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) Whether subsection 107(2) would apply to TCP distributed by a non-resident trust to a non-resident beneficiary?
2) Whether a Certificate of Compliance under section 116 would be required to be obtained?
3) Whether the non-resident trust is subject to the deemed disposition rule of paragraph 104(4)(b)?
Position: 1) No, subsection 107(2.1) applies.
2) General comments.
Reasons: Wording of the ITA and previous positions.
June 2, 2011
Re: Taxable Canadian property distributed by non-resident trust to non-resident
This is further to your e-mail of March 16, 2011, requesting our comments in respect of taxable Canadian property distributed by a non-resident trust to a non-resident beneficiary in a given set of facts. Unless otherwise stated, 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 ("ITA").
Hypothetical situation submitted
We understand the facts of the hypothetical situation submitted to be as follows:
- A private Canadian corporation ("Canco") owns rental real estate located in Canada.
- All of Canco's ares are owned by a non-resident trust the only beneficiary of which is a non-resident individual.
- The shares of Canco are "taxable Canadian property" within the meaning assigned by paragraph (d) of the definition of this expression in subsection 248(1).
- The non-resident trust is an "inter vivos trust", within the meaning assigned to this expression by subsection 108(1) and a "personal trust" as defined in subsection 248(1).
- The capital interest in the non-resident trust is "taxable Canadian property" as per paragraph (k) of the definition of this expression in subsection 248(1).
- After February 27, 2004, the trust distributes all of Canco's shares to its beneficiary in satisfaction of all of the beneficiary's capital interest in the trust.
- No attribution rules apply and the non-resident trust is not deemed to be a person resident in Canada pursuant to paragraph 94(1)(c).
You submit that Canco's shares should qualify as property described in subparagraph 128.1(4)(b)(i) (real property situated in Canada, a Canadian resource property or a timber resource property), as they are "Canadian real, immovable or resource property", as this expression is defined under subsection 248(1). A share of the capital stock of a corporation is "Canadian real, immovable or resource property" pursuant to paragraph (d) if more than 50% of the fair market value of the share is derived directly or indirectly from one or any combination of properties described in paragraphs (a), i.e. real or immovable property. As subsection 107(5) does not apply to the distribution by a trust of property described in subparagraph 128.1(4)(i), you conclude that subsection 107(2) rather than 107(2.1) would be applicable to a distribution of the Canco shares by the non-resident trust.
You ask the following:
1) Whether subsection 107(2) would apply to distribution of Canco's shares by the non-resident trust to the non-resident beneficiary?
2) Whether a Certificate of Compliance under section 116 would be required?
3) Whether the non-resident trust is subject to the deemed disposition rule of paragraph 104(4)(b)?
The particular circumstances outlined in your letter seem to relate to a factual situation involving specific taxpayers. As explained in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the Income Tax Rulings Directorate of the Canada Revenue Agency ("CRA") does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When the situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office of the CRA for their views, along with all relevant facts and documentation. Nevertheless, we are prepared to offer the following general comments which may be of assistance. Our comments constitute opinions and technical interpretations. They are not income tax rulings and are not binding on the CRA.
With respect to your first question, we note that on July 16th, 2010, the Department of Finance released proposed amendments to the ITA that included many changes formerly proposed in Bill C-10 (2007), including the previously proposed changes to subsection 107(5) aimed at making this provision applicable to non-resident trusts. As proposed to be amended, subsection 107(5) will provide that subsection 107(2.1) will apply (and subsection 107(2) will not) to a distribution of property (other than a share of the capital stock of a non-resident-owned investment corporation or a property described in any of subparagraphs 128.1(4)(b)(i) to (iii)) by any trust to a non-resident beneficiary in satisfaction of all or part of the non-resident beneficiary's capital interest in the trust. The proposed amendments were to be applied to distributions made after February 27, 2004. However, they have not been enacted into law and will not become law unless they are reintroduced. As of the date of this letter, the proposed amendments have not yet been reintroduced, but it is expected that they will be.
Consequently, provided that the proposed amendments are reintroduced and enacted in substantially the same form as the version released on July 16, 2010, we are of the view that a distribution made in circumstances such as those submitted in the hypothetical situation described above would be subject to subsection 107(2.1) as a result of the application of subsection 107(5). In our view, subsection 107(2) is not applicable in this case because the shares of Canco would not qualify as property described in any of subparagraphs 128.1(4)(b)(i) to (iii). The conclusion that the Canco shares might qualify as "Canadian real, immovable or resource property" is not relevant for the application of subsections 107(2), 107(2.1) and 107(5), as this expression is not used under those provisions. The definition of Canadian real, immovable or resource property is relevant notably for the purposes of the subsection 122.1(1) definitions, but is to be disregarded for the purposes of paragraph 128.1(4)(b).
We note that on providing security acceptable to the CRA, subsections 220(4.6) to (4.63) permit a trust to elect to defer payment of tax that is owed as a result of the distribution of a taxable Canadian property to a non-resident beneficiary.
The rules of section 116 generally apply when a non-resident person disposes of any taxable Canadian property that is not an "excluded property" pursuant to subsection 116(6). These rules generally provide that a non-resident person may obtain a Certificate of Compliance from the Minister of National Revenue ("Minister") pursuant to subsections 116(2) or 116(4), where the non-resident person proposes to dispose or has disposed of taxable Canadian property.
In accordance to subsection 116(5), in absence of a Certificate of Compliance obtained by the non-resident seller, the purchaser may incur a liability in respect of the amount he ought to have withheld on the purchase price and remitted to the Receiver General. Where the taxable Canadian property is a "treaty-protected property", as defined under subsection 248(1), the purchaser may obtain relief from this liability if the requirements of subsection 116(5.01) are met.
In the hypothetical situation submitted, assuming that the property disposed of is not a treaty-protected property, we are of the view that the non-resident trust should obtain a Certificate of Compliance from the Minister pursuant to subsections 116(2) or 116(4). A request could be made by the trust in order to relieve the beneficiary of any liability he might incur in application of the rules in subsection 116(5) in respect of the distribution of Canco's shares.
We are generally of the view that a non-resident trust may be subject to the deemed disposition rule in paragraph 104(4)(b). This provision provides for a deemed disposition of specified property on the day that is 21 years after the creation of every trust. This provision could give rise to tax consequences if it applies to a non-resident trust, for example if the non-resident trust is deemed as a consequence of the application of paragraph 104(4)(b), to have disposed of taxable Canadian property. It would be so unless an exclusion from the application of subsections 104(4), (5) and (5.2) stated in the definition of "trust" in subsection 108(1) applies to a given non-resident trust.
We trust the above comments will be of some assistance.
Alain Godin, Manager
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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