satisfactory, as is the case here, where it declined to rule.

Originally published by STEP Inside, May 2014, Volume 13 No. 2

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.