5 January 2005 External T.I. 2004-0083551E5 - Immigration of a discretionary trust

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: Follow up comments on the answer we provided to question 7 of the 2004 STEP Round table.

Position: Remains as stated in answer to question 7 of the 2004 STEP Round Table.

Reasons: Previous positions.

XXXXXXXXXX 							2004-008355
								Éric Allard-Pouliot
January 5, 2005

Dear Sir:

Re: Technical Interpretation Request: 2004 STEP Round Table - Question 7

This is in reply to your electronic mail of June 30, 2004, regarding the above-noted subject. In your correspondence you raised some concerns regarding the comments we made in answer to question 7 of the 2004 STEP Round Table, which involved the interaction of paragraph 94(1)(c) and subsection 128.1(1) of the Income Tax Act (the "Act") to a non-resident discretionary trust that was deemed resident of Canada prior to becoming a factual resident. The concern raised in your correspondence is that the interaction of these two provisions in such a case may result in an immediate tax liability due to the deemed disposition and reacquisition of the trust's property.

Comments

In answer to question 7 of the 2004 STEP Round Table we confirmed that subsection 128.1(1) of the Act would find application where a non-resident discretionary trust that is deemed resident of Canada pursuant to paragraph 94(1)(c) of the Act becomes factually resident in Canada. As a result of the application of paragraph 128.1(1)(a) of the Act, the taxation year of the trust during which it becomes factually resident in Canada would be deemed to have ended immediately before the particular time it becomes factually resident in Canada (the "First Short Taxation Year") and a new taxation year would be deemed to have begun at that particular time. Pursuant to paragraph 128.1(1)(b), the trust would also be deemed to have disposed, immediately before the end of the First Short Taxation Year, of each property owned by it.

Although we do agree that the interaction of paragraph 94(1)(c) and subsection 128.1(1) of the Act in such a scenario could result in an immediate Canadian tax liability, it is to be noted that the application of clause 94(1)(c)(i)(A), subsection 104(2), paragraph 115(1)(b), and subparagraphs 115(1)(a)(iii) and 128.1(1)(b)(i) of the Act would curtail such liability to that resulting from the deemed disposition of each property of the trust that is not a "taxable Canadian property" within the meaning of subsection 248(1) of the Act. Since pursuant to subsection 104(2) of the Act a trust is deemed to be an individual with respect to its property, it follows that the exception provided in subparagraph 128.1(1)(b)(i) of the Act would apply so as to exclude the trust properties that are taxable Canadian properties from the deemed disposition provided in paragraph 128.1(1)(b) of the Act. Given that pursuant to subparagraph 115(1)(a)(iii) and paragraph 115(1)(b) of the Act only the taxable capital gains resulting from the disposition of taxable Canadian properties would have to be included in computing the trust's taxable income earned in Canada, it follows that any taxable capital gain resulting from the deemed disposition of the trust property in accordance with paragraph 128.1(1)(b) of the Act would not be included in the trust's taxable income under clause 94(1)(c)(i)(A) of the Act.

However, any property of the trust that is not a taxable Canadian property within the meaning of subsection 248(1) of the Act would be subject to the paragraph 128.1(1)(b) deemed disposition. In accordance with clause 94(1)(c)(i)(B) and the definition "foreign accrual property income" in subsection 95(1) of the Act, such portion of the taxable capital gains resulting from the deemed disposition of these properties as may reasonably be considered to have accrued after the 1975 taxation year of the trust would be added in computing the trust's "foreign accrual property income".

In light of the above, it follows that the interaction of paragraph 94(1)(c) and subsection 128.1(1) of the Act to a scenario such as that described in question 7 of the 2004 STEP Round Table could result in an immediate Canadian tax liability. Although we agree that such a result will now be avoided with the introduction of proposed subsection 94(3) and 128.1(1.1) of the Act, unfortunately there are currently no provisions of the Act preventing the application of paragraph 128.1(1)(b) of the Act with respect to a trust that was deemed resident under paragraph 94(1)(c) of the Act prior to becoming factually resident in Canada.

The above comments are an expression of opinion only and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

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