16 September 2008 External T.I. 2008-0285961E5 - 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: Will a testamentary trust created by the will of a resident of Canada for the benefit of a resident of Canada with a non-resident trustee be deemed resident in Canada?

Position: Current legislation: Provided the deceased had been resident in Canada for 60 months and the trust is discretionary in some manner, yes. If the trust is not discretionary, the Canadian beneficiary may be required to include an amount in income in respect of his or her interest in the trust but the trust will not be deemed resident in Canada.

Under the proposals in Bill C-10 of the last session of Parliament, the trust would be deemed resident in Canada as of 2006 if it has a resident beneficiary as defined in the legislation (or, in the event of a subsequent loan to the trust, if it a resident contributor).

Reasons: General comments given summarizing the legislation

XXXXXXXXXX 								2008-028596
									Annemarie Humenuk
Attention:  XXXXXXXXXX 

September 16, 2008

Dear XXXXXXXXXX :

Re: Deemed Resident Trusts

Your letter of May 29, 2008 to the International Tax Services Office has been referred to us for in reply. You have asked for confirmation that a testamentary trust created by the will of a resident of Canada and which has a beneficiary resident in Canada and a trustee who is not resident in Canada will be deemed resident in Canada by reason of paragraph 94(1)(c).

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").

As explained in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. As we do not have all the relevant information and documentation, we cannot provide confirmation of the residence of a specific trust. However, we are prepared to provide you with general comments with respect to the application of paragraph 94(1)(c) and proposed subsection 94(3) as contained in Bill C-10, which was before the Senate prior to the dissolution of Parliament on September 7, 2008 (hereinafter referred to as "Proposed Legislation").

In the situation described in your letter, a resident of Canada has died and a portion of the estate will be transferred to a testamentary trust for the benefit of a resident of Canada. The trustee will be a resident of the U.S. It is a question of fact whether any particular trust is a resident of Canada for the purposes of the Act determined without reference to section 94. You will find information about the determination of residence in Interpretation Bulletin IT-221R3 (Consolidated), Determination of an Individual's Residence Status and Interpretation Bulletin IT-447, Residence of a Trust or Estate. As a trust is generally considered to reside where the trustee or other legal representative who manages or controls the assets of the estate resides, for the purpose of this letter we will assume that the trust would be considered resident in the U.S. for Canadian tax purposes unless the trust is otherwise deemed to be resident in Canada by reason of section 94.

Paragraph 94(1)(c) will generally apply to deem a trust that would otherwise not be resident in Canada to be resident in Canada for the purposes of Part I of the Act when:

1. the amount of income or capital of the trust to be distributed to any beneficiary depends on the exercise or failure to exercise discretion by any person, including the trustee;
2. the trust has a beneficiary who is resident in Canada (or a corporate beneficiary that is not dealing at arm's length with a resident of Canada or is a controlled foreign affiliate of a resident of Canada); and
3. the trust has received property from, among others, a person related to a beneficiary described above or from an aunt, uncle, niece or nephew of that beneficiary and the person who contributed the property has been resident in Canada for a total of more than 60 months during his or her lifetime and was resident in Canada at any time during the 18 months prior to the transfer of property to the trust or prior to his or her death.

Note that paragraph 94(1)(c) will also apply in other situations that do not appear to be relevant to your situation.

For the purpose of determining whether the first criterion listed above is met, the provisions of paragraph 94(1)(c) do not apply if the discretionary power with respect to the distribution of income or capital relates only to the timing of the payments, rather than to the determination of the amount of income or capital that is to be distributed to a beneficiary. Thus, if there is only one beneficiary and any amount not distributed to that beneficiary prior to his or her death is transferred to his or her estate, the first condition listed above would not be met. However, if the terms of the trust are such that any amount not distributed to the primary beneficiary during his or her lifetime is distributed to a contingent beneficiary following the death of the primary beneficiary and the remainder of the conditions are met, paragraph 94(1)(c) applies to deem the trust to be resident in Canada for the purposes of Part I of the Act since the discretionary power does not relate solely to the timing of the payments to the beneficiaries.

If the amount of any income or capital of the trust to be distributed to any of the beneficiaries does not depend on the exercise or failure to exercise discretion by any person but the other conditions listed above are met, paragraph 94(1)(d) or section 94.1 may apply to require any beneficiaries resident in Canada to include an amount in income in respect of his or her interest in the trust annually.

When the first criterion listed above is not met but the second and third criteria are met, paragraph 94(1)(d) requires any Canadian beneficiary with 10% or more of the total fair market value of all beneficial interests in the non-resident trust to include an amount in income computed as if the trust were a non-resident corporation with 100 shares and the beneficiary held the number of shares proportionate to his or her share of the total fair market value of all beneficial interests in that trust. Thus, if a Canadian beneficiary of a trust that would otherwise be non-resident is entitled to 100% of the trust property, the Canadian resident would include 100% of the amount that would be the trust's foreign property accrual income (FAPI) if the trust were a corporation in his or her income.

When section 94.1 applies, the Canadian beneficiary includes an amount in income computed with reference to the beneficiary's designated cost of the interest and the prescribed interest rate set out in paragraph 4301(c) of the Regulations to the Act.

Thus, under the current legislation, the determination of whether the trust described in your letter would be deemed resident in Canada for the purposes of Part I depends on whether the distribution of income or capital of the trust is dependent on the exercise, or failure to exercise, discretion by any person and on the length of time that the deceased has been resident in Canada during his or her lifetime.

Assuming that the Proposed Legislation is passed in substantially the same form as proposed during the last session of Parliament, proposed subsection 94(3) will apply for tax years after 2006 to deem a trust that would otherwise not be resident in Canada to be resident in Canada for the purposes set out in proposed subsection 94(3), including the computation of the trust's tax payable under the Act, when the trust has either a "resident contributor" or a "resident beneficiary" as those terms are defined in the Proposed Legislation. Note that a trust that is deemed resident in Canada under proposed subsection 94(3) will not be considered resident in Canada for the purposes set out in proposed subsection 94(4).

Unlike the current legislation, proposed subsection 94(3) can apply to deem a trust to be resident in Canada irrespective of whether the distribution of income or capital depends on the exercise of discretion, there is a beneficiary resident in Canada or the person who contributed property to the trust is related to any of the Canadian beneficiaries. Among other situations, it will apply when property of a person who was resident in Canada at the time of his or her death and who had been resident in Canada for at least 60 months during his or her lifetime is transferred to a trust that would otherwise not be resident in Canada and there is at least one beneficiary of the trust who is resident in Canada at any time during the year (other than a "successor beneficiary" or "specified charity" as defined in the Proposed Legislation). A successor beneficiary is a beneficiary who is a beneficiary solely because of the right of that beneficiary to receive any of the income or capital of the trust at a future time that is 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.

Thus, in the situation described in your letter, it would appear that the trust is question would be deemed to be resident in Canada for the purposes set out in subsection 94(3) for taxations years after 1996 provided that the Proposed Legislation is enacted in substantially the same form as proposed during the last session of Parliament.

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.

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

c.c. Seamus O'Brien

Non-resident Trusts and Estates Processing,
ITSO, 2204 Walkley Road, Ottawa