27 September 1996 External T.I. 9616675 - UNINCORPORATED BUSINESS TRUST ORGANIZATION

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:

tax liability of an "unincorporated business trust organization" (a term relevant for US tax administration)

Position:

taxed as a trust unless the relationship is actually one of agency

Reasons:

no provision in the Act to tax a trust other than as a trust. In Waters' "Law of Trusts in Canada", pgs444-449, he discusses the use of trusts to carry on businesses in Canada (not extensively used). While the trust must be examined carefully to ensure that the beneficiaries are not actually controlling the business, with the result that the trustee is actually acting as agent for a partnership. The portion of the US Internal Revenue Code quoted in the incoming letter, 301.7701 -4(b), clarifies that for US purposes, a business trust will be taxed as a corporation or partnership (see CCH Standard Fed Tax Rep,¶ 43890. In Canada, there is no provision to tax a trust as a corporation so that if an agency relationship exists, it would be taxed as a partnership.

A. Humenuk
XXXXXXXXXX							961667

September 27, 1996

Dear XXXXXXXXXX:

Re: XXXXXXXXXX

We are replying to your letter of April 15, 1996 to the Regina Tax Services Office which was forwarded to us for reply.

As we understand your question, you are seeking confirmation of the tax consequences applicable to the above noted unincorporated business trust organization and in particular, confirmation as to whether XXXXXXXXXX is required to have an Employer Identification Number or a Taxpayer Identification Number for the purpose of the administration of tax law in Canada. In this regard, we understand that Mr. Ackerman of the Regina Tax Services office has explained to you generally the circumstances under which these numbers are required.

In your conversation with Mr. Ackerman, you explained that

XXXXXXXXXX

but that no amount of income or capital of the trust is to be dispersed to the beneficiaries. Based on your research, it is your belief that XXXXXXXXXX has no Canadian tax liability or filing requirements since it is not a corporation, has no employees and is not required to file as a trust under U.S. law.

As you did not submit a copy of a trust deed or any other documentation relating to the creation of XXXXXXXXXX, the comments which follow are general in nature and are not binding on Revenue Canada, Customs, Excise and Taxation with respect to any particular arrangement, person or trust, including XXXXXXXXXX Furthermore, our comments apply solely in respect of tax payable under the Canadian Income Tax Act (ITA) and related Regulations thereto. Except as provided by treaty, laws imposed by a foreign jurisdiction, including the U.S. Internal Revenue Code, have no application with respect to the determination of income tax payable in Canada.

The rules relating to the taxation of trusts resident in Canada are generally found in sections 104 to 108 of the ITA. The enclosed Interpretation Bulletin IT-447 "Residence of a trust or estate", explains the criteria to be used in establishing the residence of a trust. As a resident of Canada, a trust is subject to income tax on its worldwide income under subsection 2(1) of the ITA. As explained in the attached copy of Interpretation Bulletin IT-420R3 "Non residents - Income Earned in Canada", a non-resident of Canada is subject to tax under section 115 of the ITA on taxable income earned in Canada.

As Canadian tax law does not have a regulation similar to that quoted in your letter concerning the classification of business trusts for U.S. tax purposes, the Canadian filing requirements set out in the enclosed "T3 Guide and Trust Return", also apply to a business trust. However, care must be taken to ensure that the essence of the arrangement purported to be a business trust includes a fiduciary relationship between the person holding the property (the "trustee") and the persons beneficially interested in that property (the "beneficiaries"). If the beneficiaries, as a group, have the ability to direct or control the manner in which the "trustee" carries on the business, then the arrangement may constitute a partnership with the "trustee" acting as the agent of the partnership. A partner's share of income from a partnership is included in that person's income under section 96 of the ITA. The enclosed copy of Interpretation Bulletin IT-81 "Partnerships -Income of Non-resident Partners", deals with non-resident partners of a partnership.

We trust that the above noted comments have clarified some of your concerns. If you have additional questions regarding the manner in which the income earned by XXXXXXXXXX is to be reported, please submit your request, along with a copy of any relevant documentation, to the Regina Tax Services office. Relevant documentation would include the trust deed, financial statements, the names and addresses of the trustees and beneficiaries, the relevant law under which the trust was constituted and its legal status under that law. However, you should note that it is our policy to respond to requests in the order in which they are received and that delays are sometimes unavoidable.

Yours truly,

T. Murphy
for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
Enclosures

c.c. Terry O'Hara

Regina Tax Services Office