The Federal Court of Appeal (“FCA”) decision in Canada v. Vefghi Holding Corporation, 2025 FCA 143 provides the answer to a longstanding technical question, namely, the point in time governing the determination of “connected status” in respect of dividends received by a corporate beneficiary and payor corporation in a “trust sandwich” structure.
By way of background, it is a common planning technique for owner-managed corporations to employ a structure where common shares of an operating company (“Opco”) are owned by a discretionary inter vivos family trust (the “Trust”) with another corporation (“Benco”) included in the beneficiaries of that very same trust. These structures are often referred to (somewhat unimaginatively) as “trust sandwich” structures. The aim of these structures is to provide a mechanism to “purify” Opco in a tax deferred manner.
If Opco accumulates too much “non-active” cash or other passive investment assets it shares may not qualify as qualified small business corporation shares and accordingly may not be eligible for the lifetime capital gains exemption. To ensure this status a mechanism is required to remove the redundant cash from Opco. Having an individual shareholder of Opco receive dividends from the corporation would achieve this purpose however this would result in the loss of the deferral opportunity presented by the lower corporate tax rates.
The “trust sandwich” structure is designed to preserve this deferral opportunity while allowing for the movement of redundant assets out of Opco. To do so a dividend can be declared on the common shares of Opco held by the Trust which can then allocate and pay the dividend to Benco. Assuming, among other things, Opco makes the appropriate designation under 104(19) of the ITA, the dividend is deemed to be received by Benco on the share in fact owned by the trust in Benco’s taxation year in which includes the trust’s year end.