21 March 2005 Internal T.I. 2005-0113921I7 - non-resident trust canadian beneficiary

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: taxabilty of amounts payable to Canadian beneficiaries of a Non-resident trust

Position: amounts are taxable

Reasons: ss.104(13) is applicable as benefiairies are "entitled" under the terms of the trust; also 250.1 is applicable to the foreign trust

									March 21, 2005

	Vancouver Tax Services Office				Lena Holloway
	V & E Division

Attention: Nerissa Fu

									2005-011392

South African Trust

We are writing in response to your e-mails and telephone calls (Fu/Holloway) concerning the possible assessment of the Canadian resident beneficiaries of a South African trust where the trust had disposed of property and was eventually wound up.

This memorandum will not repeat the statement of facts and events that accompanied your email of January 31, 2005. In summary, this situation involves a South Africa trust (the "Trust") settled in XXXXXXXXXX by a woman "XXXXXXXXXX" who was a Canadian resident at the time. The trust was settled with XXXXXXXXXX shares (worth XXXXXXXXXX Rand each) in a company called XXXXXXXXXX. The beneficiaries of the Trust (both capital & income) were her XXXXXXXXXX children (all Canadian residents). The trustees had discretion to distribute all or part of the income in equal shares to the children, however no distribution of capital is permitted under the terms of the Trust until the Trust disposed of its entire shareholding in XXXXXXXXXX. In fact the Trust provided that upon the disposal of the aforementioned shares, the proceeds thereof along with any accumulated income was to be divided equally among XXXXXXXXXX 's children and the Trust was to be terminated. The shares held by the Trust were sold sometime in XXXXXXXXXX --- at which time the trustees were under obligation to wind up the Trust and distribute the property. You have taken the position that as the trust document entitles the Canadian beneficiaries to all income and capital of the Trust once the shares have been sold, the Canadian resident beneficiaries should have had an income inclusion under 104(13) for XXXXXXXXXX.

Our Comments

In South Africa, prior to 2001, capital gains tax did not exist. Capital Gains Tax was introduced on October 1, 2001 on gains made on the disposal of capital assets. Therefore for trust and tax law purposes in this case, amounts that are considered to be capital gains for Canadian tax purposes were considered to be part of trust capital before 2001 under South African law. However ssection 250.1 of the Act provides that a person for whom income for a taxation year is determined under the Act includes a non-resident person and under the provisions of subsection 104(13) of the Act, the "income" of a non-resident person may affect the tax liability of a Canadian resident. While section 250.1 was added in 2001, and is applicable after December 17, 1999, the Department of Finance's technical notes do acknowledge that this section was introduced for clarification purposes only and would therefore be applicable for the XXXXXXXXXX taxation year under consideration here. Thus, it is our view that 75% of the gain on the shares disposed of by the Trust in XXXXXXXXXX would be considered income for the purposes of computing the tax liability of the Canadian beneficiaries.

Subsection 104(13) of the Act will include in the income of a Canadian beneficiary such amounts of the trust's income for the year that became "payable" to the beneficiary in the year. Subsection 104(24) provides that an amount will not have become payable unless it was paid to the beneficiary in the year, or unless the beneficiary was entitled in the year to enforce payment. The question then becomes after the shares were sold by the Trust in XXXXXXXXXX, were the intended Canadian beneficiaries "entitled in the year to enforce payment of the amount" considering also that the funds were subject to foreign currency restrictions?

Given the trust terms, a strong argument can be made that the beneficiaries became so entitled in the year the shares were sold. In Ginsburg 92 (DTC 1774 (T.C.C.) Judge Christie commented at 1778:

In my opinion the appellant was entitled to enforce payment of the amounts for which she has been assessed for 1984 and 1985 in those years within the meaning of subsection 104(24) of the Act. Under the will the appellant was entitled to net income from the residue of the estate which I understand to be the income from the assets in the hands of the trustees, net of necessary expenses. Her entitlement to that income and hence her entitlement to enforce payment arose as the funds generated by the assets of the trust became its property. The fact that for practical reasons such as the requirement for information might delay implementation of a mechanism for enforcement such as instituting judicial proceedings does not mean that the entitlement to enforce is in abeyance pending the receipt of the information. Entitlement to enforce payment and taking steps to enforce payment are not synonymous. (emphasis mine)

The reasoning in Ginsburg contrasts with that in Aubé Estate 99 DTC 8 (T.C.C.) and Hall 2003 DTC 779 (T.C.C.), where under the circumstances beneficiaries were found not to be entitled to enforce payment of estate income where administration of the estate was not completed.

In the present case, no further action was required by the either the beneficiaries or the trustees in order to establish the beneficiaries' entitlement. That is, entitlement was not dependant on the complete administration of the trust nor did it require an action by the beneficiaries (i.e. a demand for the trustees to windup the trust) but rather was established by the terms of the Trust. As in Ginsburg, the entitlement to the income (more specifically the capital gains realized by the Trust as computed under the Act) arose when the shares were sold and the funds became property of the Trust as article 10.2.1 of the Trust provides that "Upon disposal of XXXXXXXXXX's former shares in the said Company the proceeds thereof together with any capitalized or accumulated income shall be divided equally among XXXXXXXXXX's aforesaid children." Regardless of the fact that the funds could not have been sent to Canada due to South African foreign exchange regulation, in keeping with our stated policy in IT-351, Income From A Foreign Source-Blocked Currency [Archived], "in the case of a taxpayer on an accrual basis, sales constitute income at the time of sale regardless of how or when payment is to be made". Even though the Trust was not wound up until the year XXXXXXXXXX, the wind-up of the trust did not create the entitlement, rather the trust terms created the entitlement when the shares were sold. Note that subsection 161(6) allows the Minister the discretion to postpone the payment of tax arising from income from sources in a country that imposes monatory or exchange restrictions on the transfer of such income to Canada where the payment of such tax imposes hardship on the taxpayers and the income has not been transferred, used or disposed of in the manner described in paragraphs 161(6)(a) to (c).

While this non-resident trust has a fiscal year ending in XXXXXXXXXX, section 250.1 requires its income to be computed as if its taxation year was December 31 because it is an inter vivos trust. If we accept that 104(24) applies then the beneficiaries should have an income inclusion in XXXXXXXXXX equal to the income and taxable capital gains realized by the trust before December 31, XXXXXXXXXX.

If you have any further questions concerning our position, please contact Lena Holloway

at (613) 957-2104.

Yours truly,

T. Murphy
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate