CRA illustrates the resident portion rules for a s. 94 trust that inter alia has lent to a resident beneficiary or earns FAPI

Regarding where a loan is made by a non-resident trust (which has made a valid (resident portion) election under s. 94(3)(f)) to a Canadian resident beneficiary, CRA noted that s. 94(2)(g)(iv) provides that the loan to the beneficiary involves the acquisition by the trust of the debt which entails a deemed transfer by the debtor – so that, here, there is a deemed transfer of property from the beneficiary to the trust. Accordingly, under para. (a) of the “resident portion” definition, the amount of the loan owing by the beneficiary would be considered as a contribution by the beneficiary (viewed in this regard as a resident contributor) and would be included in the resident portion of the trust.

The repayment of the loan would be considered to be a contribution to the trust by the resident beneficiary so that the cash repayment proceeds would be added to the resident portion. Since the debt ceased to exist, it is expected that it would no longer be included in the resident portion.

49% of the shares of a non-resident corporation owned by a non-resident trust which has made a valid s. 94(3)(f) election were included in the resident portion but the trust held 100% of the shares in all. CRA noted that s. 94(3)(f)(viii) provides that the resident portion trust and the non-resident portion trust are a deemed to not deal with each other at arm’s length and s. 94(3)(a)(x) provides that a deemed resident trust is deemed to be resident in Canada throughout the particular tax year for purposes of determining whether a foreign affiliate is a controlled foreign affiliate (CFA) of the taxpayer. Accordingly, in light of s. (b)(ii) of the CFA definition (effectively deeming the resident portion trust to hold the shares of a non-arm’s length person) the corporation would constitute a CFA of the resident portion trust. Accordingly, its FAPI would be computed in the usual way based on its participating percentage (based on its 49% shareholding).

Neal Armstrong. Summary of 20 June 2023 STEP Roundtable, Q.7 under s. 94(1) – resident portion.