The proper operation of the s. 94.2(3) rule to avoid double taxation from a non-resident commercial trust requires a purposive reading
Paragraph 94(2)(k.1) catches a situation where a non-resident contributes to a non-resident trust for the purpose of paying benefits to employees for services rendered to a Canadian corporation. For example, a non-resident member of a multinational group funds a non-Canadian trust in order for the trust to buy shares of the publicly-traded parent, with the trust then transferring those shares under a share award plan to group employees including potentially employees of a Canadian subsidiary. Thus, such a trust can be deemed to be resident in Canada notwithstanding the absence of a contribution by a Canadian resident.
An investment in foreign commercial trusts can be subject to imputed interest inclusions under s. 94.1 if “one of the main reasons” for the investment was a significant tax reduction (as described). However:
Many if not all of the foreign commercial trusts ... encountered in practice are ones that are managed by a foreign manager that does not offer a similar product in Canada, and indeed many of these trusts distribute all or substantially of all of their investment income currently. As a result, reduction of Part I tax will typically not be one of the main reasons for a Canadian taxpayer, or its controlled foreign affiliate, investing in such foreign commercial trusts.
If s. 94.2 applies to deem a resident beneficiary to earn foreign accrual property income from the non-resident commercial trust, the s. 94.2(3) rule is intended to apply to avoid double taxation by providing for a deduction in computing the trust’s FAPI allocable to the affected beneficiary equal to that portion of FAPI that is included in the beneficiary’s income under s. 104(13). However, it is necessary to read this rule in a purposive manner in order to make it work given that the operation of s. 104(13) dovetails with the s. 104(6) rule, which references an amount of income “that the trust claims” – whereas “it could be expected that such a trust will not file a Canadian tax return and will not be expressly claiming any deductions under the Act.”