10 May 2004 Internal T.I. 2004-0057511I7 - NRH&WTrust:Barbados, Bermuda & Cayman Islands

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: Does 75(3) apply to Non-Resident Health and Welfare Trusts located in specific jurisdictions?

Position: To be determined on a case-by-case basis.

Reasons: Statutory interpretation.

May 10, 2004

International Tax Directorate					Pascal Tétrault
344 Slater Street, 6th Floor
Ottawa, Ontario						

Attention:  Linda Smith
									2004-005751

Operation of 75(3) & Non-Resident Health and Welfare Trusts

We are writing in response to your email of January 20, 2004 regarding the above captioned matter. You are asking for clarification on previously issued letters from this directorate (2002-0177447 and 2002-0152627) on the interaction of subsection 75(3) of the Income Tax Act (the "Act") and what is referred to in those letters as non-resident health and welfare trusts. You are also asking whether the operation of subsection 75(3) of the Act depends on the jurisdiction of residence of the trust.

Submissions were made on behalf of a taxpayer that health and welfare type trusts are generally exempt from the attribution rules in subsection 75(2) because both paragraph 75(3)(b) and (c) would apply.

COMMENTS

We partly agree with the taxpayer's representative on the interpretation of subsection 75(3) of the Act. Subsection 75(3) of the Act currently states:

(3) Exceptions - Subsection (2) does not apply to property held in a taxation year

(a) by a trust governed by a deferred profit sharing plan, an employee benefit plan, an employees profit sharing plan, a registered education savings plan, a registered pension plan, a registered retirement income fund, a registered retirement savings plan, a registered supplementary unemployment benefit plan or a retirement compensation arrangement;

(b) by an employee trust, a related segregated fund trust (within the meaning assigned by paragraph 138.1(1)(a)), a trust described in paragraph (a.1) of the definition "trust" in subsection 108(1), or a trust described in paragraph 149(1)(y);

(c) by a trust that

(i) is not resident in Canada,
(ii) is resident in a country under the laws of which an income tax is imposed,
(iii) is exempt under the laws referred to in subparagraph (ii) from the payment of income tax to the government of the country of which the trust is a resident, and
(iv) was established principally in connection with, or the principal purpose of which is to administer or provide benefits under, one or more superannuation, pension or retirement funds or plans or any funds or plans established to provide employee benefits;

(c.1) by a qualifying environmental trust; or

(d) by a prescribed trust.

It is also relevant to reproduce paragraph (a.1) of the definition "trust" in subsection 108(1), which reads:

108. (1) Definitions - In this subdivision,
"trust" includes an inter vivos trust and a testamentary trust but in subsections 104(4), (5), (5.2), (12), (13.1), (13.2), (14) and (15) and sections 105 to 107 does not include
[...]
(a.1) a trust, other than a trust described in paragraph (a) or (d), all or substantially all of the property of which is held for the purpose of providing benefits to individuals each of whom is provided with benefits in respect of, or because of, an office or employment or former office or employment of any individual,

I - PARAGRAPH 75(3)(b)

The first question to be answered is whether a non-resident trust, which admittedly does not comply with the all of the requirements stated in Interpretation Bulletin IT-85R2, can nevertheless fall within the ambit of paragraph (a.1) of the definition "trust" in subsection 108(1). This question is essentially a question of fact.

Where a trust does not meet the conditions of a health and welfare trust in IT-85R2, the trust may still be a group sickness or accident insurance plan and as such may qualify under paragraph (a.1) of the definition "trust" in subsection 108(1).

However, if the purpose of the trust property is to provide benefits in part to shareholders, the trust may not qualify under paragraph (a.1) of the definition "trust" in subsection 108(1), the condition being, inter alia, that "all or substantially all" of the property is held by the trust for the purpose of providing benefits in respect of, or because of, an office or employment or former office or employment of any individual. This condition is sufficiently broad without referring to the jurisprudence on the meaning of the expression "in respect of" to conclude that a trust that would normally qualify as a health and welfare trust under the bulletin referred to in the above paragraph would also qualify under paragraph (a.1) of the definition "trust" in subsection 108(1). For example, it is not because there is an element of reversion normally triggering the operation of subsection 75(2) that the trust could not fall within the ambit of paragraph (a.1) of the definition "trust" in subsection 108(1). To come to that conclusion would render meaningless the exception found in paragraph 75(3)(b) because this paragraph would partly be inapplicable.

It must be stressed that paragraph 75(3)(b) was amended by 2001, c. 17 making the new version applicable to the year 1999 and to subsequent years. The previous version of paragraph 75(3)(b) was in force in the above quoted letters issued from this directorate making subsection 75(2) fully applicable.

II - PARAGRAPH 75(3)(c)

To answer your question, the operation of paragraph 75(3)(c) of the Act depends on the jurisdiction where the trust is resident and on other elements. Generally, however, the trusts, which are the object of you query, will not benefit from the exception found in paragraph 75(3)(c). You query deals with trusts resident in Barbados, Bermuda and the Cayman Islands. Accordingly, we will focus on these jurisdictions for the purposes of this letter.

The first condition in paragraph 75(3)(c) is that the trust be non-resident in Canada. The trusts in your query will generally meet this criterion. However, if the trust is deemed resident in Canada under subsection 94(1) of the Act, the condition will not be complied with.

The second condition is that the trust be resident "in a country under the laws of which an income tax is imposed". This is the condition most of the trusts in your query will not comply with. No income tax is imposed under the laws of Bermuda and the Cayman Islands. Generally, these jurisdictions generate their revenues by way of indirect tax such as stamp duty and import duty. Barbados, for its part, imposes an income tax on individuals and corporations resident in Barbados.

The third condition is that the trust be exempt from the payment of income tax in the jurisdiction of residence. You are inquiring about trusts resident in Barbados subject to the International Trusts Act, L.R.O. (Barbados) ("International Trusts"). These trusts will not meet the third condition of paragraph 75(3)(c) of the Act. To come to this conclusion, we need to consider the laws of Barbados.

The relevant passage of the International Trusts Act, L.R.O. (Barbados) states at section 29:

(5) For the purposes of section 17 of the Income Tax Act, an international trust is deemed not to be domiciled in Barbados.

(6) Subject to subsection (7), an international trust is exempt from indirect tax, ad valorem stamp duty or other imposts on transactions undertaken or documents executed pursuant to its activities.

(7) An international trust shall pay a fixed duty as specified in the Schedule to the Stamp Duty Act.

In order to understand how International Trusts are treated under the Income Tax Act, L.R.O. (Barbados) it is necessary to understand how trusts are taxed in Barbados. The Barbadian tax regime is similar to its Canadian counterpart in the sense that trusts are deemed to be separate individuals with respect to the trust property and the income derived from its property. Trusts can also deduct, from their income of the year, the portion of the income that became payable to a beneficiary in that year.

Generally, residents in Barbados are taxed on their world income. The first $24,200.00 of taxable income of an individual is taxed at a rate of 25% and the excess at the rate of 40%. However, Barbadian residents not domiciled in Barbados are taxed based on source and remittance type income according to section 17 of the Income Tax Act, L.R.O. (Barbados) which states:

17. In calculating the assessable income for an income year of a resident person who during the income year is not domiciled in Barbados, the following amounts and no others shall be included, that is to say

(a) income derived from Barbados for that income year;

(b) income from an office in Barbados or employment exercised therein for the income year whether or not the contract of employment was made in Barbados and whether or not the employer is resident in Barbados;

(c) income from other sources outside Barbados whenever derived to the extent that a benefit is obtained in Barbados from that income in that income year in the form of a remittance of money, an importation of property, the granting of credit by bank overdraft or otherwise or in any other form whatever, and no deductions or allowances in respect of the calculation of assessable income shall be made in respect of income or the production of income not so included.

Individuals, like International Trusts, subject to section 17 of the Income Tax Act, L.R.O. (Barbados) are not exempt from the payment of an income tax. The concept of being exempt from the payment of income tax implies that immunity from tax is being granted. Immunity from tax was not granted by Barbados to International Trusts because they are subject to tax at rates stated above on source and remittance type income. To come to a different conclusion would be equivalent to say that non-residents are exempt from paying tax in Canada, which is obviously ill founded in law considering paragraph 2(3) of the Act and several other provisions of the Act.

The concept of having no tax payable for a year, for instance where the income for the year is nil, is different from the concept of being exempt from paying tax.

We hope the foregoing comments are of assistance.

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch