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: 1)Does the executor have any obligation to withhold any portion of the income or capital interest payable to the non-resident beneficiaries on the wind-up of the estate? 2) If so, what percentage must be withheld and how is this accomplished? 3) Does such an obligation exist if the estate retains the income and forwards the beneficiaries the full amount of the bequest? 4) Do the non-resident beneficiaries receive any recognition for the obligation met under the relevant tax treaty?
Position: 1) Yes, if any income is payable to the beneficiaries prior to the wind-up of the estate. 2) Article 21 of the Canada-Poland Tax Convention reduces the 25% rate to 15% where the income is taxable in Poland. The tax must be withheld by the trust and remitted to the Receiver General on behalf of the non-resident along with the NR4 form. 3) The income is taxable in the hands of the trust and the trust must file a T3 tax return for each taxation year. A T1 tax return is not required to be filed by the non-resident beneficiary unless the individual has a taxable capital gain or disposes of taxable Canadian property, otherwise from an excluded disposition. 4) See the answer to question 2.
March 29, 2012
Dear XXXXXXXXXX ,
Re: The Estate of XXXXXXXXXX
This is in response to your letter dated September 1, 2010 regarding the filing obligations of an estate where XXXXXXXXXX of the beneficiaries of the estate are residents of Poland. The deceased was a resident of Canada.
Specifically you have asked the following questions:
1) Does the executor of the estate have any obligations under Canadian tax law to withhold and forward to the Canada Revenue Agency ("CRA") any portion of the capital or interest earned on the capital that is payable to the Polish beneficiaries on the wind-up of the estate?
2) If so, what amount or percentage of the bequest to the Polish beneficiaries is payable to the CRA and how is this accomplished, as the Polish beneficiaries have no social insurance number in Canada?
3) Does such an obligation exist if all income earned by the estate is made payable to the estate alone and the estate then forwards the beneficiaries the full amount of the bequest?
4) If so, do the beneficiaries receive recognition of such obligations met in Canada under the relevant tax treaty?
All references herein to sections, subsections, paragraphs and subparagraphs are to the Income Tax Act (Canada) (the "Act") unless otherwise expressly stated.
It is assumed, for the purposes of our response, that the estate is a testamentary trust as defined in subsection 108(1) that is resident in Canada and remains so throughout each of its taxation years; the first tax period of the trust begins the day after the person dies and ends any time selected by the trust within the next 12 months. As explained on page 11 of the 2010 T3 Trust Guide, a trust is required to file a T3 Income Tax and Information Return if income from the trust property is subject to tax and in the tax year the trust meets any of the conditions listed therein including,
- the trust has tax payable; or
- where the trust receives from the trust property any income, gain or profit that is allocated to one or more beneficiaries and the trust has:
- total income for all sources of more than $500,
- income of more than $100 allocated to any single beneficiary,
- made a distribution of capital to one or more beneficiaries, or
- allocated any portion of the income to a non-resident beneficiary.
The T3 return must be filed no later than 90 days after the trust's year end and any balance owing should be remitted no later than 90 days after the trust's year end. The trust must file a T3 tax return for each taxation year, the final return is due 90 days after the wind-up of the trust. A testamentary trust's final year ends on the date of the final distribution of the trust's assets.
Pursuant to subsection 104(13), a beneficiary is required to include in its income for a year any amount of the trust's income that became payable to the beneficiary in the trust's taxation year that ended during the beneficiary's taxation year. Subsection 104(24) deems an amount not to be payable to a beneficiary in a taxation year unless it was paid in the year to the beneficiary or the beneficiary was entitled in the year to enforce payment of it.
In general, if income from the property of the trust was paid to a non-resident beneficiary, paragraph 212(1)(c) requires that a withholding tax of 25% be paid by the non-resident. Article 21 of the Canada-Poland Tax Convention reduces the 25% rate to 15% where the income from the trust or estate is taxable in Poland; otherwise the rate remains at 25%. The trust will be required to file a NR4 Summary, Return of Amounts Paid or Credited to Non-Residents of Canada and the related NR4 slips Statement of Amounts Paid or Credited to Non-Residents of Canada. The NR4 is required to be filed no later than 90 days after the end of the trust's taxation year. For more information on the filing requirements of the NR4, please refer to guide NR4 Non-Resident Tax Withholding, Remitting and Reporting (T4061) available on our website at www.cra-arc.gc.ca. In particular, page 10 of that guide provides instructions for the completion of box 13 "Foreign or Canadian tax identification number" of the NR4 slip.
Where the trust does not pay or make payable the income from the property of the trust to a non-resident beneficiary in the year that it is earned, the income is retained by the trust and taxed in the hands of the trust using the graduated rates available to individuals.
Pursuant to subsection 107(5), subject to certain exceptions, subsection 107(2.1) applies where a trust distributes property to a non-resident beneficiary. In general terms this subsection provides that the trust is deemed to dispose of the distributed property for proceeds of disposition equal to its fair market value, and the beneficiary is deemed to dispose of all or part of the capital interest in the trust for proceeds of disposition equal to an amount determined by formula. The non-resident beneficiary will generally not realize a gain on the disposition of the capital interest in the trust as the adjusted cost base of the interest for capital gains purposes will generally equal the deemed proceeds of disposition of the interest as determined under subsection 107(2.1) having regard to paragraph 107(1)(a) and the definition of cost amount in subsection 108(1).
Where the property distributed to the non-resident beneficiary has an accrued gain and it is reasonable to regard the taxable capital gain as having been made payable to the beneficiary who received the property as a distribution of trust income, the amount of the taxable capital gain will be subject to withholding tax as a distribution of trust income under paragraph 212(1)(c). The trustee may however, make an election under paragraph 107(2.11) to compute the income of the trust without regard to the distribution to the non-resident beneficiary, in which case, the taxable capital gain will be subject to tax in the T3 return.
When a trust distributes assets of the trust to non-resident beneficiaries in satisfaction of their capital interest in the trust, the non-resident beneficiaries are considered to have disposed of taxable Canadian property, as defined in subsection 248(1), where at any particular time during the 60 month period that ends at that time, more than 50% of the fair market value of the interest was derived from:
(i) real or immovable property situated in Canada,
(ii) Canadian resource properties,
(iii) timber resource properties, and
(iv) options in respect of, or interest in, or for civil law rights in, property described in (i), (ii), and (iii) whether or not the property exists.
Subsection 116(1) provides that if a non-resident person proposes to dispose of taxable Canadian property (other than property described in subsection (5.2) and excluded property as defined in subsection (6)), the non-resident person, may at any time before the disposition, send the Minister a notice setting out certain information with respect to the purchaser of the property, the property, the proceeds of disposition and the adjusted cost base. This is done by completing form T2062 Request by a Non-Resident for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property. Where the non-resident person has not provided a notice under subsection 116(1), subsection 116(3) of the Act requires that upon the disposition of the taxable Canadian property the non-resident person must, within 10 days of the date of the disposition, send the Minister a notice setting out certain information with respect to the disposition. Again, this is done by completing form T2062. Where the capital interest in the trust is not taxable Canadian property of the non-resident beneficiary, there are no compliance obligations under section 116 for either the trust or the non-resident beneficiary.
Excluded property includes a property that is a treaty exempt property a property that is treaty protected property (essentially property disposed of where the gain is exempt from tax by virtue of a tax treaty with another country) and meets the condition in paragraph 116(6.1)(b).
Paragraph 150(1.1)(b) provides that an individual is not required to file a T1 tax return where he is a non-resident unless the individual has tax payable under Part I for the year or has a taxable capital gain (otherwise than from an excluded disposition as defined in subsection 150(5); generally, a disposition of taxable Canadian property that is excluded property) or disposes of taxable Canadian property (otherwise than in an excluded disposition) in the year.
In answer to your specific questions, we offer the following answers:
1) On the wind-up of the estate (trust) the final T3 return must be filed within 90 days of the date of distribution of the assets to the beneficiaries. Any income earned by the trust that is retained by the trust will be subject to tax at the graduated rates used for individuals. Where the income of the trust has been paid to the non-resident beneficiaries, the NR4 must be filed within 90 days after the end of the trust's taxation year.
2) Where the income of the trust has been paid to the non-resident beneficiaries, the trust must withhold 25% of the amount paid. Article 21 of the Canada-Poland Tax Convention reduces this rate to 15% where the income from the trust is taxable in Poland: otherwise the rate remains at 25%. Please refer to the NR4 guide for remittance information.
3) If the trust retains the income earned by the property of the trust that income is subject to tax in the hands of the trust. On the disposition of the capital interest of the trust, there is no requirement for a non-resident beneficiary to file a T1 tax return unless the property is taxable Canadian property or the non-resident has a taxable capital gain (other than from an excluded disposition). There is no requirement for the trust or the non-resident to notify the CRA of the disposition of the capital interest unless the capital interest is taxable Canadian property (other than excluded property) of the non-resident.
4) See the answer to question 2.
We trust that our comments are helpful.
Roger Filion CA
Business and Trust Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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