12 September 2005 Internal T.I. 2005-0143901I7 - interaction of 94(1)(c) and 104(21) and 116(1)

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: Since 94(1)(c)(i)(A) requires a trust that is subject to 94(1)(c) to compute its income as if it is non-resident, is the trust precluded from making a 104(21) designation in respect of income described in 94(1)(c)(i)(A)? Is a trust that is subject to 94(1)(c) required to obtain a certificate of compliance under 116 in respect of the disposition of property that gives rise to a capital gain that is included in its income under 94(1)(c)(i)(A)?

Position: No to both questions. However, assuming that the draft legislation on NRTs is enacted in substantially the same form as proposed, the trust would be required to obtain a certificate of compliance in respect of a disposition of property after 2002.

Reasons: A trust that is deemed to be resident in Canada under 94(1)(c) is deemed to be resident in Canada for the purpose of Part I of the Act whereas as a trust that is deemed to be resident in Canada under proposed 94(3) for the purposes set out in that subsection, including subsection 104(21), is not deemed to be resident in Canada for the purpose of 116.

 		September 12, 2005

	International Tax Directorate	Income Tax Rulings
	Compliance Branch	 Directorate
	Attention: Geri Porteous	Annemarie Humenuk

		2005-014390

Interaction of subsections 104(21), 116(1) and paragraph 94(1)(c)

This is in response to your email of July 27, 2005, in which you seek further clarification of the effect of paragraph 94(1)(c)(i) on the application of subsections 104(21) and 116(1) to a trust which meets the conditions set out is subsection 94(1) to be deemed resident in Canada for the purposes of Part I.

All statutory references in this memorandum are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").

You note that clause 94(1)(c)(i)(A) requires a trust (the "Trust") that is deemed to be resident in Canada for the purposes of Part I and sections 233.3 and 233.4 to compute a portion of its taxable income as if subparagraph 94(1)(c)(i) did not apply; i.e., as if the Trust were not deemed to be resident in Canada. Clauses 94(1)(c)(i)(B) to (E) set out the rules for determining the balance of the Trust's taxable income; i.e., its income from foreign sources, such as its foreign accrual property income and income from any offshore investment fund property held by the Trust. Since clause 94(1)(c)(i)(A) requires the Trust to compute its taxable income from the disposition of taxable Canadian property as if it were not resident in Canada, you question whether the Trust would be entitled to make a designation of its taxable capital gains under subsection 104(21) in respect of its Canadian beneficiaries that are required to include an amount in their income for that taxation year under subsection 104(13), 104(14) or 105(2) in respect of any taxable capital gain realized by the Trust. Likewise, if the Trust is to be considered a non-resident for the purpose of computing the portion of its taxable income derived from the disposition of taxable Canadian property, you ask whether it would be appropriate to require the Trust to obtain a T2064 or T2068 Certificate of Compliance.

As stated in CRA document 2001-0074395, a non-resident trust that meets the conditions set out in paragraph 94(1)(a), (b) and (c) is deemed to be a person resident in Canada for the purposes of Part I and sections 233.3 and 233.4. While subparagraph 94(1)(c)(i), as modified by subsection 94(3), sets out the manner in which the Trust's taxable income for the year is to be computed and clarifies that no part of the Trust's income is exempt from tax by reason of section 149, it does not alter the fact that the Trust is deemed resident in Canada for the purposes of Part I with the result that the Trust is not required to obtain a Certificate of Compliance under the current law. However, since it is expected that the draft legislation in respect of non-resident trusts and foreign investment entities will replace the current legislation for taxation years that begin after 2002 and the proposed amendments will not deem such trusts to be resident in Canada for the purpose of section 116, a person who purchases taxable Canadian property from the Trust after 2002 could be held liable for the Trust's tax payable on the disposition if a Certificate of Compliance is not obtained and the draft legislation is enacted in substantially the same form as that released by the Department of Finance on July 18, 2005.

With respect to the Trust's ability to make a designation under subsection 104(21), the same principle applies. Since the Trust is deemed to be resident in Canada for the purposes of Part I, the trustee of the Trust would be entitled to make a designation under subsection 104(21) in respect of the beneficiaries resident in Canada who are required to include an amount in their income under any of subsections 104(13), 104(14) or 105(2) in respect of the net taxable capital gains of the Trust as defined in subsection 104(21.3). The fact that the only taxable capital gains and allowable capital losses that are included in the computation of the Trust's taxable income under clause 94(1)(c)(i)(A) are taxable capital gains and allowable capital losses from the disposition of taxable Canadian property that is not treaty-protected property as defined in subsection 248(1) does not preclude the amount of any taxable capital gains so realized by the Trust from forming part of the Trust's net taxable capital gains as defined in subsection 104(21.3). Note that the net taxable capital gains of the Trust would not include any amount included in the Trust's income under clauses 94(1)(c)(i)(B) or (C) that is payable to the beneficiaries resident in Canada because such amounts are included in the Trust's income as foreign accrual property income.

As a final comment, please note that, under the draft legislation released by the Department of Finance on July 18, 2005, a trust that has a resident beneficiary or a resident contributor as those two terms are defined in proposed subsection 94(1) would be deemed to be resident in Canada for the purpose of subsection 104(21) by reason of proposed subparagraph 94(3)(a)(iii). Thus, under the proposed changes to section 94, the Trust would still be entitled to make a designation under subsection 104(21) for any amount of its net taxable capital gains as defined in subsection 104(21.3) that is payable to its beneficiaries that are resident in Canada.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

T. Murphy
Section Manager
for Division Director
International & Trusts Division
Policy and Planning Branch
Policy and Legislation Branch

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