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.
Principal Issues: General comments to confirm taxpayer's understanding of applicability of ss. 107(5) & 107(2) in the situation where a non-resident trust distributes property to a non-resident beneficiary.
Position: Provided the property is as described in 128.1(4)(b)(i) to (iii) or is shares of a nro investment corporation
107(5) will not apply under either current or proposed legislation.
Reasons: wording of legislation--existing & provided enacted as proposed....a non-resident trust can distribute ppty (described in 128.1 (4)(b)(i) to (iii) or that is shares of a nro investment corporation) to a non-resident beneficiary without 107(5) applying. Where 107(5) does not apply ...107(2) will apply provided other excepting provisions do not apply (ie. 107(4))
XXXXXXXXXX
2012-044274
Lena Holloway, CA
January 4, 2013
Attention: XXXXXXXXXX
Re: Interpretation Request regarding subsections 107(2) and 107(5) of the Income Tax Act (the "Act")
This is in reply to your submission of March 30, 2012 in which you requested a technical interpretation of the applicability of subsections 107(2) and 107(5) of the Act. In particular you had enquired about the proposed amendments to subsection 107(5). The following amendments to subsection 107(5) of the Act were proposed in the Notice of Ways and Means Motion dated October 19, 2012, which when enacted will be applicable to distributions made after February 27, 2004:
Subsection (2.1) applies (and subsection (2) does not apply) in respect of a distribution of a property (other than a share of the capital stock of a non-resident-owned investment corporation or property described in any of subparagraphs 128.1(4)(b)(i) to (iii)) by a trust to a non-resident taxpayer (including a partnership other than a Canadian partnership) in satisfaction of all or part of the taxpayer's capital interest in the trust.
You had asked if the proposed amendment to subsection 107(5) of the Act could be interpreted to mean that distributions of property described in subparagraphs 128.1(4)(b)(i) to (iii) by a non-resident trust to a non-resident are subject to the application of subsection 107(2) and not subsection 107(2.1)?
You also asked that we confirm your understanding of the current version of subsection 107(5). It is your opinion that if property transferred by a non-resident trust to a non-resident beneficiary is a property described in any of subparagraphs 128.1(4)(b)(i) to (iii) then the transfer would be subject to the application of subsection 107(2), and the property would be distributed from the non-resident trust to the non-resident beneficiary at cost.
Our Comments
Under the proposed amendments to the Act, subsection 107(5) provides that subsection 107(2.1) will apply rather than subsection 107(2) whenever property (other than shares of the capital stock of a non-resident owned investment corporation or property described in subparagraphs 128.1(4)(b)(i) to (iii)) is transferred from either a non-resident trust or a Canadian resident trust to a non-resident beneficiary. Under current legislation, subsection 107(5) provides that subsection 107(2.1) is not applicable (and therefore subsection 107(2) is applicable if the conditions therein are met and subsection 107(4.1) is not applicable) where a Canadian resident trust makes a distribution of shares of the capital stock of a non-resident owned investment corporation or property described in subparagraphs 128.1(4)(b)(i) to (iii) to a non-resident beneficiary. The current wording of subsection 107(5) does not apply to any distribution made by a non-resident trust. Therefore, under current legislation where property is distributed by a non-resident trust to a beneficiary, subsection 107(2) would apply regardless of the type of property distributed.
In summary, we agree with your conclusion that where property distributed by a non-resident trust is either shares of the capital stock of a non-resident owned investment corporation or property described in subparagraphs 128.1(4)(b)(i) to (iii), under either the currently enacted version or the proposed amendments to subsection 107(5), subsection 107(2) of the Act would apply to the distribution (if the conditions therein are met and subsection 107(4.1) is not applicable).
As noted above the new legislation when enacted is applicable to all distributions made after February 27, 2004.
We trust the above comments will be of some assistance.
Yours truly,
Phillip Kohnen
Manager
Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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