Trust Sandwich Tax Traps: Connectedness Is Tested At Trust Year-End

Overview

In Vefghi Holding Corp. v. Canada, 2025 FCA 143,¹ the Federal Court of Appeal (FCA) reversed the Tax Court of Canada's (TCC or the Tax Court) 2023 ruling and held that in the context of a trust-designated dividend under subsection 104(19) of the Income Tax Act (Canada) (the Act), the determination of whether the corporate beneficiary is "connected" to the payer corporation for Part IV tax purposes must be made at the end of the trust's taxation year, not on the date the trust receives the dividend, nor on any other day. The FCA arrived at this decision on the "trust sandwich" issue through a strict reading of subsection 104(19), where it determined that the designation could only be made at the trust's year-end, and only once the designation is made can the determination of connectedness be undertaken.