CRA found that failure to charge for services rendered by a Canco to a NR sub of a NR trust tainted the NR trust under s. 94(2)

The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco provided services for no consideration to LLC1.

The Directorate concluded that Canco thereby was rendered a resident contributor to NRTrust (so that NRTrust was deemed to be a s. 94-resident trust) because

  • s. 94(2)(f) deemed there to be a transfer of property to that trust, and
  • it would be reasonable to view there as having been a resulting increase in the fair market value of the LLC1 shares.

In the Directorate’s view, this result obtained even if s. 247(2) also applied to deem Canco to have received FMV consideration for its services.

Essentially the same result obtained if Canco made an interest-free loan to LLC1 rather than providing free services. Similarly, the application of s. 17 (or s. 247(2)) to that loan would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust.

Neal Armstrong. Summaries of 28 May 2019 Internal T.I. 2018-0772971I7 under s. 94(2)(a).