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 the family trust which is to be established by a person who is not resident in Canada be deemed resident for Canadian tax purposes?
Position: There is insufficient information to provide a definitive response, however, overview of current and proposed NRT rules provided along with comments in respect to the limited facts provided.
Reasons: The information provided, in and of itself, would not result in the trust being deemed resident under either the current or the proposed NRT rules, however, given the limited facts provided with the submission, a definitive conclusion cannot be reached.
2009-033402
XXXXXXXXXX Phillip Kohnen, CMA
(613) 957-2123
January 11, 2010
Dear XXXXXXXXXX :
Re: Residency of a trust for Canadian tax purposes
This is in reply to your letter of July 15, 2009 in which you requested our comments with respect to whether a proposed family trust that you are contemplating setting up would be subject to taxation in Canada.
Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. For more information concerning advance tax rulings, please refer to Information Circular 70-6R5 dated May 17, 2002. As is noted in paragraph 15(h) of that circular, we cannot rule in respect of proposed legislation that has yet to be enacted.
Given that we are not in possession of all of the relevant facts and documentation relating to your proposed trust, we are unable to specifically make a determination as to its residency. The following comments are, therefore, of a general nature only and are not binding on the Canada Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.
In your letter, you note that, although you were born in Canada and have retained your Canadian citizenship, you severed your Canadian residency in 1973 and intend to remain non-resident in the future. You are considering setting up a trust for your family members which will hold only assets that are not situated in Canada, are not taxable Canadian property and will not be acquired using assets that were generated in Canada. We assume that you will be the only contributor of assets to the trust.
As is noted in Interpretation Bulletin IT-447 - Residence of a Trust or Estate, the residence of a trust is a question of fact to be determined based on the circumstances in each case. For purposes of this letter, we assume that the trust will factually be non-resident.
Pursuant to section 94 of the Income Tax Act (the "Act"), a trust that would not otherwise be considered resident in Canada may, depending on the circumstances, be deemed to be a resident of Canada in a taxation year for certain purposes of the Act. Where the amount of income or capital of the trust to be distributed to any beneficiary depends on the exercise, or the failure to exercise, discretion by any person (as per paragraph 94(1)(c) of the Act), paragraphs 94(1)(a) and (b) contain the conditions that, if met, will result in the trust being subject to tax under Part I of the Act in a given taxation year. One such circumstance would be when:
1. a person beneficially interested in the trust was a person resident in Canada, a corporation or trust not dealing at arm's length with a person resident in Canada, or a controlled foreign affiliate of a person resident in Canada; and
2. the trust has acquired property, other than in the circumstance prescribed in section 5909 of the Income Tax Regulations, from a person who:
a. was a person described in (1) above, was related to that person, or was the aunt, uncle, niece or nephew of that person,
b. was resident in Canada at any time in the 18 months before the end of the year, and
c. had been resident in Canada for more than 60 months by the end of that year.
There are other circumstances described in subsection 94(1) of the Act that may result in a trust being deemed to be resident in Canada pursuant to paragraph 94(1)(c). Furthermore, where the conditions in paragraphs 94(1)(a) and (b) are applicable, but the amount of income or capital of the trust to be distributed to any beneficiary is not dependent upon the exercise or failure to exercise discretion by any person, paragraph 94(1)(d) will, with respect to certain beneficiaries, treat the trust in a manner that is similar to that which non-resident corporations are treated for Canadian tax purposes.
Where paragraph 94(1)(d) applies, the trust is deemed to be a non-resident corporation controlled by any beneficiary that has an interest in the trust with a value equal to 10% or more of the total fair market values of all beneficial interests in the trust. It also deems the trust to be a non-resident corporation with a single class of shares of which 100 are issued. Each beneficiary is deemed to hold the number of those issued shares that is proportionate to the fair market value of their beneficial interest in the trust as compared with the fair market value of all beneficial interests in the trust. As a result, the beneficiary may be required to include in income in each tax year, a percentage of the foreign accrual property income (FAPI), as defined in subsection 95(1) of the Act, that is proportionate to his or her deemed shareholdings.
For those beneficiaries that hold less than 10% of the total fair market value of all beneficial interests in the trust, the offshore investment fund rules in section 94.1 of the Act may be applicable.
In addition to the existing rules in the Act, it should be noted that extensive revisions to the rules relating to the Canadian taxation of non-resident trusts were proposed in Bill C-10, which was before the Canadian Senate prior to the dissolution of Parliament on September 7, 2008 (hereafter referred to as "Proposed Legislation").
Pursuant to subsection 94(3) of the Proposed Legislation, for taxation years that commence after 2006, a trust that would not otherwise be considered resident in Canada will, unless it is an "exempt foreign trust", be deemed resident in Canada for the purposes outlined in paragraph 94(3)(a) if the trust has either a "resident contributor" to the trust or a "resident beneficiary" under the trust. The definitions for relevant terms, including "beneficiary", "contribution", "contributor", "exempt foreign trust", "resident contributor" and "resident beneficiary" are in subsection 94(1) of the Proposed Legislation.
In general, a beneficiary will be a "resident beneficiary" if it is an "entity" resident in Canada and there is a "connected contributor" to the trust (these terms are also defined in subsection 94(1) of the Proposed Legislation). A "connected contributor" at a particular time is an entity that is a contributor to the trust at the particular time, other than:
a) an individual (other than a trust or an individual who was never non-resident before that time) who was, at or before that time resident in Canada, for an aggregate of not more than 60 months, or
b) an entity all of whose contributions to the trust at or before that time were made at a "non-resident time" of the entity.
An entity that is, at that time, resident in Canada and is a contributor to a trust will be a "resident contributor" at that time unless it is an individual (other than a trust):
a) who was non-resident at any time before that time, and at that time has been resident in Canada for an aggregate of not more than 60 months, or
b) where the trust is an inter vivos trust created before 1960 by a person who was non-resident when the trust was created and the individual has not made a contribution to the trust after 1959.
We trust that the above comments will be of assistance to you. Please do not hesitate to contact Phillip Kohnen at (613) 957-2123 should you wish to discuss the contents herein.
Yours truly,
Robin Maley
For Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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