Date: 20071018
Docket: T-2206-06
Citation: 2007 FC 1071
BETWEEN:
HUGH WILLIAM PERRY, IN HIS
CAPACITY
OF TRUSTEE OF THE 2005 ROBERT
JULIEN FAMILY
DELAWARE DYNASTY
TRUST
Applicant
and
CANADA (THE MINISTER OF NATIONAL
REVENUE)
and
CANADA
REVENUE AGENCY
Respondents
REASONS FOR
ORDER
GIBSON J.
INTRODUCTION
AND BACKGROUND
[1]
By
letter dated the 23rd of February, 2005, counsel for the Applicant
wrote to the Canada Revenue Agency, Director, Competent Authority Services
Division, International Tax Directorate, Compliance Programs Branch. Counsel
requested that the residence of the 2005 Robert Julien Family Delaware Dynasty
Trust (the “Applicant Trust”) be settled in accordance with paragraph 4 of Article
IV of the Convention Between Canada and The United States of America
With Respect to Taxes on Income and on Capital signed
on the 26th of September, 1980, as amended by the protocols signed
on the 14th of June, 1983,
the 28th of March, 1984,
the 17th of March, 1995
and the 29th of July, 1997
(the “Convention”). For ease of reference, a copy of the substance of
that letter is attached as Annex A.
[2]
Paragraph
4 of Article IV of the Convention reads as follows:
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Where
by reason of the provisions of paragraph 1 an estate, trust or other person
(other than an individual or a company) is a resident of both Contracting
States, the competent authorities of the States shall by mutual agreement
endeavour to settle the question and to determine the mode of application of
the Convention to such person.
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Lorsque,
selon les dispositions du paragraphe 1, une succession, une fiducie ou une
autre personne (autre qu’une personne physique ou une société) est un
résident des deux États contractants les autorités compétentes des États
contractants s’efforcent d’un commun accord de trancher la question et de
déterminer les modalités d’application de la Convention à ladite personne.
|
[3]
By
letter dated the 17th of June, 2005, the Canada Revenue Agency (the
“CRA”) responded to the request on behalf of the Applicant and concluded:
…we are not able to
proceed with your request. However, in the event that income, profit or gains
of the Trust become subject to taxation in both the United States and Canada, we would be
prepared to consider a request for relief from any resulting double taxation.
Once again, for ease of reference, the
substance of the CRA letter is attached as Annex B.
[4]
There
is no evidence before the Court that the Applicant Trust or its counsel pursued
the request further, directly with the CRA. Rather, counsel turned to the
United States Internal Revenue Service (the “IRS”) and requested, as it was
entitled to do under the Convention, that the IRS pursue the settlement
of the residence of the Applicant Trust with the CRA. The IRS raised the issue
with the CRA. A transcript of notes taken at a CRA/IRS meeting in Washington, District of
Columbia,
on the 11th of July, 2006, more than twelve (12) months after the
exchange of correspondence between counsel for the Applicant and the CRA that
is referred to above, reflects a discussion of the issue. An extract from that
transcript appears as Annex C to these reasons.
[5]
Three
(3) points are worthy of note in the extract from the transcript: first, the
discussion took place in the context of the “proposed section 94 of the Income
Tax Act”, not section 94 of the same Act as it read at the time of
the discussion and as it continues to read today; second, a representative of CRA undertook
to the IRS representatives to “…seek further policy guidance on the issue”; and
third, CRA proposed to seek that guidance from the Canadian Department of
Finance, not within its own resources, notwithstanding the fact that CRA is, by
delegation, the designated representative of Canada, the “competent authority”,
for the purposes of bi-lateral discussions under the Convention.
[6]
The
IRS reported to counsel for the Applicant Trust in a letter dated the 15th
of November, 2006. In essence, it reported that the CRA refused to endeavour,
or further endeavour, to settle the residence of the Applicant Trust in
accordance with the Convention. Once again, for ease of reference, the
substance of the reply to Applicant’s counsel from the IRS is attached as Annex
D.
[7]
Counsel
for the Applicant Trust treated the response from the IRS as the first notification
to the Applicant Trust of a decision of the CRA responding definitively to
counsel’s request in the letter of the 23rd of February, 2005, earlier
referred to. On the basis of this “definitive” response, this application for
judicial review followed seeking the following relief:
…
The purpose
of the Application is the following:
1. An order
setting aside the decision of the Minister of National Revenue by its
representative the Canada Revenue Agency (“CRA”) dated July 11, 2006, whereby
the Applicant’s request that the residence of The 2005 Robert Julien Family
Delaware Dynasty Trust (the “Trust”) be settled in accordance with paragraph 4
of Article IV of the Convention Between Canada and The United States of
America With Respect to Taxes on Income and on Capital Signed on September 26,
1980, as Amended by the Protocols Signed on June 14, 1983, March 28, 1984,
March 17, 1995 and July 29, 1997 (the “Convention”), was formally refused;
2. An order
(writ of mandamus) that the Minister of National Revenue or its representative,
the CRA, endeavour to settle the residence of the Trust with the U.S.
Secretary of Treasury or his delegate, the Internal Revenue Service, in
accordance with paragraph 4 of Article IV of the Convention.
3.
Subsidiarily, any other relief in the same nature so as to oblige the
Respondents to comply with paragraph 4 of Article IV of the Convention.
4. A
declaration that the judgment is executory notwithstanding appeal.
THE WHOLE
WITH COSTS.
…
[8]
The
Application was heard at the premises of the Court in Montreal on the 30th
of August, 2007. Decision was reserved. These are the reasons for a decision
issued this day.
THE PARTIES
[9]
The
Applicant is briefly described in the style of cause of this application. The
“Trust Agreement”, once again briefly, but I am satisfied sufficiently, is
described in the letter the substance of which appears as Annex A to these reasons.
[10]
The
Minister of National Revenue is the responsible Minister for the purposes of
implementation of the Convention Act, and is also responsible for
the CRA.
[11]
CRA,
formerly the Canada Customs and Revenue Agency, is responsible for “…supporting
the administration and enforcement…” of the Income Tax Act
and, by delegation from the Minister of National Revenue, is the “competent
authority” for the purposes of the Convention.
THE ISSUES
[12]
Counsel
for the Applicant Trust, in his Memorandum of Fact and Law, succinctly
described the issues on this application
for judicial review in the following terms:
(a) whether mandamus
lies against the Respondents on the facts of this case; and
(b) whether
an order should be issued to set aside the decision.
[13]
Counsel
for the Respondents added the following issue: “Whether the Applicant [Trust]
is time-barred from attacking the decision of the Canadian Competent Authority
[CRA] not to settle the question of the [Applicant] Trust’s residency with the United
States’
Competent Authority.”
[14]
Counsel
for the Respondents rephrased the “mandamus” issue as whether mandamus
can issue against the Respondents to oblige them to further endeavour to
settle the residency of the Applicant Trust with the United States’ Competent
Authority in accordance with paragraph 4 of Article IV of the Convention.
[15]
I
would expand and rephrase the issues before the Court in the following terms:
first, and
this issue was not contested by either party, the Court’s jurisdiction to
entertain this application;
secondly, is
this application for judicial review time-barred by reason of the fact that the
CRA’s letter of the 17th of June, 2005 to counsel for the Applicant
Trust constituted the “decision” of the Respondents relating to the request on
behalf of the Applicant Trust contained in counsel’s letter of the 23rd
of February, 2005;
thirdly, is
the response from the IRS, the substance of which is reproduced in Annex D,
notice of a reviewable decision or, alternatively is the application for
judicial review premature in that, in substance, it seeks review of the
application to the Applicant Trust of a proposed law rather than a law that is
of full force and effect;
fourthly,
what is the appropriate standard of review with regard to the “decision” sought
to be reviewed;
fifthly,
whether, against the appropriate standard of review, the decision under review
should be set aside;
and, finally,
if the decision under review should be set aside, is the remedy of mandamus
open to the Applicant Trust.
[16]
Both
the Applicant and the Respondents have requested costs and that issue will also
be briefly dealt with.
ANALYSIS
1) Jurisdiction
[17]
As
earlier indicated in these reasons, neither counsel before the Court contested
the jurisdiction of the Court on this matter but, in turn, neither counsel
cited authority to support the Court’s jurisdiction. Out of an abundance of
caution, and in particular having regard to the cautionary note sounded by the
Supreme Court of Canada in Canada v. Addison & Leyen Ltd., I
consider it important to briefly address the issue. At paragraphs 10 and 11 of
its brief reasons in Canada v. Addison & Leyen Ltd., the Court
wrote:
The Minister is granted
the discretion to reassess a taxpayer at any time. This does not mean that the
exercise of this discretion is never reviewable. However, in light of
the words “at any time” used by Parliament in s. 160 ITA, the length of
the delay before a decision on assessing a taxpayer is made does not suffice as
a ground for judicial review, except, perhaps, inasmuch as it allows for a
remedy like mandamus to prod the Minister to act with due diligence once a
notice of objection has been filed. Moreover, in the case at bar, the
allegations of fact in the statement of claim do not disclose any reason why it
would have been impossible to deal with the tax liability issues relating to
either the underlying tax assessment against York or the assessments against
the respondents through the regular appeal process.
Reviewing courts should
be very cautious in authorizing judicial review in such circumstances. The
integrity and efficacy of the system of tax assessments and appeals should be
preserved. Parliament has set up a complex structure to deal with a multitude
of tax-related claims and this structure relies on an independent and
specialized court, the Tax Court of Canada. Judicial review should not be used
to develop a new form of incidental litigation designed to circumvent the
system of tax appeals established by Parliament and the jurisdiction of the Tax
Court. Judicial review should remain a remedy of last resort in this context.
[emphasis
added]
[18]
This
is not a review of the Minister’s discretion to reassess a taxpayer “at any
time”. Rather, it is an application for judicial review of, as counsel for the
Applicant Trust would argue, an obligation of the Minister to seek settlement
of the residence of a trust such as the Applicant Trust and further to seek the
remedy of mandamus against the Minister for “failure” to fulfil that
obligation once a request is made. As such, I am satisfied that this
application is closer to the issue that came before this Court and the Federal
Court of Appeal in LJP Sales Agency Inc. v. Canada (Minister of National
Revenue – M.N.R.).
For this Court, my colleague Justice MacTavish, after citing section 18.5 of
the Federal Courts Act wrote at paragraphs 33 to 37 of
her reasons:
Having given
the Minister’s argument careful consideration, I am satisfied that this Court
does in fact have jurisdiction to entertain LJP’s application.
The purpose
behind section 18.5 is to prevent a multiplicity of proceedings. As a
consequence, judicial review is precluded where there already exists a
statutory right of appeal to the Tax Court, or another such body.
It is true
that an application for judicial review of the decision of the Minister to
assess or confirm a person’s tax liability is beyond the jurisdiction of this
Court, because the assessment of that liability may be appealed to the Tax
Court: Addison & Leyen Ltd. et al., … .
However, it
must be recalled that what LJP is seeking in this case is not to appeal an
income tax assessment to this Court, but rather an order of mandamus,
requiring that the Minister exercise his statutory duty. In this regard, LJP
asserts that the Minister incorrectly refused to exercise his jurisdiction,
erred in law or otherwise acted in a manner contrary to law. Such relief is
not available to LJP in the Tax Court.
I am
therefore satisfied that, to the extent that LJP’s application seeks an order
compelling the Minister to perform a statutory duty, the application is one
that is properly brought in this Court. Whether or not such a duty in fact
exists in the circumstances of this case is another question altogether. …
I am satisfied that the same might be said
here, with perhaps even greater emphasis given to the fact that no assessment
has, to the date of hearing of this matter, issued against the Applicant Trust
and, at the date of the Respondents’ reply that is extracted in Annex B to
these reasons, was even in contemplation. I quote very briefly from the last
paragraph that appears in Schedule B:
However, in
the event that income, profit or gains of the Trust become subject to taxation
in both the United States and Canada, we would be prepared to consider a
request for relief from any resulting double taxation.
[19]
For
the foregoing brief reasons, I conclude that this Court has jurisdiction to
deal with this application for judicial review and mandamus.
2) Is this
application for judicial review and mandamus time-barred?
[20]
Counsel
for the Respondents urged that this application for judicial review and mandamus
is indeed time-barred as the CRA’s letter of the 17th of June, 2005
(see Annex B) to counsel for the Applicant Trust constituted the decision of
the Respondents relating to the request on behalf of the Applicant Trust
contained in counsel’s letter of the 23rd of February, 2005 (see
Annex A). Counsel for the Respondents further urged that, while the Applicant
Trust’s determination to pursue the issue through the IRS was open to it, it
did not constitute an alternative to seeking judicial review of the “decision
letter” of the 17th of June, 2005, but rather was tantamount to
nothing more than an indirect request to the Respondents to “review” the
decision of the 17th of June, 2005, and that a request for a review
does not stop the clock running on the time for applying for judicial review.
[21]
While
not directly addressing the issue of a time-bar, counsel for the Applicant
Trust urged that the CRA has systematically, knowingly, and categorically
refused to endeavour to settle the Applicant Trust’s residency with the IRS
without justification and despite a formal request by the Applicant Trust and
the existence of a clear public legal duty to do so under paragraph 4 of
Article IV of the Convention.
[22]
With
great respect to counsel for the Applicant Trust and to the Applicant Trust
itself, the existence of an alleged “clear public legal duty” does not arise
for consideration unless an application for judicial review is brought in a
timely manner. Subsection 18.1(2) of the Federal Courts Act reads as
follows:
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18.1 (2)
An application for judicial review in respect of a decision or an order of a
federal board, commission or other tribunal shall be made within 30 days
after the time the decision or order was first communicated by the
federal board, commission or other tribunal to the office of the Deputy
Attorney General of Canada or to the party directly affected by it, or within
any further time that a judge of the Federal Court may fix or allow before or
after the end of those 30 days.
[emphasis
added]
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18.1 (2) Les demandes de contrôle judiciaire sont à présenter dans les trente
jours qui suivent la première communication, par l'office fédéral, de
sa décision ou de son ordonnance au bureau du sous-procureur général du
Canada ou à la partie concernée, ou dans le délai supplémentaire qu'un juge
de la Cour fédérale peut, avant ou après l'expiration de ces trente jours,
fixer ou accorder.
[je
souligne]
|
The CRA’s letter of the 17th of June,
2005 constituted a clear and unequivocal communication of a decision of the CRA
responding to the request contained in counsel’s letter of the 23rd
of February, 2005. For ease of reference, that request was in the following
terms:
We hereby
request that the residence of the Trust be settled in accordance with paragraph
4 of Article IV of the Convention Between Canada and the United
States of America With Respect to Taxes on Income and on Capital Signed
on September 26… .
[23]
The
response, in essence, was as follows: “Accordingly, we are not able to proceed
with your request.” That response was communicated to counsel for the
Applicant Trust in the letter dated the 17th of June, 2005, and it
was not urged before the Court that the response was not received within a few
days following the date of the response.
[24]
I
am satisfied that this application for judicial review is time-barred. Despite
the fact that my foregoing conclusion fully disposes of this application for
judicial review, I will nonetheless go on to consider the third issue
identified in my summary of the issues.
3) Prematurity
[25]
As
noted in paragraph 4 of these reasons, the consultation that took place between
representatives of the CRA and representatives of the IRS, which is reflected
in Annex C to these reasons, and in the letter from the IRS to counsel for the
Applicant Trust that is extracted in Annex D, related to the residence of the
Applicant Trust under the proposed new section 94 of the Income Tax Act
and not under section 94 of the that Act as it reads today.
[26]
It
is trite law that it is not the role of this Court to pronounce on the
circumstances of an individual or a trust, such as the Applicant Trust, under a
proposal as to what the law may some day be. Parliament is the master of its
processes and conclusions. It is not for the Court to presume that Parliament
will adopt, without amendment, proposed legislation put before it by the
Government of the day.
This principle is even more rigid in its application where the Government of
the day does not have legislation on the issue here under consideration before
Parliament and might choose not to reintroduce the proposed section 94 of the Income
Tax Act or, alternatively, to reintroduce it with amendments from the form
that was previously before Parliament and which died on the Order Paper between
the date on which this application for judicial review was heard and the date
of these reasons.
[27]
It
follows that it is inappropriate for this Court to require, by mandamus,
that a Minister of the Crown or officials acting on his or her behalf,
endeavour to settle the residence of a trust under a provision of law that may,
or may not, some day be adopted by Parliament.
[28]
Thus,
the application for judicial review before the Court, as framed, is not only
“time-barred”, it is premature in that it is not in respect of a “decision”, if
such there was in the summer of 2006, that this Court could properly entertain
or grant mandamus upon.
[29]
I
will not consider further the issue of whether there was, through the communications
reflected in Annex C and Annex D, in fact a decision of the Respondents.
CONCLUSION
[30]
In
light of my conclusions regarding jurisdiction of this Court, a time-bar in
respect of the application for judicial review that is before the Court and in
respect of prematurity, I need not and I will not go on to consider the further
issues outlined in paragraph [15] of these reasons. This application for
judicial review will be dismissed. Further, in light of my conclusions and the
result, the Respondents are entitled to their costs, on the ordinary scale, as
against the Applicant Trust.
COSTS
[31]
In
the ordinary course of litigation in this Court, costs follow the result, that
is to say costs are payable by the unsuccessful party to the successful party.
There are no circumstances arising in this matter that would justify a
different result. The Respondents are entitled to their costs, calculated on
the ordinary scale, payable by the Applicant Trust.
“Frederick
E. Gibson”
Ottawa, Ontario
October
18, 2007.
ANNEX
A
(paragraph
[1])
…
We hereby request that the
residence of the Trust be settled in accordance with paragraph 4 of Article IV
of the Convention Between Canada and The United States of America With
Respect to Taxes on Income and on Capital Signed on September 26, 1980, as
Amended by the Protocols Signed on June 14, 1983, March 28, 1984, March 17,
1995 and July 29, 1997 the “Convention”).
The Trust is an
irrevocable discretionary trust settled pursuant to a trust agreement dated
February 1, 2005 among Mrs. Delia Moog as Grantor, Mr. Hugh William Perry as
Initial Trustee and Christiana Bank & Trust Company as Initial
Administrative Trustee (the “Trust Agreement”), a copy of which is
attached for your review.
Because the Trust has
just been formed, no identification number has yet been assigned by the Canada
Revenue Agency or the Internal Revenue Service. There is obviously no pending
objection or appeal in respect of the Trust.
Mrs. Moog is a resident
of Canada and Mr. Perry is a
resident of the United States.
Cristiana Bank & Trust Company is a Delaware banking corporation.
Mrs. Moog settled the
Trust with US$40,0000 and no other person has made a contribution to the
Trust. She established the Trust primarily for the benefit of her nephew,
Robert Julien, a resident of the United States. The beneficiaries of the Trust also include Mr. Julien’s spouse
and issue as well as entities in which Mr. Julien (or any of his issue) has an
interest. Mr. Julien does not yet have any children and his spouse resides
with him in the United States.
The Trust does not own
any taxable Canadian property and does not carry on business in Canada. The Trust’s income solely
originates from sources within the United States. The Trust has no plan to own taxable Canadian property, to carry
on business in Canada or to
have any income from Canadian sources.
The Trust is a United
States person within the meaning of section 7701(a)(30) of the Internal
Revenue Code because a court within the United States is able to exercise
primary supervision over the administration of the Trust pursuant to Section
8.1 of the Trust Agreement and a United States person (Mr. Perry) has the
authority to control all substantial decisions of the Trust. As a United
States person, the Trust is subject to tax in the United
States on its worldwide income and is therefore a
resident of the United States
for the purposes of the Convention.
Although the Trust does
not have any Canadian beneficiary, the Trust is likely deemed to be a person
resident in Canada for certain purposes under subsection 94(1) of the Income
Tax Act (“ITA”) because the Trust acquired property from a Canadian
resident (Mrs. Moog) and persons resident in Canada not dealing at arm’s length
with Mrs. Moog might become beneficially interested in the Trust as a result of
the exercise of the power of appointment in Section 5.1(kk) of the Trust Deed.
On October 30, 2003, a
Notice of Ways and Means Motion to amend provisions of the ITA relating to the
taxation of non-resident trusts and foreign investment entities (the “Proposed
Rules”) was tabled in the House of Commons. If and when the Proposed Rules
come into force, they will retroactively apply to trust taxation years that
begin after 2002. Because the Trust received a contribution of property from a
Canadian resident (Mrs. Moog), the Trust would be deemed to be resident in Canada for certain purposes under
subsection 94(3) of the Proposed Rules. In the technical notes to the Proposed
Rules, the following comments are made in respect of subsection 94(3).
“A trust to which subsection 94(3) applies
is deemed to be resident in Canada throughout the year for the above
purposes, including the computation of its income and its taxable income and
section 2 of the Act. Section 2 imposes on every person resident in Canada at any time in a taxation year an obligation to pay
an income tax on that person’s taxable income for the year.
Under paragraph 1 of the resident article
in Canada’s income tax treaties, a reference in such a treaty to a “resident of
a Contracting State” means any person who, under the law of that State, is
liable to taxation in that State by reason of the person’s domicile, residence,
place of management or any other criterion of a similar nature. A person, in
this context, would generally include a trust because of the definition
“person” in Canada’s income tax treaties. Because a trust to
which subsection 94(3) applies is deemed to be resident of Canada and is liable
to tax in Canada on its worldwide income, it will be considered a resident of
Canada under paragraph 1 of the resident article in Canada’s income tax
treaties, whether it is also considered to be resident, under the applicable
treaty, in another country or not.
A trust that is also resident of the other
contracting state under a particular treaty would be a dual resident under the
treaty. In the event of dual residency under an income tax treaty, the
tie-breaker rules in the resident article applicable to individuals would not
apply. The Canada Customs and Revenue Agency has expressed the view that in
this context, the term “individual” is to be interpreted to mean natural person
and not a trust. The Agency has indicated that this interpretation would
generally prevail across most if not all of Canada’s
income tax treaties if the definition “person” in the particular treaty under
consideration makes reference to both an “individual” and a “trust”. Even if a
trust were considered an individual for the purpose of an income tax treaty, it
is clear from the context of the tie-breaker rule applicable to individuals
that it is intended to apply only to natural persons. This is because
expressions such as “personal home”, “centre of vital interest” and “habitual
abode” used in the tie-breaker rules have meaning only in reference to natural
persons and would not be of use in clarifying the residence of a trust for the
purpose of a treaty.
In general, therefore, under the income tax
treaty the competent authorities of each contracting state would have to enter
into an agreement to determine in which state the trust would be resident for
the purpose of the particular treaty. In the absence of such an agreement Canada would exercise its first right to tax. Canada would grant foreign tax credits for the other State’s
income taxes paid by the trust.
We
do not necessarily agree with the position outlined above. Consequently, this request
is made without prejudice to out client’s right to have this matter judicially
determined.
The
first condition to the application of subsection 94(3) of the Proposed Rules is
that the trust must be a non-resident of Canada [determined without reference to 94(3)] at the end of a particular
taxation year. Since the basis of the application of subsection 94(3) is the
non-residence of the Trust, it would be illogical to suggest that it is liable
to tax in Canada by reason of
Canadian residence. In fact, it is the exact opposite: the Trust would be
liable to tax in Canada, not by
reason of its residence, but by reason of its non-residence combined with the
presence of a resident contributor. In other words, the deemed Canadian
residence of the Trust for certain purposes would not be the cause of
its Canadian tax liability but the consequence of its non-residence combined
with the existence of a resident contributor.
Non-residence
and resident contributor are clearly not criteria of “a similar nature” to
those used for determining residence for the purposes of Article IV of the
Convention. Justice Iacobucci, in Crown Forest, noted that the United States entered a specific reservation to Article 4(1) of the OECD Model
Convention for the right to use “place of incorporation” as an indicator of
residence.
While
Canada also reserved the right
to use “place of incorporation”, it never reserved the right to use other
special criteria, such as having a resident contributor (let alone acknowledged
non-residence, which is the antithesis of residence). Canada never bargained
with its treaty partners for the ability to tax entities of its treaty partners
based on untraditional and novel criteria, a fortiori criteria that are
extraneous to the subject entity (such as the residence of its contributors and
beneficiaries). Therefore, subsection 94(3) of the Proposed Rules should have
no bearing on the determination of residence under the Convention, because it
is based on unrecognized criteria that are dissimilar to those enumerated in
paragraph 1 of Article IV of the Convention.
Considering
that all of the trustees and beneficiaries of the Trust are resident in the
United States and that the Trust does not have any income from Canadian
sources, we submit that the Canadian competent authority should agree to treat
the Trust as a resident of the United States for the 2005 and following taxation years.
In
our view, the Trust should not be subject to tax in Canada solely because it received property from a Canadian resident who is
not and cannot become a beneficiary thereof.
Even
if the Trust would be treated as a resident of Canada, its income would be exempt from tax in Canada under paragraph 2 of Article XXII of the Convention to the extent
that such income is distributed to its beneficiaries.
The
Trust would nevertheless like to have the ability to accumulate income that is
not immediately needed by its beneficiaries. The accumulation of income in the
Trust would not achieve any United States income tax reduction since all undistributed income would be fully
taxable in the hands of the Trust. The sole advantage of accumulating income
in the Trust would be to prevent additional property from becoming part of a
beneficiary’s estate for United States estate tax and asset protection purposes.
In
the light of the above, we see no ground on which Canada should insist on
treating the trust as a resident of Canada. Doing so would not result in any additional tax revenue for Canada and would have as its sole
consequences an increase in the beneficiaries’ U.S. estate tax and creditors liability expose [sic] together with the
imposition on the trustees of complex and time-consuming Canadian information
and tax return reporting requirements.
The
case at hand is clearly not the type of planning that the Department of Finance
was attempting to curb when it introduced the Proposed Rules. Therefore, the
relief sought would not contravene any tax policy objective.
…
ANNEX
B
(paragraph
[3])
…
We are writing in response to you letter of
February 23, 2005, in which you requested competent authority assistance with
respect to the determination of the residency of the Trust under Article IV(4)
of the Canada-United States Income Tax Convention, 1980 (the
“Convention”). In this regard, you have advised that the Trust is considered a
resident of the United States for the purposes of the Convention and that the
Trust would be deemed to be a resident of Canada in the manner provided under
proposed paragraph 94(3)(a) of Income Tax Act (Canada) (the “Act”). If
proposed paragraph 94(3)(a) is enacted, the Trust is deemed to be a resident of
Canada for the purposes of
certain provisions of the Act for taxation years of the Trust beginning after
2002.
As discussed in our previous telephone
conversations (Wilson/Gagnon, MacGillivrary/Gagnon), the Agency’s position is
that a trust that is deemed to be a resident of Canada in accordance with
proposed paragraph 94(3)(a) of the Act will be considered a resident of Canada for the purposes of the Convention.
In the event that such a trust is also a resident of the United States under
United States domestic tax legislation, the Canadian competent authority will
not settle the question of the trust’s residency with the United States
competent authority under Article IV(4) of the Convention so that the
Convention could be applied to the trust on the basis that it was a resident of
the United States and not a resident of Canada.
Accordingly, we are not able to proceed
with your request. However, in the event that income, profit or gains of the
Trust become subject to taxation in both the United
States and Canada, we would be prepared to consider a request for relief from any
resulting double taxation.
…
ANNEX C
(paragraph 4)
Issue : Non-resident trusts and proposed section 94 of the Income tax Act
- …
- Jim Wilson (CRA) explained Canada’s
position regarding section 94 trusts: the legislation is predicated on
the fact that Canada
considers the residence of the contributor a key factor in determining the
residence of a trust. Jim explained that this is anti-avoidance
legislation in Canada
intended to circumvent the ease with which these arrangements can be used
to avoid taxation in Canada, by accumulating income outside Canada and having those amounts paid out
to a Canadian resident as capital at a later time, which would not be
taxable in Canada. Giving
up on the deemed resident status of these trusts would render this
anti-avoidance legislation ineffective. We would not expect the US to make their anti-avoidance
legislation ineffective. Canadian resident taxpayers setting up trust in
other jurisdictions can avoid paying Canadian tax by not accumulating
income in the offshore trust, i.e. paying out the income to non-Canadian
beneficiaries every year, or by outright gifting the property to the
intended beneficiaries. Finally, Canadian residents can always set up a
Canadian resident trust to hold property in trust for the benefit of US
residents.
- Elizabeth Karzon (IRS) asked if the CRA
is willing to negotiate the residency question for dual resident trusts
that are not s. 94 trusts.
- Jim Wilson confirmed the CRA would still
be negotiating the dual residence question for trusts that are not s. 94
trusts, i.e. dual resident trusts under common law principles.
- Graham Clark (IRS) mentioned that the US
rules dealing with grantor trusts to address avoidance issues associated
with trusts and that the US/UK treaty has rules applicable when the US
taxes the grantor while the UK taxes the trust; the FTC and sourcing rules
are modified to resolve the problem created by taxing different persons.
Graham suggested Canada
could consider such an approach in the case of s. 94 trusts.
- More importantly, Graham asked why the
trust in this case was caught by the rules in section 94. He adds that he
has difficulty understanding how Canada can focus solely on the residence of the contributor to
determine the residency of a trust. He points out that in this case
several other factors suggest the trust should not be considered a
resident of Canada, i.e.
there are no Canadian beneficiaries in this case, all beneficiaries are
adult US persons; there are no Canadian assets and although there is a
Canadian contributor, he/she has legally given up all rights on the
property contributed and it cannot revert back to the contributor. Graham
added that he could understand Canada having concerns if the contributor somehow retained control
over the contributed property, but in cases where the contributor and
persons closely-related to the contributor (e.g. spouse, children, etc) no
longer have any control over the property, he would have expected Canada
to recognize that fact and not maintain its right to tax the income
derived from the contributed property.
- Jim Wilson mentioned that the legislation
provides that a Canadian resident contributor is a sufficient connection
to Canada to maintain Canada’s right to tax the income derived from the contributed
property. Jim added he was not in a position to question the legitimacy
of such an approach but understood it may be difficult to see any
avoidance schemes in the case where the only beneficiaries are adult
residents of the US, although these facts can change in the future,
particularly where the trustees have a power to appoint new beneficiaries
that could be Canadian residents, as in this case. Nonetheless, Jim
suggested we would seek further policy guidance from the Canadian
Department of Finance before taking a final decision on this matter as it
seemed reasonable to take another look at Canada’s position where there is no apparent tax avoidance concerns
and the income is fully taxed in the US.
- Ross Kauffman agreed to take the issue to
the Dept.Finance and reply to the letter from the US competent authority regarding this case.
- Jim also confirmed that notwithstanding
Canada’s position on the residence of the trust, Canada would be willing to resolve any unexpected double tax
situation and provide foreign tax credits to the trust where appropriate
to do so.
- Calvin Watson (IRS) mentioned that this
would not be satisfactory to the taxpayer and that the trust would prefer
not being subject to any Canadian tax at all.
- Jim pointed out that the trust would only
be subject to the rate differential between the US and Canadian tax rates.
- Calvin replied that the trust would still
prefer not paying that differential.
- We agreed Ross would let our Dept.Finance
know about these concerns and seek their policy guidance before writing
back to them on this subject.
[emphasis added]
ANNEX
D
(paragraph
6)
…
We conducted negotiations with
representatives of the Canadian government on July 11, 2006. The Canadian
officials, representatives of that government’s competent authority under our
treaty, took the position that the above trust was Canadian under the Income
Tax Act of Canada because a Canadian resident provided property to the trust
and because certain Canadian residents might in the future become beneficiaries
of the trust. The Canadian officials further advised that a Canadian grantor
alone would suffice under that nation’s domestic law to deem this entity to be
of Canadian residence.
Further, we were advised at this meeting
that t he Canadian Ministry of Finance had specifically removed this case and
all others like it; we assume cases under Section 94(1) and 94(3) of the income
Tax Act (Canada), from
competent authority negotiations. In other words we are advised that his case
will not be considered for resolution by the Canadian Competent Authority.
We objected to this position as
inconsistent with the spirit and letter of our income tax treaty. We further
related our views on this matter to our own Treasury Department which has
ultimate responsibility for the negotiation and oversight of our income tax
treaty network.
The Canadian representatives at the July
11, 2006, meeting promised a letter finalizing this case from their standpoint;
however, to date we have received no such letter. We are advised through
telephone contacts, the latest being of November 6, 2006, that the office of
competent authority is in the process of clearing the above stated disposition
as to this particular case with their Ministry of Finance through the efforts
of the Legislative Policy Division. To date this clearance has not occurred;
however, we are advised of no change in their intended disposition.
…
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