23 June 2005 External T.I. 2005-0127911E5 - residence of a 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: Will Canada recognize a trust as a resident of the US if it is considered resident in the US for US tax purposes? In the facts given, the trustees were all resident in Canada but the trust was governed by the laws of a state within the U.S.

Position: Trustee should seek resolution of the dual residency under the competent authority procedures set out in IC 71-17R5

Reasons: Trust meets the criteria for being considered resident in Canada for the purposes of Canadian domestic law.

XXXXXXXXXX 	2005-012791
		Annemarie Humenuk
Attention:  XXXXXXXXXX 

June 23, 2005

Dear Sirs:

Re: Residence of a Trust

This is in reply to your letter of December 3, 2004 in which you seek assistance in determining whether a particular unidentified trust is considered resident in Canada for the purposes of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

Our understanding of the facts is as follows. A U.S. resident (the Settlor) established a revocable living inter vivos trust (the Trust) in 1988 that is governed by the laws of the State of Michigan. The beneficiaries of the Trust include the Settlor and his two nieces. While he was alive, the Settlor was the sole trustee of the Trust. All of the assets of the Trust are U.S. Securities. The Settlor died in 1998 at which point, the two nieces, both residents of Canada, became co-trustees of the Trust and the only remaining beneficiaries of the Trust. One of the nieces died in 1995 such that the other niece is the only remaining trustee.

Generally, a trust is resident for Canadian tax purposes where the trustee resides. As the trustees have been resident in Canada since the Settlor's death, the Trust would be considered resident in Canada for purposes of the Act as of the date the nieces became the trustees of the Trust. You have indicated that the Trust is also considered resident in the U.S. for U.S. tax purposes because a U.S. court (i.e., a court of the State of Michigan) is able to exercise primary supervision over the administration of the Trusts, even though the Canadian trustees have the authority to control all substantial decisions pertaining to the Trust.

Where an estate or trust is considered to be a resident of both Canada and the U.S. under the respective domestic laws of each nation, and the income of that trust is liable to tax in each jurisdiction, either in the hands of the trust or in the hands of the beneficiaries of the trust, the competent authorities of both countries will try to resolve the issue of the trust's residence for the purpose of avoiding double taxation of the trust income pursuant to paragraph 4 of Article IV of the Canada-U.S. Income Tax Convention (1980).

As stated in paragraph 11 of Information Circular IC 71-17R5, Requests for Competent Authority Assistance under Canada's Tax Conventions, a taxpayer should approach the competent authority of the country in which the taxpayer asserts residency for the purpose of the tax convention. A request for the assistance of the Canadian competent authority may be sent to:

Canada Revenue Agency
Director, Competent Authority Services Division
International Tax Directorate
Compliance Programs Branch
5th floor, 344 Slater Street
Ottawa ON K1A 0L5

In order to fully understand the tax implications of assigning the residency of the Trust to either Canada or the U.S., the request should include:

? name, address and Canadian account number, if assigned, of the Trust;
? a complete non-severed copy of the Trust Deed;
? copies of the Canadian and U.S. income tax returns filed by the Trust for the period in which the Trust is considered resident in both countries;
? confirmation that no Canadian assets are held by the Trust;
? confirmation of the residency of the beneficiaries and the trustee; and
? the specific characterization of the Trust for U.S. tax purposes.

As a final note, you made a reference to the fact that the Trust's income would be payable to the Canadian beneficiaries. To the extent that the Trust's income is payable to the beneficiaries in the year that the income is earned, the Trust would be entitled to a deduction for Canadian tax purposes for the amount of the income that is so payable to the beneficiaries such that the Trust's income for Canadian tax purposes might be reduced to nil. However, irrespective of whether the Trust is considered resident in Canada or the U.S. for the purposes of the Canada-U.S. Income Tax Convention (1980), the Canadian beneficiaries would be required to include the amount of the Trust's income that is payable to them in the year it is earned in their income for that year.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch