23 November 1999 External T.I. 9904095 - MEANING OF EXEMPT FOR PURPOSE OF 233.2

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: Meaning of "exempt trust" and whether a trust resident in Guernsey that is not subject to tax in that country because it doesn't have any income sourced in Guernsey nor does it have any beneficiaries resident in Guernsey is exempt from tax.

Position: Trust is not an exempt trust within the meaning of subsection 233.2(1).

Reasons: The requirement in (b)(ii) of the definition of exempt trust requires the trust to be exempt from taxation for all income taxed under the laws of the country of which it is resident. While the trust may not have income sourced in Guernsey, it is not exempt from income tax on such income if it had any and thus does not meet the requirement in (b)(ii) of that definition.

XXXXXXXXXX 990409
A. Humenuk
Attention: XXXXXXXXXX

November 23, 1999

Dear Sirs:

Re: Information Reporting and the Application of Subsection 233.2 of the Act

This is in reply to your letter of February 1, 1999, in which you describe the circumstances surrounding a particular trust and ask whether the trust is an "exempt trust" within the meaning of subsection 233.2(1) of the Canadian Income Tax Act (the "Act"). Our understanding of the relevant facts can be summarized as follows:

1. A corporation ("Employer") with employees working in various countries has established an employee benefit plan as defined in subsection 248(1) of the Act for some of its employees and some of the employees of its subsidiaries, including a subsidiary resident in Canada.

2. The majority of employees covered by this employee benefit plan are not resident in Canada. To the extent that the Employer or any of its subsidiaries has eligible employees resident in Guernsey, such employees are specifically excluded from coverage under this employee benefit plan.

3. The employee benefit plan is administered by a trust resident in Guernsey. The trust receives contributions from the Employer and from its subsidiaries in respect of the employees covered by the plan and uses such funds to purchase shares of the Employer. Your letter does not provide any detail as to how the benefits from this plan are conferred on the employees.

The situation described in your letter appears to relate to an actual fact situation. This Directorate will provide a technical interpretation concerning the provisions of the Act and Regulations but not with respect to specific factual transactions. Written confirmation of the tax implications inherent in proposed transactions are only given where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R3. When a completed transaction is involved, the inquiry should be addressed to your local tax services office and include all relevant documentation (including company names and identification numbers). We can, however, provide the following general comments concerning the provisions of the Act, in accordance with the above-mentioned Information Circular, which are not binding on the Canada Customs and Revenue Agency (CCRA).

In order to qualify under paragraph (b) of the definition of "exempt trust" in subsection 233.2(1) of the Act, four conditions must be met. For the purpose of your enquiry, it is assumed that the conditions in subparagraphs (b)(iii) and (iv) of the definition of "exempt trust" in subsection 233.2(1) of the Act are met. As the trust is resident in Guernsey and Guernsey imposes an income tax on its residents, the condition in subparagraph (b)(i) of that definition is met. In order to meet the condition in subparagraph (b)(ii) of that definition, a trust must be exempt from the payment of income tax to the government of a country described in subparagraph (b)(i) of which it is resident. A resident in Guernsey is generally subject to taxation on the resident's worldwide income. You note that the liability for the payment of such tax by a trust resident in Guernsey is limited to the amount payable in respect of the income arising from a source in Guernsey with the exception of interest earned on deposits with a bank that is resident in Guernsey, provided that all of the income of a trust is payable to beneficiaries that are not resident in Guernsey.

A person is not exempt from the payment of income tax solely by reason of not having any income that is subject to tax. As you pointed out in your letter, the word "exempt" means "free or released from some liability or requirement to which others are subject". As the amount of income tax payable by a person varies according to the amount of income realized by that person, a person with no income from a source that is subject to income tax (or a person who has incurred deductible losses in excess of its income which is subject to tax) will not be required to pay an amount of income tax. However, such a person has not been released from an obligation to which others with the same income are subject.

Since the income tax payable to the government of Guernsey includes a tax on a resident's income earned in Guernsey (other than bank interest) and the trust described in your letter is not exempt from the payment of income tax on such income, it is our view that such a trust would not be an "exempt trust" within the meaning of subsection 233.2(1) of the Act. Even though such a trust may have other income which is exempt from taxation in Guernsey and may not have any income that is subject to tax in Guernsey, such a trust cannot be said to be fully exempt from the payment of the income tax imposed on the residents of Guernsey.

The above noted comments should not be construed as providing comments on the income tax laws imposed by the government of Guernsey or the CCRA's views on whether the conditions in subparagraphs (b)(iii) and (iv) of the definition of "exempt trust" in subsection 233.2(1) of the Act are met with respect to any particular trust.

We trust our comments have clarified our position in this matter.

Yours truly,

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