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: 1.What are the tax consequences of an estate resident in Canada with non-resident beneficiaries?
2. What are the tax consequences of an non-resident estate with beneficiaries resident in Canada?
Position: 1. Generally, Part XIII tax on distributions of income.
2. The change in executors will result in a deemed disposition but the trust will likely not be deemed resident in Canada under existing 94(1)(c) or proposed 94(3) as the deceased was never resident in Canada. However, proposed 94.1 may apply.
Reasons: See general comments in letter.
XXXXXXXXXX 2004-006212
Annemarie Humenuk
Attention: XXXXXXXXXX
June 30, 2004
Dear Sirs:
Re: Tax Consequences for Resident and Non-Resident Estates
This is in reply to your letter of February 6, 2004, concerning the tax implications of an estate resident in Canada with non-resident beneficiaries and a non-resident estate with beneficiaries resident in Canada.
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").
You describe a scenario under which an individual who has never been a resident of Canada dies and bequeaths his property to his children, some of who are resident in Canada and some of who are not resident in Canada. The sole property of the estate consists of real property located outside of Canada that is held in partnership with another party. Currently, the Canadian children are the executors of the estate and it is expected that the estate may take several years to be fully administered. You would like to know whether the non-resident beneficiaries will be subject to tax in Canada on distributions from the estate. If the Canadian executors resign and are replaced with executors who are not resident in Canada, you would like to know whether the Canadian beneficiaries will be required to treat their interest in the estate as a foreign affiliate.
The particular circumstances outlined in your letter relate to a factual situation involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments which may be of assistance.
The CRA's views with respect to the residency of an estate are contained in Interpretation Bulletin 447, Residence of a Trust or Estate. The residence of an estate in Canada, or in a particular province in Canada, is a question of fact to be determined according to the circumstances in each case. However, an estate (referred to in this letter as a trust) is generally considered to reside where the executor or other legal representative who manages or controls the assets of the estate resides.
Canadian executors
Subject to subsections 104(13.1), (13.2) and 107(2.11), the amount of any income earned by a trust resident in Canada that is distributed to non-resident beneficiary is subject to Part XIII tax. The applicable rate of Part XIII tax is 25% except where the non-resident beneficiary is resident in a country with which Canada has an income tax convention. In such a case, the applicable rate can found in Information Circular 76-12R5, Applicable Rate of Part XIII Tax on Amounts Paid or Credited to Persons in Countries with Which Canada has a Tax Convention.
As stated in paragraph 17 of Interpretation Bulletin IT-465R, Non-Resident Beneficiaries of Trusts, the amount of any taxable capital gain of a Canadian trust that is payable to a non-resident beneficiary is also subject to Part XIII tax since the taxable capital gains realized by the trust form part of the trust's income for the purposes of the Act and are thus included in the beneficiary's income under subsection 104(13) to the extent that the amount 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 a non-resident beneficiary has been paid to that beneficiary as part of the capital distribution which gave rise to the gain. Thus, in the absence of an election under subsection 107(2.11), the portion of any taxable capital gain distributed to a non-resident beneficiary is subject to Part XIII tax as a distribution of trust income.
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 all or 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 an interest in a mutual fund trust which is not taxable Canadian property) 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.
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 form T2062, Notice of Disposition), the trust will not be required to remit or post any amount as security since the amount shown on the certificate of compliance will equal the full amount of the distribution.
Non-resident executors
If the Canadian executors of a testamentary trust resign and are replaced with non-resident executors, the trust will cease to be resident of Canada and subsection 128.1(4) will apply to deem the taxation year of the trust to end immediately before the trust ceases to be resident in Canada, and the trust will be deemed to have disposed of, and reacquired, each of its properties (other than property listed in subparagraphs 128.1(4)(b)(i) to (iii)) at the end of the trust's last taxation year in which it was resident in Canada for an amount equal to the fair market value of the property at that time. Additional information concerning the deemed disposition rules can be found in the guide T4056, Emigrants and Income Tax Guide 2003.
When the income of a testamentary trust, whether resident in Canada or not, is payable to a beneficiary resident in Canada, the amount is included in the beneficiary's income under subsection 104(13) of the Act.
In certain circumstances, paragraph 94(1)(d), as presently enacted, requires a Canadian beneficiary of a non-resident trust, holding a beneficial interest with a fair market value of 10% or more of the total fair market value of the non-resident trust (including a non-resident estate) to include in income that portion of the trust's income that would be included in the beneficiary's income if the trust were a foreign affiliate of the beneficiary. Paragraph 94(1)(d) only applies where the conditions in paragraph 94(1)(a) and (b) are met and the conditions in paragraph 94(1)(c) are not met. As a result, paragraph 94(1)(d) will generally not apply provided that the non-resident testamentary trust has never acquired any property directly or indirectly from a person who has been resident in Canada for more than 60 months.
However, under the proposed amendments released by the Department of Finance on October 30, 2003 entitled Legislative Proposals for the Taxation of Non-Resident Trusts and Foreign Investment Entities, a Canadian beneficiary's interest in a non-resident testamentary trust would typically constitute a "participating interest" in a "foreign investment entity" as those terms are defined in proposed subsection 94.1(1). If the legislation is enacted in the substantially the same form as currently proposed, effective for 2003 and subsequent years, the Canadian beneficiaries of the non-resident testamentary trust would be required to include an amount in income as determined under proposed subsection 94.1(4), 94.2(4) or 94.3(4) as applicable in the circumstances.
The cost of any property acquired by a beneficiary from a personal trust (including an estate) is computed under paragraph 107(2)(b) unless an election is made under subsection 107(2.001) or 107(2.002). The cost of property as determined under paragraph 107(2)(b) will typically equal the cost of the property to the trust immediately before the distribution. Where the property has been held by the testamentary trust since the death of the original owner of the property, the cost to the trust, and thus the cost to the beneficiary, will generally be the fair market of the property at the time of the original owner's death. The elections under subsections 107(2.001) and 107(2.002) allow a non-resident trust, or alternatively the Canadian beneficiary, to opt out of the application of subsection 107(2) in respect of a particular distribution of property. The effect of these elections on a beneficiary resident in Canada is that the beneficiary's adjusted cost base of the property received as a result of the distribution that was the subject of the election will typically be equal to the fair market value of the property at the time of the distribution. In the case of the election under subsection 107(2.002) made by the beneficiary, the election may also result in a capital gain on the disposition of the beneficiary's capital interest in the trust.
Note that, in certain circumstances, the Canadian beneficiaries may be required to file Form T1142, Information Return in Respect of Distributions from and Indebtedness to a Non-resident Trust, pursuant to section 233.6 for any year in which they receives a distribution of property from, or who is indebted to, a non-resident trust. Although section 233.6 is not applicable to a distribution from an estate that arose on and as a consequence of the death of an individual, it can be applicable to distributions from a non-resident testamentary trust once the estate has been administered.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5. In particular, our comments are based on the Act as currently enacted, and the draft legislation released in October 2003.
We trust our comments will be of assistance.
T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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