16 February 2012 External T.I. 2011-0430841E5 - U.S. Grantor 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: 1. Whether a U.S. grantor trust could be subject to Canadian tax and reporting requirements when it receives dividends from Canadian resident corporations (Cancos) that are controlled by two unrelated US resident shareholders each owning 50% of the Cancos shares? 2. What amount of dividend payment will meet the requirements in subparagraph (b)(i) in the definition of "arm's length transfer" in the proposed subsection 94(1)? 3. If the proposed subsection 94(3) applies, does Article IV(6) of the Canada-U.S. Tax Convention apply?

Position: 1. Question of fact; 2. Question of fact; 3. No.

Reasons: 1. Paragraph 251(1)(c) stipulates that, at a particular time, it is a question of fact whether unrelated persons are dealing with each other at arm's length and similarly, it is a question of fact whether the transferor (Cancos) and the recipient (grantor trust) are dealing at arm's length with each other. 2. It is a question of fact what amount of dividend payment meets the requirements of subparagraph (b)(i) in the particular circumstances; 3. If the proposed subsection 94(3) applies, the grantor trust is deemed to be resident in Canada and the treaty benefits under Article IV(6) of the Convention would not be available because Cancos and the grantor trust would both be Canadian residents and Convention benefits are not applicable between Canadian residents.

XXXXXXXXXX
					2011-043084
					S. Bernards

February 16, 2012

Dear XXXXXXXXXX :

RE: U.S. Grantor Trusts

All statutory references in this letter, unless otherwise specified, are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.

This is in response to your letter dated December 12, 2011 wherein you requested a confirmation whether a U.S. resident grantor trust ("GT"), settled in the U.S. by a citizen and a resident of the U.S. ("Mr. X"), could be subject to Canadian tax and reporting requirements upon receiving dividends on shares of a number of Canadian formed and resident corporations (Cancos) controlled by Mr. X and another U.S. resident shareholder unrelated to Mr. X, each shareholder owning 50% of the Cancos shares. You also inquired as to how the requirements of subparagraph (b)(i) in the proposed subsection 94(1) could be met within the context of dividends paid by closely held corporations such as the Cancos. Lastly, you inquired whether Article IV(6) of the Canada-U.S. Tax Convention ("Convention") applies to provide treaty benefits if the proposed subsection 94(3) applies.

In your view, Mr. X and the other unrelated Cancos shareholder would not be viewed as dealing at arm's length with the paying Cancos such that proposed subsection 94(3) could apply to deem the GT to be resident in Canada and render a portion of its income subject to tax in Canada. Furthermore, in your view, if the GT is deemed to be resident in Canada, Article IV(6) of the Convention may not be applicable.

Our Comments

In general, paragraph 251(1)(c) stipulates that, at a particular time, it is a question of fact whether unrelated persons are dealing with each other at arm's length. As noted in paragraph 22 of Interpretation Bulletin IT-419R2, Meaning of Arm's Length, sometimes unrelated persons may deal with each other at arm's length, sometimes they may not, depending on all the circumstances.

In our opinion, it is a question of fact whether Mr. X and the other unrelated Cancos shareholder are dealing at arm's length with each other and it is also a question of fact whether the transferor (Cancos) and the recipient GT are dealing at arm's length with each other. Similarly, it is a question of fact as to what amount of dividend payment meets the requirements of subparagraph (b)(i) in the definition of "arm's length transfer" in the proposed subsection 94(1).

With respect to the application of Article IV(6) of the Convention, it is our view that if proposed subsection 94(3) applies, the GT would be deemed to be resident in Canada and thus the treaty benefits under Article IV(6) of the Convention would not be available.

This opinion is provided in accordance with paragraph 22 of the Information Circular 70-6R5. We hope our comments will be of assistance.

Yours truly,

Phil Kohnen
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch