5 March 2004 Internal T.I. 2003-0024621I7 - Deemed Resident Trust -Deductions

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.

Principal Issues: Whether a non-resident trust deemed resident in Canada under 94(1)(c) is entitled to a deduction in computing income under 104(6) for an amount payable to a non-resident beneficiary in respect of a taxable capital gain on taxable Canadian property.

Position: No.

Reasons: Wording of the Act as explained in the interpretation.

							March 5, 2004

Mrs. Linda Smith						Trusts Section
Offshore Trust Project Coordinator
International Tax Operations Division
International Tax Directorate
344 Slater Street, 6th Floor
Ottawa ON
									2003-002462

Deductions in Computing Income of a Deemed Resident Trust

This is in response to your enquiry concerning clause 94(1)(c)(i)(A), subsection 104(6) and paragraph 115(1)(f) where:

1. a trust has a taxable capital gain on the disposition of taxable Canadian property that is not treaty-protected property, and

2. that gain is distributed in the same year that the gain is realized to a beneficiary who is neither resident nor deemed resident in Canada.

Specifically, you ask whether in computing the clause 94(1)(c)(i)(A) amount, the trust is entitled to a subsection 104(6) deduction or a deduction under paragraph 115(1)(f) for an amount equal to that taxable capital gain.

Clause 94(1)(c)(i)(A) refers to "the amount, if any, that would but for this subparagraph be its taxable income earned in Canada for the year."

In other words, for purposes of clause 94(1)(c)(i)(A), the deemed residency of the trust under paragraph 94(1)(c) is ignored in computing its taxable income earned in Canada.

Subsection 115(1) provides:

For purposes of this Act, the taxable income earned in Canada for a taxation year of a person who at no time in the year is resident in Canada is the amount, if any, by which the amount that would be the non-resident person's income for the year under section 3 if

(a) the non-resident person had no income other than...

(iii) taxable capital gains from dispositions described in (b) [dispositions of taxable Canadian properties other than treaty-protected properties]...

exceeds the total of...

(f) where all or substantially all of the non-resident person's income for the year is included in computing the non-resident person's taxable income earned in Canada for the year, such of the other deductions permitted for the purpose of computing taxable income as may reasonably be considered wholly applicable.

In computing income under section 3, we note the Explanatory Notes issued by the Department of Finance in July of 1995 with respect to section 180.2 which state, among other things:

It should be noted that, under the scheme of the Act, the provisions of Division B of Part I (Computation of Income) apply to require both residents and non-residents to calculate their incomes in the same manner. Non-residents may be entitled to certain deductions under Division D in arriving at taxable income.

If the trust were computing income under section 3, it would deduct amounts paid or payable to beneficiaries under subsection 104(6), subject to subsection 104(7). Subsection 104(7) denies a subsection 104(6) deduction for income paid or payable in the year to designated beneficiaries unless throughout the year the trust is resident in Canada. The definition of designated beneficiary is set out in section 210, and includes a non-resident beneficiary.

Thus, in the scenario you presented, the non-resident trust is not entitled to a deduction under subsection 104(6).

With regard to paragraph 115(1)(f), it deals with deductions in computing taxable income of a non-resident. As set out in paragraph 3 of Interpretation Bulletin IT-171R2: "For the purposes of computing taxable income earned in Canada, a non-resident individual may claim the total of certain Division C deductions permitted by virtue of paragraphs 115(1)(d), (e) and (f)...." Thus, paragraph 115(1)(f) does not otherwise entitle the trust to a subsection 104(6) deduction which has been denied by subsection 104(7).

You asked what the consequences would be if a paragraph 94(1)(c) trust distributes a taxable capital gain to a Canadian resident beneficiary. The taxable capital gain would be included in the Canadian resident beneficiary's income under subsection 104(13). It is unlikely that this beneficiary is a designated beneficiary. If the beneficiary is not a designated beneficiary, then subsection 104(7) would not apply to deny the non-resident trust a deduction under subsection 104(6) for the purpose of computing its income. The subsection 115(1) taxable income earned in Canada would then be nil. It follows then that the amount determined under clause 94(1)(c)(i)(A) is also nil. Essentially then, the Canadian resident beneficiary, rather than the deemed resident trust, is liable to tax on the taxable capital gain.

As you know, we have not previously addressed the interaction of the provisions in question. We note the following comments made by M. Cullity, in an article entitled "Non-resident Trusts," 1981 Conference Report, at page 657:

Where the trust contains discretionary power of the kind mentioned, the trust is deemed to be a person resident in Canada who is not exempt from tax under section 149 and whose taxable income is the aggregate of:

(i) the trust's taxable income earned in Canada for the year as determined under Division D of the Act as if the trust were not resident in Canada;

(ii) the amount that would be its FAPI if there were no discretionary power and, in consequence, it were deemed to be corporation for the purposes of section 94; and

(iii) the amount, if any, of the FAPI of a controlled foreign affiliate of the trust (determined on the assumption that the trust is resident in Canada).

It is expressly provided that, for the purposes of computing the taxable income of a discretionary trust, amounts payable to a beneficiary may be deducted from the amounts included in computing taxable income under (ii) and (iii) above [subsection 94(3)]. Despite the absence of any express reference to a similar deduction in computing the trust's taxable income earned in Canada, it would seem that amounts payable to a beneficiary who is resident in Canada are deductible for this purpose by virtue of subsection 104(6). Any amounts of taxable income earned in Canada that are payable to non-resident beneficiaries would not be deductible [footnote reference to subsection 104(7)]. [my additions]

If you have any questions concerning this memorandum, please contact T. Murphy.

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