2000 Ruling 1999-0015023 - XXXXXXXXXX - trust residency status

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

(i) Whether certain offshore trusts are resident in Canada where the trustee is a Canadian resident corporation which carries on its trustee functions through an offshore branch or branches and which delegates all the administrative functions except housekeeping activities to its foreign parent company;

(ii) Whether the administrative fees paid by the trustee to its foreign parent company who acts as the trust administrator are subject to tax in Canada.

Position:

(i) No ruling but only an opinion was given in this regard. Our opinion is that, provided the offshore trusts are established and operated in the manner described in the ruling letter and provided the resident status of the beneficiaries and the situs of the trust assets and their management are such as described in paragraph 8 of the ruling letter, the offshore trusts are considered not to be resident in Canada;

(ii) Not subject to tax in Canada

Reasons:

(i) In certain unique situations it is our administrative policy as described in paragraph 7 of IT-447 to consider the trusts to be resident in the jurisdiction of the offshore branch of the trustee if control and management of the trusts are exercised by that offshore branch.

(ii) The administration and management fees are exempt from tax in Canada because of the provisions of the Canada-XXXXXXXXXX Income Tax Convention.

XXXXXXXXXX
XXXXXXXXXX 1999-001502
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers.

XXXXXXXXXX tax affairs will be administered by the XXXXXXXXXX Tax Services Office and it will file its first income tax returns either at the XXXXXXXXXX Taxation Centre or the XXXXXXXXXX Taxation Centre. It has not yet assigned a federal tax account number.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(b) "Canco" means XXXXXXXXXX, a corporation XXXXXXXXXX under the law of XXXXXXXXXX;

(c) "Parentco" means XXXXXXXXXX;

(d) "Foreignco" means XXXXXXXXXX.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

1. Parentco is a company resident in XXXXXXXXXX for the purpose of the Canada-XXXXXXXXXX Income Tax Convention (the "Convention") and is a direct subsidiary of Foreignco. Neither Parentco nor Foreignco is a resident of Canada and neither Parentco nor the Foreignco has any branches or offices in Canada or any employees rendering services in Canada. Part of Parentco's ordinary, day-to-day business activities is the provision of management and administrative support services to offshore trusts for a fee.

2. Canco is a "private corporation' and a "taxable Canadian corporation" within the meaning of subsection 89(1). The authorized capital of Canco is $XXXXXXXXXX consisting of an unlimited number of shares divided into such classes as the directors may provide from time to time by bylaw. The issued and outstanding share capital of Canco consists of XXXXXXXXXX common shares having an aggregate adjusted cost base and paid-up capital of $XXXXXXXXXX. All the outstanding shares of Canco are owned by Parentco.

3. Canco was incorporated for the purpose of carrying on a business as a professional trustee, asset manager, protector, custodian, and executor outside of Canada. It has all the power of a trust company save and except the power to accept deposits from or lend money to the public.

4. The registered office of Canco is in XXXXXXXXXX.

5. To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

Proposed Transactions

6. The board of directors of Canco will consist of XXXXXXXXXX senior employees of Parentco all of whom are not resident in Canada: XXXXXXXXXX. All meetings of the board of directors will be held outside Canada and all decisions made by signed resolutions of the directors will be executed outside Canada. Decisions which need to be taken by a trustee or executor by law, or under the terms of a particular trust document or will, will be made by Canco at a meeting of its directors or a committee thereof held outside Canada, or by a Canco officer or employee located in a branch outside Canada.

7. All the activities of Canco will be carried on outside Canada except those described below. The only activities that Canco will conduct in Canada are administrative "housekeeping" activities involving its corporate, tax and regulatory filings. Although it may place records such as a copy of the incorporating act, the names of the shareholders, the stock held by each shareholder, the transfer register, and the names and addresses of the directors as well as the trust documents for each trust, for safekeeping by a law firm in Canada, it has no operating office in Canada. It will not conduct any trustee, promotional or marketing activities in Canada.

8. Canco will act as a trustee under trusts or estates which are outside Canada (individually referred to herein as an "Offshore Trust" and collectively as the "Offshore Trusts") in the following situations:

(a) by taking over the trustee functions of another trustee which is another corporation incorporated XXXXXXXXXX under the law of XXXXXXXXXX. The current trustee wishes to withdraw in favour of Canco.

(b) by acting as a trustee for new settlements settled by individuals who are not resident in Canada and who do not contemplate becoming resident in Canada.

In both of the above situations, Canco will act as a trustee or an executor of an Offshore Trust only in cases where the settlor or the testator is a non-resident of Canada. In addition, all or substantially all of the assets of each Offshore Trust are not assets having their situs in Canada. All or substantially all of the beneficiaries of each Offshore Trust which is a non-discretionary trust within the meaning assigned under subsection 17(15), whose beneficial interests in the Offshore Trust comprise all or substantially all of the value of all beneficial interests in the trust, are not and will not be resident in Canada. All of the beneficiaries of each Offshore Trust other than a non-discretionary trust are not and will not be resident in Canada.

9. The trust deeds of the Offshore Trusts will permit the appointment of one or more "Protectors" to assist in managing the affairs of the trusts. All Protectors, if and when they are appointed, will not be resident in Canada and all meetings and deliberations of the Protectors will take place outside Canada. The Protectors, if and when appointed, will meet each year outside Canada with Canco's board of directors to provide a report on the activities of the relevant trusts during the preceding year and to present, for the approval of the board of directors, a list of proposed projects and a budget for the coming year. Such proposals may be modified, accepted or rejected by the board of directors.

10. In carrying out its duties as trustee, Canco will act solely through its officers and employees and a trust administrator, all of whom will be non-resident of Canada and will carry their duties in connection with the administration of the Offshore Trusts outside Canada. In this regard, Canco will enter into a Trust Administration Agreement (the "Administration Agreement") with Parentco under which Parentco will act as a trust administrator by providing administrative services in connection with accounting and reporting functions, the custody of securities and other assets, and the collection and depositing of funds. All these administrative duties will be carried on outside Canada. Canco will pay Parentco fees for these services at normal commercial rates which will be reasonable in the circumstances and will not exceed those between parties dealing with each other at arm's length and which will be based on the value of the assets under administration, or on time spent. The identity of the Trust Administrator and the services provided will not influence the value of the assets under administration.

11. Canco or Parentco will enter into custody agreements with arm's length custodians who may include Canadian chartered banks or trust companies. In such cases, the custody of the assets of the Offshore Trusts will be confided to the offshore branches of such custodians.

12. None of Parentco, Canco, the Offshore Trusts and any other potential administrators of the Offshore Trusts will utilize the services of a Canadian resident investment advisor. All assets of the Offshore Trusts will be managed outside Canada.

13. The Offshore Trusts will not hold themselves out as being resident in Canada for the purpose of obtaining the benefits available to residents of Canada under any of Canada's international agreements pertaining to taxation.

Purpose of the Proposed Transactions

14. Canadian trust companies have established an international reputation for reliability and Canadian courts are considered a desirable forum for the resolution of disputes involving trusts, trustees and beneficiaries. Canada is perceived as a safe country in a time of international crisis and it is perceived that other jurisdictions are less likely to sequestrate property held by a Canadian trustee. For these reasons, Parentco desires the ability to offer to their clientele who are outside Canada the possibility of having entrusted assets held by a Canadian trust company.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:

The management and administration fees paid by Canco to Parentco as described in paragraph 10 above will be exempt from tax under the Act by virtue of Article 7 of the Convention.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding on the Canada Customs and Revenue Agency ("CCRA") provided that the proposed transactions are completed by XXXXXXXXXX.

This ruling is based on the Act in the present form and does not take into account amendments to the Act which, if enacted into law, could have an effect on the ruling provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above. In particular, we have not commented on any tax consequences relating to the custody fees, if any, in connection with the custody agreements referred to in paragraph 11 above.

Opinion

The CCRA's published position in paragraph 7 of Interpretation Bulletin IT-447 dated May 30, 1980 is that where management and control of a trust is exercised by a branch office of a trust company, the trust may be considered to be resident in the jurisdiction where the branch office is located even though the trust company itself is resident in Canada.

In our opinion, provided the Offshore Trusts are established and operated in the manner described in this letter, the Offshore Trusts will be considered to be persons who are not resident in Canada for the purposes of the Act.

As stated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, the opinion expressed above is not a ruling and is consequently not binding on the CCRA.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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