12 June 2012 Roundtable, 2012-0442891C6 - Questions concerning US revocable trust

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. Will 75(2) apply to the trust on immigration by the settlor?
2. Will settlor's power to revoke cause trust to be factually Canadian resident?

Position:
1. Application of proposed 75(3)(c.3) explained.
2. The power, in and of itself, and absent additional facts, would not lead to a conclusion of factual residence in Canada.

Reasons:
See document

STEP CRA Roundtable – June 2012

Q15 In U.S. estate planning, revocable trusts are well accepted and commonly used. Suppose a U.S. citizen moves to Canada with such a revocable trust structure in place. Assume the trustees are U.S. resident and the trust is U.S. resident. (The trust is not deemed Canadian resident due to the 60-month exemption.)

Our question concerns whether subsection 75(2) would apply if the proposed amendment of paragraph 75(3)(c.3) were passed into law.

Also, would CRA agree that a Canadian resident person with the power to revoke a foreign trust would not in itself cause the foreign trust to be considered factually Canadian resident?

CRA Response

We assume that the reference to a U.S. citizen moving to Canada with a revocable trust structure in place means that the U.S. citizen was not a resident of Canada prior to the move, that the trust was created in the U.S. while he or she was non-resident, and that he or she was both the settlor and beneficiary of the trust.

In general, where a trust receives property from a person, if:

1. the property can revert to that person;
2. the person can determine to whom the property may pass; or
3. the person’s consent or direction is needed before the trust can dispose of the property,

then while the person is resident in Canada, any income or loss from the property or any taxable capital gain or allowable capital loss from the disposition of the property is attributed to the person.

Subsection 75(3) of the Act provides for certain exceptions whereby subsection 75(2) will not apply to property held by a trust in a particular taxation year. The August 27, 2010 Department of Finance draft legislation in respect of non-resident trusts proposed to add paragraph 75(3)(c.3) to the Act.

As the Department of Finance Technical Notes indicate, this new paragraph is meant to ensure that subsection 75(2) does not apply to a trust in respect of which all the contributors are either non-resident or recent immigrants (i.e. none of the contributors have been resident for more than 60 months). As the Technical Notes indicate, this is similar to the 60-month exemptions in proposed section 94 of the Act (see the definitions of “connected contributor” and “resident contributor” under the proposed legislation).

As per the wording proposed, new paragraph 75(3)(c.3) will except from the application of subsection 75(2), “a trust that is non-resident, but would be resident in Canada for the purpose of computing its income for the year if the definition “resident contributor” in subsection 94(1) were read without its paragraph (a)”.

Pursuant to proposed subsection 94(3), if a trust is not factually resident in Canada, it will be deemed resident in a taxation year if there is a “resident contributor” to the trust or a “resident beneficiary” under the trust. In general, the definition of “resident contributor” in proposed subsection 94(1) applies to a person who is resident in Canada at that time and is a contributor to the trust. However, paragraph (a) of the definition excludes an individual (other than a trust) who was non-resident and at that time was resident for a period or periods of not more than 60 months.

Accordingly, if the trust in question is otherwise not considered resident in Canada, and it has only one contributor (in accordance with proposed section 94 of the Act), it is our opinion that proposed paragraph 75(3)(c.3) will exempt the trust from the application of subsection 75(2) for the first 60 aggregate months of residency, where the contributor was previously non-resident.

For purposes of the second portion of the question, we have assumed that in referring to a Canadian resident person with the power to revoke a foreign trust, we are referring to the above settlor/beneficiary of the U.S. trust. We also assume that in referring to a revocable trust, we are discussing a trust under which the express power to revoke the trust has been reserved by the settlor from the outset.

As the Supreme Court has indicated, in their recent decision in Fundy Settlement v Canada (2012 SCC 14), the residence of a trust should be determined by the principle that a trust resides for the purposes of the Income Tax Act where its real business is carried on, which is where the central management and control of the trust actually takes place. As was the case in the above decision, this will always be a question of fact.

In our view, the fact that the settlor of the trust, in the above scenario, has a power to revoke the trust, would not, in and of itself, and absent additional facts that would impact on the central management and control analysis, lead to a conclusion that the trust would be considered factually a resident of Canada.

Dominic Tiu
2012-044289
June 12, 2012