8 June 2007 Roundtable, 2007-0235241C6 - 2007 STEP Conf-Q.10-Deemed resident trusts

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: Canadian resident and citizen taxpayer ("Mother") has two adult children. One child attended university in the U.S. and has now decided to take up residence there (she married a U.S. person). The other child plans to remain in Canada. Mother wants to create a will that splits her estate 50/50 between her two children (her husband has died). To minimize U.S. estate tax on the death of her U.S. resident child, she plans to put 50% of the estate into a U.S. resident trust, with U.S. resident trustees. The beneficiaries of this trust will be her U.S. resident daughter and her children. The balance of the estate will go directly to the Canadian resident beneficiary.

The U.S. resident daughter will be one of the three trustees of the U.S. trust. The trust will last beyond her lifetime. There is a power to pay income to her and to her grandchildren, and to encroach on capital for the health, maintenance and education of her children. However, if this daughter dies without issue, or all her issue are deceased, the residue of the trust will go to the Canadian resident beneficiary and ultimately to her children.

Will the U.S. trust be deemed to be resident in Canada under proposed subsection 94(3) of the ITA? Will the Canadian child be considered to have an interest in a non-resident trust?

Position: No.

Reasons: Since the daughter who is resident in Canada would be a "successor beneficiary" as defined in proposed subsection 94(1) of the ITA as long as her sister and her sister's children are alive, the trust would not be deemed resident in Canada under proposed subsection 94(3) of the ITA following the mother's death and during the period in which any of the other beneficiaries of the trust are alive and not resident in Canada.

2007 STEP Round Table
Q. 10 Deemed Resident Trusts under the Proposed Legislation

Canadian resident and citizen taxpayer ("Mother") has two adult children. One child attended university in the U.S. and has now decided to take up residence there (she married a U.S. person). The other child plans to remain in Canada. Mother wants to create a will that splits her estate 50/50 between her two children (her husband has died). To minimize U.S. estate tax on the death of her U.S. resident child, she plans to put 50% of the estate into a U.S. resident trust, with U.S. resident trustees. The beneficiaries of this trust will be her U.S. resident daughter and her children. The balance of the estate will go directly to the Canadian resident beneficiary.

The U.S. resident daughter will be one of the three trustees of the U.S. trust. The trust will last beyond her lifetime. There is a power to pay income to her and to her grandchildren, and to encroach on capital for the health, maintenance and education of her children. However, if this daughter dies without issue, or all her issue are deceased, the residue of the trust will go to the Canadian resident beneficiary and ultimately to her children.

Will the U.S. trust be deemed to be resident in Canada under proposed subsection 94(3) of the ITA? Will the Canadian child be considered to have an interest in a non-resident trust?

Response

Since the daughter who is resident in Canada would be a "successor beneficiary" as defined in proposed subsection 94(1) of the ITA as long as her sister and her sister's children are alive, the trust would not be deemed resident in Canada under proposed subsection 94(3) of the ITA following Mother's death and during the period in which any of the other beneficiaries of the trust are alive and not resident in Canada.

Our analysis of the tax consequences is as follows:

A trust will be deemed resident in Canada under the proposed legislation if it has either a resident contributor or a resident beneficiary as those terms are defined in proposed subsection 94(1) of the ITA.

If the trust created by Mother is established on her death, Mother will be a "connected contributor" but not a "resident contributor" as those terms are defined in proposed subsection 94(1) of the ITA. This is because Mother will have been resident in Canada at some time during the 60 months preceding her death; in the example given, likely during the full 60 months preceding her death.

Although the one daughter will be resident in Canada and will be a beneficiary of the trust, she will be a "successor beneficiary" and thus, she will not be a "resident beneficiary" as those terms are defined in proposed subsection 94(1) of the ITA. In order to be a "successor beneficiary", the beneficiary must be a beneficiary solely because of the right of that beneficiary to receive any of the income or capital of the trust on or after the death of an individual who is either a "contributor" to the trust or is related to a "contributor" to the trust.

The daughter resident in the U.S. and her children are related to Mother, the sole "contributor" to the trust or would be so related if Mother were still alive. Paragraph (c) of the definition of "successor beneficiary" makes it clear that in determining whether persons are related for the purpose of that definition, the relationship is determined on the basis that no death has occurred. For example, if we were to change the facts in the question such that:

• Mother was alive and had established the trust as a long term resident of the U.S. such that she was not a "resident contributor" to the trust;
• primarily for the daughter and her husband who were also resident in the U.S.;
• with the daughter resident in Canada entitled to benefits from the trust only if both the daughter and her husband in the U.S. were deceased; and
• the daughter living in the U.S. were to die;

the husband who survived her would be considered related to Mother for the purpose of the definition of "successor beneficiary" even though he would no longer be related to Mother for any other purpose of the ITA.

Thus, in the situation described in the question, the trust will have neither a "resident contributor" nor a "resident beneficiary" during the time following Mother's death and before the death, or immigration to Canada, of any of the beneficiaries currently resident in the U.S.

The daughter resident in Canada will continue to be a "successor beneficiary" until the death of all the other beneficiaries of the trust as described in the question, at which time she will be entitled to income and capital of the trust. At that time, she will become a "resident beneficiary" of the trust as defined in proposed subsection 94(1) and the trust will be deemed resident in Canada by reason of subsection 94(3) of the ITA.

Since the trust will be deemed resident in Canada at that time for the purposes listed in proposed subsection 94(3), including the definition of "specified interest" in proposed subsection 94.1(1) of the ITA, the trust will not be a non-resident entity for the purpose of determining whether the daughter resident in Canada has a participating interest an a foreign investment entity at that time.