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: Is a Liechtenstein foundation a trust or a corporation for the purposes of the Act during the years XXXXXXXXXX ?
Position: Review of our previous position. A Liechtenstein foundation will generally be considered as a trust for the purposes of the Act.
Reasons: In our view, the attributes of a Liechtenstein foundation more closely resemble those of a Canadian trust under our common law. It is our view that the existence of a separate legal entity clause contained in foreign foundation legislation would not, in and by itself, preclude an arrangement from being considered a trust for purposes of the Act.
April 15, 2008
Russ Lyon HEADQUARTERS
CRA- Audit Division Income Tax Rulings
Vancouver Island TSO1415 Vancouver Street Directorate
1415 Vancouver Street Sylvie Labarre
Victoria BC V8V 3W4
2008-026625
Tax Status of a Liechtenstein Foundation
We are writing in response to your facsimile of January 23, 2008 in which you asked for our views with respect to the tax status of a Liechtenstein foundation (stiftung).
On XXXXXXXXXX was created pursuant to Art. 552 et seq. of the Liechtensteinisches Personen und Gesellschatftsrecht (PGR). XXXXXXXXXX made a contribution of CHF XXXXXXXXXX (the endowment capital).
The object of the XXXXXXXXXX is the economic support of members of certain families as well as, supplementally, of natural and juridical persons outside the family circle.
According to the Agency Agreement, the beneficiaries were supposed to be named by separate by-laws. Article XXXXXXXXXX of the Articles of the XXXXXXXXXX states the following: "XXXXXXXXXX ."
In the letter sent by Richard Mallet of the Vancouver TSO to Wayne Mousseau of Head Office, it was indicated that the taxpayer had not provided any information or documentation designating beneficiaries other than the taxpayer and it was assumed, for that reason, that XXXXXXXXXX was the sole beneficiary of the foundation.
According to your Summary of XXXXXXXXXX Account - Additions and Deductions for XXXXXXXXXX loaned funds to the XXXXXXXXXX from XXXXXXXXXX . The funds were repaid in XXXXXXXXXX . The XXXXXXXXXX earned interest and dividend income on those funds, realized capital gains and had capital losses and net losses. The funds of the XXXXXXXXXX (including income of the XXXXXXXXXX ) were distributed but you do not have the identity of the recipient(s).
Question
Is the Liechtenstein Foundation a trust or a corporation for the purposes of the Income Tax Act (the "Act") during the XXXXXXXXXX years?
According to the PGR, a Liechtenstein foundation has some of the characteristics of a Canadian corporation and some of the characteristics of a Canadian trust.
A Liechtenstein foundation is an entity which has legal personality and owns the property transferred by the founder. Since the introduction of IT-343 in 1977, we have changed our position regarding the significance of the separate legal entity status in the classification of foreign entities. At the time that IT-343R was written in 1977, separate legal entity status was considered a fundamental characteristic of a corporation and essentially defined any entity with its own separate legal existence as a corporation. Today, the situation is quite different. Separate legal entity status is no longer considered a distinctive feature of corporations alone. Many US entities, for example DRUPAs (i.e. partnerships created under the Delaware Revised United Partnership Act) have separate legal personalities. We have decided in the past that the fact that an entity is a separate legal entity is not in itself determinative and we started to consider other characteristics of the entity. For example, in the case of the entity created under the DRUPA, the CRA has publicly stated that it recognizes such entities as partnerships and not as corporations. In this regard, see Technical News Number 25 (June 2001) in which the CRA stated with respect to the Delaware Revised Uniform Partnership Act:
We received many requests concerning the status for Canadian income tax purposes of an entity governed by the Delaware Revised Uniform Partnership Act (DRUPA). The initial concern as to the status of an entity governed by the DRUPA comes from the fact that an entity governed by this legislation is a separate legal entity which is distinct from its partners unless, or to the extent, otherwise provided in a statement of partnership existence and in a partnership agreement. However, an entity governed by the DRUPA has additional characteristics that are similar to the characteristics of a Canadian partnership. We have fully analysed the attributes of the entity governed by the DRUPA and compared them to the attributes of a Canadian partnership and of a Canadian corporation. Generally, this approach is used in determining the classification, for purposes of applying the Canadian Income Tax Act, of any entity created under foreign partnership legislation. In our view, the attributes of an entity formed under the DRUPA in which its members carry on business in common with a view to profit (in our common law sense) more closely resemble those of a Canadian general partnership under our common law and, as such, an entity governed by the DRUPA would be treated as a partnership for Canadian income tax purposes. Furthermore, it is our view that the existence of a separate legal entity clause contained in foreign partnership legislation would not, in and by itself, preclude an arrangement from being considered as a partnership for purposes of the Canadian Income Tax Act....
To determine the status of an entity for Canadian tax purposes, we have been examining the foreign legislation creating the entity and comparing the entity with the various legal forms in Canada to see which is the closest to the entity.
The approach we follow in classifying foreign entities is described in an article published by Marc Darmo 1 as follows:
Foreign Business Associations: the Two-Step Approach
There is even less statutory guidance on how to characterize a foreign business association for Canadian tax purposes. However, it now seems settled (although this was not always the case) that the appropriate approach is, first, to determine the characteristics of the foreign business association under foreign commercial law, and then compare these characteristics with those of recognized categories of foreign business association under Canadian commercial law in order to classify the foreign business association under one of those categories. This two-step approach has been adopted by Canadian courts and is also supported by the leading cases in the United Kingdom.
Mr. Darmo comments on the acceptance of this approach in the United Kingdom, referring to the 1998 decision of the English Court of Appeal in Memec PLC v. IR Commrs., [1998] BTC 251 (CA) and mentions:
The characterization approach adopted in Memec PLC has been accepted by the UK Inland Revenue. Following that decision, the Inland Revenue issued Tax Bulletin 39 outlining its views as to the classification of "foreign entities."19 The bulletin lists the factors that the Inland Revenue considers when characterizing a foreign entity as either "transparent" or "opaque" for UK tax purposes.20 With a few exceptions, these factors are essentially based on the characteristics that make UK partnerships transparent as proposed by the Court of Appeal in Memec PLC.21 The | Inland Revenue confirms that in considering these factors, it looks at the foreign commercial law under which the entity is formed and the internal constitution of the entity. In recent years, a similar approach appears to have been more clearly endorsed by the CRA.22 In the past, the CRA seemed inclined to simply default to a finding of corporate status if the foreign business association had legal personality in its country of formation.23 It had never been entirely clear whether the CRA was relying on a different characterization approach, or applying the two-step approach but considering that separate legal personality was the determining factor when distinguishing between partnerships and corporations under Canadian commercial law.
Other jurisdictions also seem to be adopting the view that entities that have separate legal personalities are not necessarily corporations. In a recent article published by Taxanalysts 2, it was stated:
In a reversal of its previous position, the Ruling Committee of Belgium's Ministry of Finance, in a series of recent advance tax rulings, has upheld the tax transparency of several foreign partnerships. The rulings, which follow the OECD's August 16, 1999, report on the application of the OECD model tax treaty to partnerships, reverse positions previously taken by the Ministry of Finance, which used to take only one feature into consideration- the separate legal personality of the foreign entity. If a foreign entity had, or was deemed to have, separate legal personality, it was treated as a corporation for Belgian tax purposes, often resulting in double taxation or double nontaxation.
Using this approach, we have taken the position that an Austrian Private Foundation, an entity similar to a stiftung, was a trust for the purposes of the Act. However, that position is being challenged in the Canadian Tax Court.
Separate legal personality aside, a Liechtenstein foundation, in general, has many more similarities with our common law trust than it does with corporations in Canada. The similarities are the following:
- A Liechtenstein foundation is created by a endowment by a founder much like a settlor gives property to the trust to settle it.
- A Liechtenstein foundation has beneficiaries, just like a trust.
- The beneficiaries or at least an ascertainable class of beneficiaries are named at the foundation's formation usually in the by-laws of the foundation, which is similar to a trust indenture. The beneficiaries may derive a present or future advantage from the assets of the foundation, be it a share in the revenues or a share in the assets of the foundation on the basis of a resolution of the foundation council.
- In a family foundation like the XXXXXXXXXX, the beneficiaries do not pay for their interests and are not entitled to vote.
- The foundation council acts in the same way trustees do to protect the capital of a Liechtenstein foundation and to follow the founder's wishes. The foundation board administers and uses the property transferred by the founder for the benefit and advantage of the beneficiaries. The foundation board exercises considerable decision and control powers over the foundation assets much as a trustee has over the assets of a trust.
- A Liechtenstein foundation can be compared to a trust.
- A Liechtenstein foundation can be created inter-vivos or can be testamentary.
- Under the law applicable to the period under your review, the regulations concerning the trust enterprise with legal personality were to be applied to foundations accordingly, particularly with regard to the foundation participant (founder, foundation council, beneficiaries), where and insofar as the provisions of the PGR law or the foundation articles or the regulations concerning the obligation of the trust enterprises to register do not determine to the contrary.
Another feature of a Liechtenstein foundation that is dissimilar to that of a Canadian corporation is the fact that a foundation cannot perform any commercial activities except when commercial operations serve its non-commercial purpose or the type and scope of the participation held require the facilities of a commercial business. Furthermore, a Liechtenstein foundation is a legal entity without members, partners or shareholders.
As the foreign legislation is not the same as the Canadian legislation, our view is that it is not relevant to apply the certainty of intention test when determining if a foreign entity is a trust because we would arrive at the conclusion that the parties had the intention to create the foreign entity that they created and which we need to classify.
In our view, notwithstanding the position expressed in IT-343R, the attributes of a Liechtenstein foundation more closely resemble those of a Canadian trust under our common law and, as such, a Liechtenstein foundation would be treated as a trust for Canadian income tax purposes. Furthermore, it is our view that the existence of a separate legal entity clause contained in foreign foundation legislation would not, in and by itself, preclude an arrangement from being considered as a trust for purposes of the Canadian Income Tax Act.
When applying to your particular situation the general position that a Liechtenstein foundation is a trust for the purpose of the Act, you will have to examine whether any of the foundation's income should be attributed to XXXXXXXXXX (assuming that he is a resident of Canada) pursuant to subsection 75(2) of the Act and whether the exception provided for in subsection 75(3) applies. According to you, XXXXXXXXXX is the sole beneficiary of the foundation. Therefore, the endowment or other contribution that is not a genuine loan, made by XXXXXXXXXX, may revert to him and, subject to subsection 75(3), subsection 75(2) of the Act may apply to deem the income earned on such an endowment or contribution as being the income of XXXXXXXXXX. Furthermore, subsection 104(13) of the Act may apply to tax a beneficiary, resident of Canada, in respect of the income payable in a taxation year to that beneficiary, income which is not deemed to be the founder's by virtue of subsection 75(2) of the Act.
Generally speaking, a non-resident trust is only taxable in Canada on its income earned from sources in Canada unless section 94 applies. Considering the assumptions that XXXXXXXXXX is resident of Canada and is a beneficiary of the foundation, it would appear that the conditions required in section 94 of the Act as it applied to the years under review (subject to the elections provided for in the application rules of the proposed amendments), are met resulting in the consequences described in subsection 94(1)(c) or (d), as the case may be.
We trust that our comments will be of assistance.
Yours truly
Alain Godin
Section Manager
For Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
cc. Brett Evers
Technical Applications And Valuations Division
ENDNOTES
1 Marc Darmo, International Tax Planning, Characterization of Foreign Business associations, 2005 Canadian Tax Journal, Issue # 2
2 Werner Heyvaert and Grégory Noyen, Belgian Ruling Committee Accepts Tax Transparency of Foreign Partnerships, Taxanalysts, April 27, 2006.
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