12 June 2000 External T.I. 2000-0030855 - Non-resident trustee for testamentary trust

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: Will the appointment of a non-resident as the trustee of a testamentary trust cause the trust to be a non-resident trust, and if so, what are the consequences of such an appointment, assuming that the beneficiaries continue to be resident in Canada?

Position: Likely a non-resident trust and general comments given concerning some of the differences between the taxation of a non-resident personal trust and a resident personal trust

Reasons: IT-447 sets our criteria for determining the residence of a trust. The tax consequences of establishing a non-resident testamentary trust, rather than a resident testamentary trust, includes the possible application on 94(1)(c), the taxation of world-wide income vs. income earned from Canadian sources, Part XIII tax on dividends rather than Part I, the ability to designate dividends under 104(19) and (20), the inability of the trust to use the principal residence exemption even if a property is designated as such and the requirement to file various forms, including T1142 for distributions from a n/r trust and T2062 on the disposition of TCP

XXXXXXXXXX 				2000-003085
				Annemarie Humenuk
Attention:  XXXXXXXXXX 

June 12, 2000

Dear XXXXXXXXXX:

Mr. Bill McCloskey, the Assistant Commissioner of Policy and Legislation Branch of the Canada Customs and Revenue Agency, has asked us to explain some of the tax consequences associated with the creation of a non-resident testamentary trust.

In your letter of April 13, 2000, you explained that you would like a trust to be established for the benefit of your children in the event that you and your spouse die before they reach the age of 25 and that the individual you have selected to be the trustee of such a trust is a resident of Germany. You were advised by an estate planner that there may be significant tax consequences if such a trust is considered to be a non-resident trust. As explained by Mr. McCloskey, the residence of a trust is determined by the residence of the trustee or trustees who exercise management and control of a trust. However, as noted in paragraphs 3 and 4 of Interpretation Bulletin IT-447, Residence of a Trust or Estate, the determination of the trust's residence is less clear when a trust has more than one trustee.

Under subsection 104(2) of the Income Tax Act (the "Act"), a trust is taxed as if it were an individual whose income is the income from the property held in the trust. While a person who is resident in Canada is subject to tax on his or her world-wide income, a person who is not resident in Canada is generally only subject to tax on the income earned from Canadian sources. However for certain provisions of the Act, a non-resident trust created for Canadian beneficiaries by a resident of Canada may be deemed to be resident in Canada under paragraph 94(1)(c) or may be deemed to be a non-resident corporation under paragraph 94(1)(d) of the Act. Please note that the 1999 federal budget proposed significant changes to these deeming provisions. As the draft legislation to implement these proposals has not yet been released by the Department of Finance, which is responsible for tax policy and legislative changes, we cannot be more specific as to how these changes may affect you.

One of the tax considerations which may be relevant in considering the choice of trustee for a testamentary trust is the treatment of dividends received by a trust. Dividends received by a testamentary trust which is resident in Canada or which is deemed to be resident in Canada are included in the trust's income and taxed at a graduated rate depending on the amount of the trust's taxable income. In addition, a testamentary trust which is resident in Canada may designate any dividends received in the year as having been received directly by the beneficiaries provided that such amounts are payable to the beneficiaries in the same year that they were received by the trust. Dividends received by a non-resident, including a non-resident trust, are subject to a flat rate of non-resident tax. The rate of non-resident tax is set at 25%, but as a result of tax treaties with other countries including Germany, the rate has been reduced to 15% for residents of those countries. While a non-resident trust that is deemed to be resident in Canada is entitled to a deduction for that portion of its income payable in that year to a beneficiary who is resident in Canada, a designation in respect of dividends received by the trust does not reduce the amount of non-resident tax payable by that trust.

Another factor which may be relevant in considering the choice of trustee for a testamentary trust is the principal residence exemption. While a trust may designate a property as a principal residence in certain circumstances, the use of the principal residence exemption is limited in part by the number of years during which the owner of the property was resident in Canada. Thus, a non-resident trust which is not deemed to be resident in Canada is not able to use the principal residence exemption to reduce the amount of any capital gain realized by the trust on the disposition of the property even if it designates the property as its principal residence for any or all of the years during which it held the property. However, to the extent that subsection 107(2) of the Act applies to the distribution of the property to a beneficiary who is resident in Canada, the non-resident trust will not realize a capital gain on the distribution so that its inability to use the principal residence exemption may not be an issue.

Another factor you may wish to consider is the information reporting rules for a beneficiary who holds an interest in a non-resident trust. While no additional tax is imposed as a result of these rules, a beneficiary with an interest in a non-resident trust is required to file an annual information return in respect of that interest. These rules, which also apply to a beneficiary who holds an interest in a non-resident trust that is deemed to be either a resident of Canada under paragraph 94(1)(c) or a non-resident corporation under paragraph 94(1)(d) of the Act, are in place to ensure that residents of Canada pay the appropriate amount of income tax on income accruing from their foreign holdings. Similarly, a non-resident, including a non-resident trust, that wishes to dispose of taxable Canadian property will normally be required to obtain a certificate with respect to the proposed disposition from the Canada Customs and Revenue Agency in order to limit the purchaser's liability for the non-resident's taxes in respect of the sale.

While the residence of your family farm corporation will not likely change as a result of the transfer of shares to a non-resident trust, we refer you to paragraphs 15 and 16 of the enclosed Interpretation Bulletin IT-391R, Status of Corporations, for comments on the residence of a corporation.

The enclosed copies of Interpretation Bulletin IT-349R3, Intergenerational Transfers of Farm Property on Death, and Interpretation Bulletin IT-268R4, Inter Vivos Transfer or Farm Property to Child, explain the various rollover provisions which may be applicable to farm property and to shares in a family farm corporation. One of these rollover provisions, subsection 70(9.2) of the Act, permits any gain that may otherwise be realized as a result of the deemed disposition of shares of the capital stock of a family farm corporation upon the death of a taxpayer to be reduced or eliminated provided the shares become vested indefeasibly in a child of the taxpayer as a consequence of the taxpayer's death and within 36 months of that time. Under subsection 70(9.2) of the Act, the deceased taxpayer's proceeds of disposition of the shares and the child's cost of acquiring those shares are considered to be either the same as the cost to deceased taxpayer or such other amount as chosen by the legal representative of the deceased taxpayer. As indicated in paragraph 3(c) of IT-349R3, this provision can apply even if the shares are held in a trust and not actually distributed to the child until the child reaches the age specified in the will.

We hope you find this information on possible tax considerations useful in your estate planning. Please note however that there may be other non-tax related issues that should be considered in making a choice of trustee or trustees for a trust to be created upon your death.

Yours truly,

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

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