9 February 2010 External T.I. 2008-0301681E5 - SIFT 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: Application of the SIFT Rules

Position: General comments provided

XXXXXXXXXX  						2008-030168 

Attention: XXXXXXXXXX

February 9, 2010

Dear XXXXXXXXXX :

We are writing in response to your e-mail of December 10, 2008 in which you raised several questions concerning the application of the Income Tax Act (Canada) (the "Act") to payments made by a SIFT trust to a non-resident beneficiary, including:

1. What is a SIFT trust and what is the effective date of the new rules applying to SIFT trusts?

2. What is the withholding tax applicable to a distribution from a SIFT trust?

3. Where all or a portion of a distribution from a SIFT trust includes a return of capital, would that portion be subject to Canadian withholding tax?

4. When is a SIFT trust required to file its tax return and send information slips to its beneficiaries?

Please note that it is not this Directorate's practice to comment on transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular IC70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications, referred to below, can be accessed on the CRA website, http://www.cra-arc.gc.ca. We are, however, prepared to provide the following general comments, which we trust will be of some assistance.

Our Comments

With respect to your first question, a SIFT trust is a specified investment flow-through trust. It is defined in subsection 122.1(1) of the Act to mean a trust (other than a trust that is a "real estate investment trust" or an "excluded subsidiary entity") that meets all the following conditions at any time during the taxation year:

• the trust is resident in Canada;
• investments in the trust are listed or traded on a stock exchange or other public market; and
• the trust holds one or more non-portfolio properties.

This definition applies generally to a trust for taxation years that end after 2006, except that if a particular trust would have been a SIFT trust on October 31, 2006, the definition does not apply to that trust for any taxation year that ends before the earlier of 2011 and the first day after December 15, 2006 on which the trust exceeds "normal growth". In this regard, "normal growth" is determined by reference to guidelines issued by the Department of Finance on December 15, 2006.

In computing its income for a taxation year, a SIFT trust may not deduct its "non-portfolio earnings" that are payable to its beneficiaries in the year. Amounts distributed by a SIFT trust from its non-portfolio earnings are deemed to have been received by the beneficiaries as a taxable dividend paid by a taxable Canadian corporation.

With respect to your second question, a SIFT trust is obligated to withhold (and remit to the Receiver General for Canada), on the beneficiary's behalf, any taxes that are payable under Part XIII of the Act. To the extent that a distribution from a SIFT trust is deemed to be a taxable dividend paid by a taxable Canadian corporation, the trust would be required to withhold and remit 25% of the amount of the dividend, subject to any reduction in the rate that may be available under an applicable tax treaty.

With respect to your third question, the rules applying to SIFT trusts do not impact the existing treatment of capital distributions from a trust. However, if the SIFT trust is a mutual fund trust, there is a withholding requirement in the following circumstances:

• If the trust disposes of taxable Canadian property and designates an amount under subsection 104(21) of the Act in respect of a beneficiary under the trust, subsection 132(5.1) of the Act will apply if more than 5% of the amounts designated by the trust are designated in respect of beneficiaries that are either a non-resident person or a partnership that is not a Canadian partnership. Where subsection 132(5.1) applies, the non-resident person (or the partnership that is not a Canadian partnership) is deemed to have received a distribution from the trust and the payer must withhold and remit as required under Part XIII of the Act.
• If the trust makes a distribution to a non-resident person, or to a partnership other than a Canadian partnership, the trust unit owned by the non-resident person is listed on a prescribed stock exchange, and more than 50% of the fair market value of the unit is attributable to one or more properties each of which is real property in Canada, Canadian resource property or timber resource property, section 218.3 of the Act will apply, unless the distribution is already subject to tax under Part I or Part XIII. The terms "Canadian resource property" and "timber resource property" are defined in the Act. If section 218.3 applies, the distribution is deemed to be a disposition of taxable Canadian property, and the payer must withhold 15% of the distribution. However, if the non-resident unit holder realizes a capital loss on the actual disposition of the unit in the year or in any of the three subsequent taxation years, the non-resident investor may file a Canadian income tax return and claim a refund of some or all of the tax paid under section 218.3.

With respect to your fourth question, a trust is required to file its T3 information return and send T3 information slips to beneficiaries no later than 90 days after the trust's tax year-end. There are some additional reporting requirements if the trust is a mutual fund trust that is either a public trust or a public investment trust. For additional information on the reporting requirements for trusts, please see "Information about Trusts" on the CRA website at http://www.cra-arc.gc.ca/tx/trsts/menu-eng.html.

We trust that these comments are helpful. For more information about SIFT trusts, please refer to the CRA website at http://www.cra-arc.gc.ca/tx/trsts/sfts/menu-eng.html.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch