Plain overview of when s. 94 applies (p. 1217)
- Except for limited exceptions regarding principally some commercial and charitable trusts, s. 94 essentially applies where a Canadian resident has made a contribution to a nonresident trust, or a nonresident trust has a Canadian resident beneficiary and another person has made a contribution to the trust while that other person was resident or within 60 months of being resident in Canada.
Engaging of s. 94(3) if small contribution by resident contributor (p. 1218)
- It is common for U.S. citizens to settle irrevocable trusts for the benefit of descendants and make gifts to those trusts in in amounts equal to the U.S. federal gift tax applicable exclusion amount (currently $13.61 million per donor), thereby allowing for gifts to be made tax-free for the benefit of the trusts’ beneficiaries while maintaining the flexibility of using a trust.
- However, the s. 94 rules potentially may apply to such a trust even if none of the beneficiaries was ever resident in Canada and the contributions to the trust by a resident contributor were immaterial.
- This would occur for instance if a U.S. resident and citizen who has never been resident in Canada established a discretionary U.S.-resident trust in 2010 for his U.S.-resident children and contributed an aggregate of $10 million to the trust over the following 10 years – but his brother, a U.S. citizen and Canadian resident, over the same 10-year period gave an aggregate of $100,000 cash to the trust to take advantage of his applicable credit (part of the $12.92 million amount) or his annual exclusion limit (currently, $18,000).
-
The adverse consequences of s. 94 applying can be ameliorated by making a resident portion election under s. 94(3)(f) – but this election cannot be made if the trust has already filed a return for a year in which it was deemed resident pursuant to s. 94.
Need in light of (b) of “contribution” that any subsequent gift of property, by a donee of a Canadian resident, to a non-resident trust, occurs independently (pp. 1218-1219)
- Given that the definition of “contribution” includes transfers and loans that form part of a series of transactions that includes a transfer or loan of property by another person to the relevant trust, to the extent the transfer or loan to the trust can reasonably be considered to be made “in respect of" the transfer or loan at issue, an outright gift by a Canadian resident to a nonresident donee should be appropriately documented and care should be taken that any subsequent dealing with the donated property by such donee, such as a transfer to a U.S. trust for the benefit of that individual, is independent from the original gift.
Use of s. 94(16) election to avoid FTC mismatch for grantor trust (pp. 1219 1222)
- No Canadian foreign tax credit is available to a U.S.-resident trust that is a grantor trust but is deemed to be a resident trust under s. 94 for the U.S. tax not paid by the trustee but instead paid by the grantor.
- However, this mismatch can potentially be addressed by having a resident contributor elect to have s. 94(16) apply to the trust.
- For example, if a U.S. citizen and Canadian resident who is the sole contributor to a U.S.-resident grantor trust, elects to have s. 94(16) apply, all the trust’s income will be allocated, and the foreign tax credit will be available, to the individual regarding such foreign income designated to that individual pursuant to s. 94(16)(c).
FTC mismatch as a result of application of s. 104(7.01) (p. 1220)
- Where a non-grantor trust that is subject to s. 94 makes a distribution to a beneficiary, which has the effect of shifting income of the trust to that beneficiary, so that the beneficiary pays the U.S. tax on such income, the trust often will be precluded by s. 104(7.01) from taking an s. 104(6) deduction for such distribution if, generally speaking, the income is from a Canadian source or is an amount (subject to exceptions) that would have been subject to Part XIII tax if the trust were not deemed to be resident in Canada.
- Thus, no foreign tax credit will be available due to the income being earned and Canadian tax imposed at the trust level, and the U.S. tax being payable at the beneficiary level.
Example of application of s. 94(2)(k) (p. 1219)
- S. 94(2)(k) could, for example, apply if a Canadian resident asks or directs a nonresident to settle a nonresident trust or otherwise transfer or lend property to the trust, with a view to avoiding the trust being deemed resident in Canada – so that there would be a deemed joint contribution, and a resulting deemed contribution by the Canadian resident.
Example of application of s. 94(2)(a) (p. 1219)
- S. 94(2)(a) would apply, for instance, to a transfer of property to a corporation owned by a trust, where this increased the value of the corporation’s shares.
Email this Content