2 May 2001 External T.I. 2001-0077705 - Non-resident Trusts

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: 1. Is a trust that is factually not resident in Canada subject to tax in Canada as a resident of Canada if the contributor(s) have never been and never will be resident in Canada where the trust has a contingent beneficiary who is resident in Canada?

2. What are the information reporting requirements in respect of such a non-resident trust?

Position: 1. No. 2. T1142 must be filed by the Canadian resident beneficiary in any year in which s/he becomes entitled to receive a distribution or becomes indebted to the trust. T1141 and T1135 would not be required based on the facts described in the letter.

Reasons: 1. Under current law, the trust would not be deemed to be resident in Canada because the condition in 94(1)(b) is not met based on the facts presented. Under the proposed legislation, the trust would have neither a resident contributor nor a resident beneficiary.

2. 233.2, 233.3 & 233.6

XXXXXXXXXX 		2001-007770
		  Annemarie Humenuk
May 2, 2001

Dear XXXXXXXXXX:

Re: Offshore Family Trusts

This is in reply to your letter of January 26, 2001, addressed to the Toronto Centre Tax Services Office concerning the potential Canadian tax liability and filing requirements in respect of an offshore family trust settled by a non-resident of Canada.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

You state that you and your spouse intend to contribute property to a trust which will be resident in South Africa. The primary beneficiaries of the trust will be you, your spouse, your children and any other descendants who are living during the period the trust is in existence. Neither you, your spouse nor your children have ever been resident in Canada nor do any of you plan to take up residence in Canada. In the event that all the above-named beneficiaries die before the termination of the trust, any property remaining in the trust will be distributed to your brother and your brother-in-law. While your brother is not a resident of Canada, your brother-in-law is. For the purpose of your query, it is assumed that none of your brother, grandchildren or other descendants will ever become resident in Canada.

Your bank has provided you with a summary of some of the tax consequences that may apply to a trust which is not factually resident in Canada (referred to as a "non-resident trust" in this letter) but which has beneficiaries who are resident in Canada. You ask whether these rules would apply to the non-resident trust you intend to set up from the day of its inception or whether the rules would only apply if and when your brother-in-law, a resident of Canada, actually becomes entitled to receive a distribution from the non-resident trust. As explained in the attached Information Circular 70-6R4, Advance Income Tax Rulings, it is not our practice to comment on a proposed transaction involving a specific taxpayer, except by way of an advance income tax ruling. Nevertheless, we offer the following general comments which may be of assistance to you.

Generally speaking, a non-resident trust is only taxable in Canada on its income earned from sources in Canada unless section 94 applies. Under current Canadian income tax law, a non-resident trust will generally be deemed to be resident in Canada under subsection 94(1) if:

(a) any of the beneficiaries of the trust is either resident in Canada, is a trust or corporation with which a person resident in Canada is not dealing at arm's length or is a controlled foreign affiliate of a person resident in Canada;

(b)(i) the non-resident trust acquired any property, directly or indirectly, in any manner whatsoever from either

(A) the beneficiary, a person related to the beneficiary or an aunt, uncle, niece or nephew of the beneficiary, and the person who contributed the property to the trust meets certain residency requirements, or

(B) a trust or corporation that acquired the property directly or indirectly in any manner whatever from persons described in (A), or (ii) any of the beneficiaries of the trust acquire any part of their interest in the trust directly or indirectly by means of a purchase or as a gift, bequest, inheritance from a person described in (b)(i), or as a result of the exercise of a power of appointment by such a person; and

(c) the amount of income or capital of the trust to be distributed to any beneficiary at any time depends on any person's exercise or failure to exercise a discretionary power (a "discretionary trust").

As the conditions specified in (a), (b) and (c) must all be met in order for the trust to be deemed to be resident in Canada, we have considered each of these conditions as they relate to the scenario you describe.

(a) For the purposes of paragraph 94(1)(a) and the Act generally, a beneficiary of a trust includes a person like your brother-in-law, whose beneficial interest in the trust is contingent upon the death of another person.

(b) The residency requirements referred to in subparagraph 94(1)(b)(i) essentially exclude a person who has never been a resident of Canada. Thus, the condition in subparagraph 94(1)(b)(i) is not met when all of the property of a non-resident trust is acquired from one or more persons who have never been resident in Canada. If any such person who has contributed property to the non-resident trust subsequently becomes a resident of Canada, the residency requirements in clause 94(1)(b)(i)(A) should be re-examined. In addition, subparagraph 94(1)(b)(ii) should be examined if any beneficiary acquires his or her interest directly or indirectly from a person described in (b) above or purchases the interest in any manner whatsoever.

(c) A trust such as the one you describe would be considered a discretionary trust as described in paragraph 94(1)(c).

Based on the facts you presented, paragraph 94(1)(b) does not apply and, consequently, the non-resident trust you describe would not be deemed to be resident in Canada.

On June 22, 2000, draft legislation was released by the government that proposes to significantly change the rules relating to non-resident trusts effective for taxation years beginning after 2001. If enacted as proposed, the amendments will apply equally to non-resident trusts in existence on January 1, 2002 and to non-resident trusts created after that date. Under proposed changes, a non-resident trust will be deemed to be resident in Canada if there is either a "resident contributor" or a "resident beneficiary" as those terms are defined in proposed subsection 94(1).

Under the proposed amendments, a "resident contributor" to a non-resident trust means a person who is, at that time, both resident in Canada and a "contributor" to the trust within the specific meaning given to the term "contributor" under the proposed amendments, but does not include an individual (other than a trust) who has not, at that time, been resident in Canada for a period of, or periods the total of which is, more than 60 months.

A beneficiary who is resident in Canada will be considered a "resident beneficiary" under the proposed amendments whenever there is a "connected contributor" to the non-resident trust provided that the beneficiary's interest in the trust is not solely contingent on the subsequent death of an individual who is related at that time to the contributor to the trust or would have been so related if every individual who existed before that time had existed at that time. A person who has never been and never will be resident in Canada will not be a "connected contributor" as that term is defined in proposed subsection 94(1). Furthermore, the facts described in your letter suggest that your brother-in-law's interest in the non-resident trust is solely contingent on the death of certain beneficiaries, each of whom is related to one or more of the contributors to the non-resident trust. Thus, even if the non-resident trust described in your letter had a connected contributor, your brother-in-law would not be a resident beneficiary of the non-resident trust described in your letter. As a result, based on the facts provided, it would appear that the non-resident trust described in your letter would not be deemed to be resident in Canada under the proposed amendments to section 94 released June 22, 2000.

The summary of tax consequences supplied by your bank also refers to the information reporting requirements that may be applicable in respect of a non-resident trust. The following information returns may apply in respect of a non-resident trust that is not a foreign affiliate of a resident of Canada.

Section 233.2 requires information return T1141 to be filed when a person transfers or loans property directly or indirectly, in any manner whatsoever, to certain non-resident trusts and that person is a resident of Canada or a controlled foreign affiliate of a resident of Canada at the end of the trust's taxation year in which the contribution is made. While the draft legislation proposes to amend this provision, T1141 will still not be required in respect of a transfer or loan from an individual who is not resident in Canada at the end of the trust's taxation year in which the contribution is made.

Section 233.3 requires information return T1135 to be filed when a specified Canadian entity, including a Canadian beneficiary of a non-resident trust, has an interest in a specified foreign property, including an interest in a non-resident trust, which has a cost amount in excess of $100,000.

Section 233.6 requires information return T1142 to be filed by a Canadian beneficiary of a non-resident trust for any year in which the beneficiary receives a distribution from, or becomes indebted to, the non-resident trust. It is required to be filed on or before the day on which the person's income tax return for the year in which the distribution was received or indebtedness incurred is due. This information return is required even if the amount of the distribution is not required to be included in the beneficiary's income (as would be the case if the distribution was made from the capital of the trust).

As indicated in paragraph 22 of Information Circular 70-6R4, this opinion is not an advance income tax ruling and consequently, is not binding on the Canada Customs and Revenue Agency.

Yours truly,

T. Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

Enclosure

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