5 March 2002 External T.I. 2001-0074395 - Deemed Residence Trust, Section 11694(1)(c)

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether deemed residence of trust under (i) current subsection 94(1) and (ii) proposed subsection 94(3) means section 116 does not apply and (iii) whether subsection 250(5) can apply to such trusts.

Position: (i) Yes; (ii) No; (iii) Dual residency possible if subsection 250(5) not apply.

Reasons: (i); and (ii) Different wording of current and proposed legislation; (iii) Most income tax conventions entered into by Canada do not provide for residency 'tie-breaker' rules to apply to trusts. This issue is generally left to the discretion of the Competent Authorities.

XXXXXXXXXX  	2001-007439
		Suzanie Chua
March 5, 2002

Dear XXXXXXXXXX:

Re: Trusts Deemed Resident in Canada and Section 116

This is in reply to your letter requesting our interpretation of the application of section 116 of the Income Tax Act ("the Act") to a foreign trust that is deemed to be resident in Canada under current subsection 94(1) and also under proposed subsection 94(3). You have defined a "foreign trust" as a trust all of the trustees of which are resident in a country with which Canada has an income tax treaty.

You state the view that it would be inappropriate to file a notification requirement under section 116 because the current provisions of subsection 94(1) deem the trust to be a resident of Canada for purposes of Part I of the Act where certain conditions are met. Consequently, you also state that no purchaser of taxable Canadian property from such a trust would be liable to pay an amount to the Minister pursuant to subsection 116(5) or subsection 116(5.3) of the Act even though no certificate under section 116 was obtained.

Finally, you state that subsection 250(5) will not apply to a trust deemed resident pursuant to subsection 94(1) because it is only deemed to be a resident of Canada for purposes of Part I of the Act and not, as required by subsection 250(5) of the Act for the purposes of the Act which you believe to be for all purposes of the Act.

Comments

The situation outlined in your letter appears to involve either actual proposed transactions or an existing business arrangement involving identifiable taxpayers. Confirmation as to the income tax consequences of proposed transactions will only be given in the context of an advance income tax ruling. The procedures for making a request for an advance income tax ruling are outlined in Information Circular 70-6R4, dated January 29, 2001, issued by Canada Customs and Revenue Agency ("CCRA"). If the arrangement described already exists, assistance in determining its Canadian tax results may be obtained from a Tax Services Office of the CCRA. We can, however, offer the following general comments.

Pursuant to current subparagraph 94(1)(c)(i), where a trust meets certain conditions, the trust is deemed "for the purposes of this Part and section 233.3 and 233.4 to be a person resident in Canada...". The Part therein referred to is Part I of the Act. Accordingly, we agree that should the trust satisfy those conditions, pursuant to subparagraph 94(1)(c)(i), it is deemed resident of Canada for all purposes of Part I of the Act, including section 116.

Under proposed subsection 94(3) released August 2001, a trust is deemed to be resident in Canada for very specific purposes enumerated therein. Unlike current subsection 94(1), the deemed status does not extend to the whole of Part I of the Act. Therefore, in our view, under the August 2001 draft legislation, a trust subject to subsection 94(3) would not be deemed to be resident in Canada for purposes of section 116 of the Act.

With respect to subsection 250(5), in our view, this provision can be invoked if the applicable income tax convention or treaty determines that a person is resident in the other country and not Canada, that is to say, the 'tie-breaker' rules in the treaty operated in favour of the other contracting state, not Canada. While a trust is a "person" under most income tax conventions Canada has in force with other contracting states, a trust is not an "individual" and as such, would not be entitled to avail itself of the tie-breaker rule in the provisions of a treaty that are applicable only to individuals. Using the Canada-US Income Tax Convention as an example, paragraphs 2 and 3 of Article IV of that Convention refer to "individual" and "company" respectively, both of which defined terms do not encompass a "trust". Therefore, in our view, a trust that is deemed resident of Canada pursuant to current subsection 94(1) or proposed subsection 94(3) will be considered dual resident in our example.

However, a trust can access subsection 250(5) if mutual agreement procedures (such as that in paragraph 4 of Article IV of the Canada-US Income Tax Convention) can be invoked but it appears unlikely that the CCRA would agree that a trust described in paragraph 94(1)(c) of the Act was not resident in Canada. In the unlikely event a trust were determined to be resident in the other contracting state and not in Canada under an income tax convention pursuant to the tie-breaker rule therein, by virtue of subsection 250(5), it is our view that the provisions of section 116 would apply in respect of a disposition of taxable Canadian property by the trust.

We trust these comments will be of assistance.

Yours truly,

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