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: General discussion of Immigrant trust rules.
Position: general comments given
CRA PUBLICATIONS: T1141;2002-0133035;2001-007705;2000-0000217
March 10, 2005
Re: Immigrant Trusts
This is in reply to your e-mail of February 10, 2005 in which you requested information on setting up a non-resident trust prior to your intended immigration to 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").
Your letter explains that you have been a non-resident of Canada for around 15 years and that you and your Singaporean wife have recently decided to settle in Canada. From your own research and examination of the Act you are aware of a mechanism which allows assets to be put into a tax-exempt trust prior to immigration, however as you find the cost of obtaining private tax planning advice prohibitive you have asked us to provide you with more information on the nature and tax treatment of such trusts. Based on your understanding of the Act, the trust to be set up must have the following attributes: but you have asked for guidance in interpreting the rules:
- all of the trust property would be acquired from a non-resident settler (your wife);
- the trust would have non-resident trustees which would constitute a majority of the trustees; the non-resident trustees would exercise their responsibilities as trustees independently;
- the beneficiaries of the trust would be you, your wife or anyone else.
The situation outlined in your letter relates to actual proposed transactions. Note that written confirmation of the tax implications arising from particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. With respect to some of the questions posed in your correspondence, it is not the role of the Canada Revenue Agency to engage in tax planning. Accordingly, you may wish to seek professional tax advice with respect to the tax planning aspects of questions raised in your letter. However, we are prepared to provide you with general comments, which may be of assistance.
At present, a non-resident trust is not subject to Canadian tax if all persons who contribute directly or indirectly to such trust have not resided in Canada for 60 months or all persons beneficially interested in the trust are not Canadian residents. Therefore, when an individual immigrates to Canada and leaves his or her property in a non-resident trust, the trust is basically not taxable until the immigrant, or someone related to the immigrant that is beneficially interested in the trust who has contributed to the trust, has resided in Canada for a cumulative lifetime total of 60 months. During this tax holiday of up to 60 months, the trust is commonly referred to as an Immigrant Trust. The 60 month tax free period is calculated by taking the end of the year for the trust, which is usually December 31 and count back 60 months. If all persons who have contributed property to the trust directly or indirectly immigrated to Canada less than 60 months before the end of the year, the trust is generally not taxable.
While you have asked for general guidance in interpreting the rules, you have also asked very specific questions. The CRA's responses to your questions follow:
Is there any declaration required for the trust either on arrival in Canada or in the first tax-reporting year? Alternatively is reporting required identifying the trust as an Immigration Trust?
A T1141 information return must be filed by a Canadian resident who transferred property (either while non-resident or resident) to a non-resident trust under subsection 233.2(4) of the Act. The return is filed on an annual basis, however, an immigrant individual does not have to file this information return for the first year that they become a resident of Canada under section 233.7 of the Act. A T3 Trust return is not required until the taxation year (year ending Dec. 31st) in which the 60-month exemption expires. This is usually the 5th year after the immigration date of any individual who contributed property to the trust and has never previously been resident in Canada. However, if income of the trust is distributed or otherwise payable to a Canadian, that Canadian must report the income. Also, a person who receives a distribution of property from, or who is indebted to, a non-resident trust 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 of the Act.
Does the Trust have to be set up prior to arrival in Canada or could the trust be set up immediately after we arrive in Canada?
It does not matter when the trust is set up. The 60-month exemption period under subsection 94(1) of the Act is counted back to the immigration date of the immigrant who transferred property to the non-resident trust.
What happens at the end of the 60-month tax holiday, do we simply start reporting the income? Are there any special declarations?
A T3 return under section 94 must be filed by the non-resident trust for the taxation year during which the 60-month exemption period expires. A T1141 information return must be filed by the immigrant on an on-going basis for each year following the year of immigration
Could the trust be settled jointly by my wife and I?
The exemption under 94(1) is allowed for the first 60 months after immigration. If an individual has lived in Canada at any time, for more then 60 months, the exemption is unavailable. The exemption under section 94 relies on a cumulative lifetime total of less then 60 months. Thus, if you have previously lived in Canada for a cumulative period of 60 months, the trust would not be entitled to the exemption period if you contribute property directly or indirectly to the trust.
Could I also settle such a trust given that I have been non-resident for 15 years?
The exemption under 94(1) is allowed when the person who contributes property to the trust has not been resident in Canada for more than 60 months before the end of the trust's taxation year. Therefore if an individual has lived in Canada at any time, for more then 60 months, the exemption is unavailable. The exemption under section 94 relies on a cumulative lifetime total of less then 60 months.
As a non-resident I understand that I can "Gift" assets to my wife without Canadian tax implications. Given this is there likely to be any problem, say under a future audit, with me doing so if she were to then place these assets into the Trust?
The non-resident trust may be considered to be holding assets that are indirectly transferred to the trust from you as paragraph 94(1)(b) looks to the person from whom the trust has acquired property, directly or indirectly in any manner whatsoever. If you are also a capital beneficiary of the trust or control these assets in the trust, the income from these assets could be attributed to you under subsection 75(2) and taxed in your hands. Currently there is pending legislation that would exempt the application of 75(2) during the 60 month immigrant exemption period - 75(3)(c.2) but only if the trust has received no contributions directly from a person who has been resident in Canada for 60 months. Alternatively, if you indirectly transfer property to the non-resident trust and the trust distributes that income to your wife, again that income could be attributed to you and taxed in your hands under 74.1(1).
The fact that a trust may be excluded from taxation by reason of the settlor's recent immigration to Canada does not preclude the application of other provisions of the Act that may be relevant to the immigrant or to the beneficiaries of the trust during this period on distributions from the trust. The exclusion from taxation in Canada during this period applies to the income of the non-resident trust established by an immigrant, and not to the income of the immigrant generally.
Under the most recent proposed amendments to the Income Tax Act the Immigrant Trust continues to enjoy its tax-exempt status for a period of up to 60 months. The draft legislation also provides that a trust which is not otherwise resident in Canada, is deemed to be resident in Canada if it has a "resident contributor" or a "resident beneficiary", and such trust will generally be liable for Canadian tax on its worldwide income. A "resident contributor" is defined in the draft legislation as a person who is resident in Canada and a contributor to the trust. In this regard, a contributor is any person who has made a contribution to the trust, including any loan or transfer. A "resident beneficiary" is defined in the draft legislation as a beneficiary of a trust, who is resident in Canada, and to have a "resident beneficiary", the trust must also have a "connected contributor". A "connected contributor" is defined as a person who has made a contribution to the trust at any time in the preceding 60 months and was a resident of Canada at the time of the contribution. Note that the foregoing description is a very general and simplistic explanation of the proposed Non resident trust legislation and is not intended to be a complete summary of the proposed legislation. .
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments will be of assistance.
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2005
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2005