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 the accrued gain realized by a trust on the distribution of property to a n/r beneficiary considered payable to that beneficiary in the absence of an election under 107(2.11)?
Reasons: In the absence of any evidence of an intention to the contrary, it is reasonable to conclude that the distribution of property with an accrued gain includes the capital gain that has accrued on such property and to the extent that the capital gain is included in the trust's income for tax purposes, it is payable to the beneficiary. Where the trustees do not intend to distribute the gain to the beneficiary, an election can be made under 107(2.11).
June 24, 2003
Re: Capital Distribution from a Testamentary Trust to a Non-resident Beneficiary
This is in reply to the letter of January 29, 2003, from XXXXXXXXXX of your office concerning the distribution of property with an accrued gain from a trust resident in Canada to a non-resident beneficiary.
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 (the "Act").
The letter describes the situation where a testamentary trust resident in Canada is created to hold shares of a publicly traded corporation for the benefit of a non-resident beneficiary. When the shares are distributed to the beneficiary, the value of the shares has increased such that the trust will realize a gain on the disposition of the shares. The shares are not taxable Canadian property. You ask us to confirm your analysis of the relevant tax consequences related to that distribution.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant tax services office. However, we are prepared to provide the following general comments.
The explanatory notes released by the Department of Finance in connection with the introduction of subsection 107(2.11) acknowledge that a taxable capital gain realized by a trust upon the distribution of property with an accrued capital gain could be construed as having been made payable to the beneficiary who received the property. When a trustee makes an election under paragraph 107(2.11)(a) in a particular taxation year, the amount of any taxable capital gain realized on the distribution of property with an accrued gain to a non-resident beneficiary, including a partnership that is not a Canadian partnership, is treated as having not been made payable to the non-resident beneficiary who receives such a distribution. The election under paragraph 107(2.11)(a) applies to all distributions of property made to a non-resident beneficiary in the particular year or any subsequent year, and results in the amount of any capital gain realized as a result of such distributions being recognized at the trust level.
You ask whether the Canada Custom and Revenue Agency takes the view that, where the trustee has not made an election under paragraph 107(2.11)(a), a distribution of property to a non-resident beneficiary necessarily results in the amount of any taxable capital gain realized as a result of the distribution being considered to be payable to that non-resident beneficiary such that the trustee would be required to remit Part XIII tax on behalf of the non-resident beneficiary in respect of such amounts.
As stated in paragraph 17 of Interpretation Bulletin IT-465R, Non-Resident Beneficiaries of Trusts, the amount of any taxable capital gain of a trust that is payable to a non-resident beneficiary is subject to Part XIII tax since the taxable capital gains so realized form part of the trust's income for the purposes of the Act and would thus be included in the beneficiary's income under subsection 104(13) to the extent that it is payable to the beneficiary in the taxation year. In the absence of any evidence to the contrary, a reasonable argument can be made that the taxable portion of any accrued gain on the property distributed to the non-resident beneficiary has been paid to that beneficiary as part of the capital distribution which gave rise to the gain. The absence of an election by the trustee under subsection 107(2.11) supports the view that such a result was intended in a respect of a particular trust. Thus, in the absence of an election under subsection 107(2.11), the portion of the trust's income so distributed to the non-resident beneficiary (the taxable portion of the capital gain) would be subject to Part XIII tax as a distribution of trust income.
In addition, you asked us to comment on the amount that would be required to be remitted by the beneficiary in order to obtain a certificate of compliance under section 116 in respect of the beneficiary's disposition of his or her capital interest in the trust. 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 beneficiary 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.
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.
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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