18 July 2001 External T.I. 2000-0047355 - FOREIGN PROPERTY REPORTING

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: Income of a Canadian resident beneficiary from a U.S. and testamentary trust and foreign reporting requirements

Position: General comments

Reasons: N/A

XXXXXXXXXX 						2000-004735
S. Leung
July 31, 2001

Dear XXXXXXXXXX:

Re: Foreign Property Reporting

We are writing in reply to your letter of September 7, 2000 in which you requested our view as to whether your method of reporting the income of a Canadian resident beneficiary of a U.S. testamentary trust in accordance with the amounts of income and capital gains or losses as shown on U.S. Form 1041 K-1 (translated in Canadian currency) is correct and whether the beneficiary can claim a foreign tax credit for U.S. income tax paid which is attributable to such income and gains. You stated that the beneficiary is a Canadian resident individual who may or may not be a U.S. citizen. You also inquired whether any of the foreign reporting requirements described in sections 233.1 to 233.6 of the Income Tax Act (the "Act") applies with respect to the situation noted above.

Our Comments

The situation outlined in your letter appears to relate to an actual situation involving identifiable taxpayers. Accordingly, the applicable Tax Services Office should be consulted with respect to the income tax liabilities and reporting requirements of such a taxpayer. However, based on the very limited information you provided, we can offer only very general comments.

In our following comments, it is assumed that the trust is a trust resident in the U.S. both for U.S. tax purposes and for the purpose of the Canada-United States Income Tax Convention. As a result, notwithstanding the provisions of subsection 94(1) of the Act, the trust would not be considered resident in Canada because of the application of subsection 250(5) of the Act.

It is our understanding that under the U.S. tax law an estate can be either a simple trust or complex trust. Simply put, a simple trust is one where the trust is required to distribute all of its income annually to its beneficiaries while a complex trust can accumulate income in its hands and be taxed on such income in the year where the income is earned (other than that which was distributed in that year). Where U.S. income tax is paid by the trust for the income or gains of the trust not distributed or payable to the beneficiaries, such tax is not creditable or deductible by the beneficiary for Canadian tax purposes as the tax paid or payable is the liability of the trust, not that of the beneficiaries.

Where the income and capital gains earned and realized by the trust did not accumulate in the trust and was distributed to the beneficiary in the year it was earned and realized, the amount distributed by the trust would be considered income from the trust for the Canadian resident beneficiary. As such it should be reported as foreign income on the beneficiary's Canadian income tax return. Where U.S. withholding tax is applicable to the amount of the distributed income to the beneficiary, the beneficiary would be eligible for a foreign tax credit. However, as a result of the application of subsection 20(11) of the Act, which allows a deduction for the foreign tax paid in excess of 15% on income from property, such foreign tax credit would be limited to a maximum of 15% of the gross amount of the income from the trust.

Where the beneficiary is a U.S. citizen resident in Canada, the beneficiary is taxed in the U.S. on his or her world-wide income including the income distributed or allocated by the trust. To the extent that the distributed income is included in computing income of the beneficiary for Canadian income tax purposes, a foreign tax credit or a subsection 20(12) deduction is available in Canada subject to the application of subsection 20(11) of the Act.

The information you provided is insufficient to determine whether any of the foreign reporting requirements contained in section 233.1 to 233.6 of the Act is applicable. For example, it is not clear whether the deceased person is the only transferor of property to the trust, whether there is any business transactions carried on by the trust or the Canadian resident beneficiary, whether the trust owns any shares of a foreign corporation which is a foreign affiliate of the trust, or whether the trust is an estate that arose on and as a consequence of the death of an individual.

Section 233.1 of the Act is not applicable if there is no transaction that relates in any manner whatever to a business carried on by the beneficiary or the trust. If the deceased person is the only person who transferred or lent property to the trust, section 233.2 of the Act is not applicable because the transferor has deceased and therefore cannot be resident in Canada at the end of the trust's year. It appears that the rules in section 233.3 of the Act would not apply because the interest in the non-resident trust is not a "specified foreign property" by virtue of paragraph (m) of the definition of that term under subsection 233.3(1) of the Act unless the Canadian resident beneficiary's interest in the trust was acquired for consideration. Section 233.4 of the Act is not applicable if there is no foreign affiliate involved or the transferor (i.e., the deceased person) is not a person described in clause 94(1)(b)(i)(A) of the Act. Lastly, section 233.6 of the Act is not applicable if the non-resident trust is an estate that arose on and as a consequence of the death of an individual. However, if the estate has been administered and the Canadian beneficiary is a beneficiary of a testamentary trust, section 233.6 of the Act will require an information return to be filed by the Canadian beneficiary for any year in which the beneficiary receives a distribution of property from the trust, subject to the exceptions noted therein.

As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Customs and Revenue Agency.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch