29 May 2003 External T.I. 2002-0180235 - Residence of a Trust for Treaty purposes

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: 1. Is a trust that is subject to 94(3) and which is liable for tax in the US as a resident of the US considered to be resident in the US for the purposes of the Canada-US Treaty?

2. If the trust is resident in the US for the purpose of the Canada-US Treaty, will 250(5) apply to eliminate any Part I tax payable in Canada?

Position: 1. Where a trust is resident in both countries by reason of the laws of each country, the residency for the purpose of the treaty is determined by the Competent Authorities.

2. Where the Competent Authorities have determined that a particular trust is resident in the US for the purpose of the Canada-US Treaty, 250(5) will apply to deem the trust to be non-resident of the purposes of the Act.

Reasons: see above

XXXXXXXXXX 	2002-018023
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

May 29, 2003

Dear XXXXXXXXXX:

Re: Residence of a Trust

This is in reply to your letter of December 10, 2002, in which you ask for our comments on the residence of a trust where the trust is deemed to be resident in Canada under proposed subsection 94(3) for the purposes of the Income Tax Act and is also liable for income tax in the U.S. as a resident of the U.S.

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

In the scenario you presented, residents of Canada establish a trust (the "Trust") for the benefit of their adult children who are resident in the U.S. The trustees of the Trust are resident in the U.S. and the Trust's income is derived from shares of a U.S. corporation that carries on its business in the U.S. You note that the Trust will be deemed to be resident in Canada effective for 2003 under proposed subsection 94(3). You further state that the Trust is considered to be resident in the U.S. for the purpose of U.S. tax law and is required to pay U.S. income tax on all of its income, regardless of where such income is earned.

You ask us to comment on the following three questions:

1. You ask whether the Trust would be considered resident in Canada or the U.S. for the purpose of the Canada-United States Tax Convention (1980) (the "Treaty").

2. In the event that the Trust is determined to be resident in the U.S. and not resident in Canada for the purpose of the Treaty, you ask whether subsection 250(5) would apply to deem the Trust to be non-resident of Canada for all purposes of the Act.

3. Proposed subsection 94(5) deems a trust, which was deemed to be resident in Canada under proposed subsection 94(3) for the immediately preceding taxation year, to have ceased to be resident in Canada at the moment when the trust first has neither a resident contributor nor a resident beneficiary. You ask whether any gains that might otherwise arise by reason of the application of paragraph 128.1(4)(b) as a result of such a deemed cessation of residence of the Trust would be exempt by reason of either subsection 250(5) or paragraph 4 of Article XIII of the Treaty.

Comments

Although a technical interpretation was requested, the scenario presented appears to contemplate an actual fact situation. We provide assurance with respect to actual proposed transactions only by way of advance income tax rulings. If your situation involves completed transactions of actual taxpayers, you may wish to submit all relevant facts and documentation (including taxpayer identification) to the appropriate tax services office for their comments. We are, however, prepared to provide some general comments applicable to the fact scenario described.

1. The determination of the residency of a trust for the purposes of the Act is determined according to the laws of Canada. As stated in the Department of Finance Technical Notes to the draft legislation released in October 2002, a trust that is deemed to be a resident of Canada under proposed subsection 94(3) is considered to be resident in Canada for the purpose of the various tax conventions with other countries. Thus, it is possible that a trust may be considered to be resident in both countries for the purpose of Article IV of the Treaty. As stated in paragraph 4 of Article IV of the Treaty, where a trust is liable for tax in both countries by reason of its residency in each country, the manner in which the Treaty will apply to the trust is to be determined by the competent authorities of Canada and the U.S. Canadian taxpayers seeking to invoke the assistance of the Canadian competent authority should follow the procedures set out in Information Circular 71-17R4, Request for Competent Authority Consideration under Mutual Agreement Procedures in Income Tax Conventions.

2. & 3. In the event the competent authorities of Canada and the U.S. agree that a particular trust is considered to be a resident of the U.S. and not a resident of Canada for the purpose of the Treaty, subsection 250(5) would apply to deem that trust not to be resident in Canada for any purpose of the Act. In such a case, proposed subsection 94(5) would have no application when the trust ceased to have any resident contributors and any resident beneficiaries provided that the trust had not been resident, or deemed to be resident, in Canada in the previous taxation year. If the trust had been resident, or deemed to be resident, in Canada for the previous taxation year and subsection 250(5) applies to the current year, then the trust would be subject to the rules in subsection 128.1(4) when it ceased to be resident in Canada for the purposes of the Act. Any taxable capital gain arising as a result of such a deemed disposition would not be exempt from tax in Canada by reason of the Treaty as the trust would be considered a resident of Canada for the purpose of the Treaty at the time of the disposition.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

We trust our comments will be of assistance.

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