24 February 2003 External T.I. 2002-0131015 - Distribution of Capital to a non-resident

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: Is a certificate of compliance required in respect of a distribution of capital to a non-resident beneficiary from a trust resident in Canada?

Position: Yes

Reasons: A capital interest in a trust resident in Canada is TCP (except an interest in a MFT not described in (j) of the def'n of TCP). Any payment out of a trust after 1999 (other than the distribution of income or a capital dividend or a payment from a unit trust where the number of units held by the beneficiary is not reduced as a result of such payment) that can reasonably be considered to have been made because of the capital interest will result in a disposition of all or part of the beneficiary's capital interest in that trust. Thus, a distribution of capital to a non-resident beneficiary will normally result in the disposition of TCP by that non-resident beneficiary.

XXXXXXXXXX 	2002-013101
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

February 24, 2003

Dear XXXXXXXXXX:

Re: Distribution of Capital from a Trust to a Non-Resident Beneficiary

This is in reply to your letter of March 25, 2002, in which you ask us to reconsider our position in respect of a non-resident beneficiary's obligation to obtain a certificate of compliance under section 116 in respect of a capital distribution from a trust resident in Canada, which was announced at the 2001 Congress of the Association de planification fiscale et financière (APFF).

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

As set out in paragraph (d) of the definition of disposition in subsection 248(1) of the Act, a payment after 1999 in satisfaction of all or part of a beneficiary's capital interest in a trust will give rise to a disposition of that part of the beneficiary's capital interest in the trust. A capital interest in a trust resident in Canada (except in most cases, an interest in a mutual fund trust) constitutes taxable Canadian property under the definition of that term in subsection 248(1). Therefore, section 116 will apply when a trust resident in Canada (other than a mutual fund trust) distributes one or more of its properties to a non-resident beneficiary in satisfaction for all or part of the beneficiary's capital interest in the trust.

At the 2001 APFF, we stated that the trust making the distribution of capital to the non-resident beneficiary is considered to be the purchaser for the purposes of subsection 116(5) with the result that the trust would be liable under subsection 116(5) to pay the amount described in that subsection on behalf of the non-resident beneficiary. For this purpose, we confirmed that paragraph 107(2.1)(c) does not affect amount the trust is obligated to remit on behalf of the non-resident beneficiary.

You note that a non-resident beneficiary will not normally realize any capital gain as a result of the disposition of any part of the capital interest in a personal trust because the adjusted cost base of the interest as determined under paragraph 107(1)(a) will normally equal the proceeds of disposition of that interest. In addition, you contend that the trustee cannot be considered the purchaser of the interest in the trust when the interest, or part thereof, ceases to exist when the trustee makes a payment in satisfaction of that interest. Finally, you ask us to consider the burden that these procedures place on the trustees and beneficiaries when the trustees may be held liable for the failure to remit an amount even though the beneficiary has not realized any capital gain as a result of the disposition.

As stated in paragraph 32 of IC 72-17R4, Procedures Concerning the Disposition of Taxable Canadian Property by Non-residents of Canada - Section 116, the objective of these procedures is to protect the revenues of the Crown that are generated by taxes which may be exigible on the income and capital gains realized by a non-resident on the disposition of taxable Canadian property. Although we would agree that in many cases, the distribution of capital from a trust will not result in a capital gain to the non-resident beneficiary, it is possible that such a gain will arise, either because of the application of paragraph 53(2)(g.1) or because the trust is not a personal or prescribed trust.

Thus, although the non-resident may not realize any gain as a result of the disposition of the capital interest in the trust, the procedures set out in section 116 provide the Canada Customs and Revenue Agency (the CCRA) with sufficient information to ensure that the appropriate amount of tax is remitted on behalf of any gain that is taxable in the hands of the non-resident beneficiary. The procedures for requesting a clearance certificate under subsection 159(3) do not distinguish between resident and non-resident beneficiaries and as such cannot be relied upon to provide the CCRA with the information required to administer the collection of income tax. As a result, we maintain our view as expressed at the 2001 APFF.

It is not unreasonable to take the view that the trust is the purchaser in respect of a disposition of an interest in the trust as the trust is providing the beneficiary with the proceeds of disposition. This view is consistent with the views of Maurice Cullity, as expressed in his article published in volume 18 of the Estates, Trusts & Pensions Journal (pages 31-51), Post-Mortem Tax Planning: Renunciations, Disclaimers, Surrenders and Elections, where he notes that a release or surrender of an interest in a trust with no express intent to benefit any other person is considered to be a release or surrender of the interest to the trustees.

Where the non-resident beneficiary can show that no capital gain arises as a result of the disposition of the non-resident's capital interest in the trust (i.e., as shown by the calculation on T2062, Notice of Disposition), the trust will not be required to remit or post any amount as security as the amount shown on the certificate of compliance will equal the full amount of the distribution.

We trust our comments have clarified our position in this matter.

Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch