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: Is 100% distribution of its gain by a non-resident trust taxable in the hands of a Canadian resident beneficiary?
Reasons: Where the trust is a non-resident trust, the income of the trust, for the purpose of subsection 104(13) of the Act, will be computed according to the provisions of the Act, pursuant to section 250.1. Pursuant to clause 3(b)(i)(A) of the Act, only the taxable portion of the capital gain is considered in computing the income of the trust under Part I of the Act. Accordingly, only the taxable portion of the distribution will be included in the beneficiary's income.
October 2, 2012
Re: Capital gain distribution by a non-resident trust
This is in response to your correspondence dated May 15, 2012, wherein you requested our views on the application of section 250.1 of the Income Tax Act (the “Act”) with respect to a capital gain distribution by a non-resident trust to its Canadian resident beneficiary (the “Beneficiary”). Specifically, you wanted our views on whether the Beneficiary will report only the taxable portion of the gain distributed by the non-resident trust.
Written confirmation of the tax implications inherent in actual proposed transactions is given by this Directorate only where the transactions are the subject of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, entitled ‘Advance Income Tax Rulings’, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (“CRA”) publications can be accessed on our website at http://www.cra-arc.gc.ca. Your request was not submitted as an advance income tax ruling request, however, as stated in paragraph 22 of IC 70-6R5, we do provide written opinions on general enquiries and we are prepared to provide you with the following comments.
Your concern appears to be with respect to our response to question # 12 at the 2011 STEP conference wherein the discussion was about the reporting by a Canadian investor of a distribution from a foreign mutual fund that arose from capital gains realized by the fund. In response to the question of how the gain distributed by the mutual fund would be taxed in the hands of the resident beneficiary, we indicated that there is no flow-through provision in the Act with respect to a distribution of a gain by a non-resident mutual fund similar to subsection 104(21) of the Act, which is applicable only to a resident trust.
Accordingly, pursuant to subsection 108(5) of the Act, the distribution from the non-resident trust will be treated as income ‘from a property that is an interest in the trust and not from any other source’. You would like us to clarify that, pursuant to the provisions of section 250.1 and subsection 104(13) of the Act, only the taxable portion of the gain will be included in the Beneficiary’s income.
There are two issues to be resolved to address your concern. Firstly, the nature of the distribution in the hands of the Beneficiary, and secondly, the portion of the distribution that will be included in the hands of the Beneficiary.
Subsection 104(13) requires that a beneficiary of a trust shall include in computing his/her income such part of the trust’s income that was paid or payable to the beneficiary in that year. Subsection 108(5) further provides that the nature of income or deductions flowing through a trust to a beneficiary of the trust is retained only where the Act specifically provides for it. As a result, only certain categories of income retain their character when flowed through a trust to a beneficiary such as dividends, taxable capital gains, foreign source income, etc.
Subsection 104(21) permits a trust to designate in respect of a beneficiary, a portion of its net taxable gains, such that the amount so designated is deemed for the purposes of sections 3 and 111 of the Act to be a taxable capital gain of the beneficiary for the year, from the disposition of capital property. Further, for the trust to make the designation under subsection 104(21), the trust must, inter alia, be a resident of Canada throughout the taxation year in which such a designation is made.
Accordingly, as indicated in our response at the STEP conference, since there is no specific provision in the Act to designate the distribution of a taxable capital gain by a trust that does not meet the residency requirement, there is no flow-through of the gains to the resident beneficiaries for Canadian tax purposes. Therefore, pursuant to paragraph 108(5)(a), the distribution of the gain by a non-resident trust will be taxable as income from a property that is an interest in the trust, to the extent that it is included in the income of the beneficiary, pursuant to subsection 104(13). Consequently, in the given scenario, the distribution by the non-resident trust will not be treated as a capital gain distribution to the Beneficiary.
In order to determine what portion of the distribution will be taxable to the Beneficiary, one has to look at the computation of income of the non-resident trust for the purpose of subsection 104(13). Paragraph 250.1(b) of the Act generally provides that where income is to be determined under the Act for a non-resident person, it will be done in accordance with the provisions of the Act. Accordingly, in the given scenario, income of the non-resident trust, will be determined in accordance with paragraph 3(b) of the Act, specifically, clause 3(b)(i)(A), which refers to “…all of the taxpayer’s taxable capital gains for the year from the disposition of property”.
Further, since the reference in clause 3(b)(i)(A) of the Act is to “taxable capital gains”, in our view, only the taxable portion of the gain will be included in computing the income of the non-resident trust. Consequently, only an amount equal to the taxable portion of the distribution will be included in computing the income of the Beneficiary. Similar views have been expressed in CRA documents 2003-0034237 and 2005-0113921I7, wherein the issue was whether the distribution of gains from a non-resident trust will be treated as capital or income in the hands of a resident Canadian beneficiary.
Please note that the above views are based on the assumption that section 94.1 of the Act is not applicable to the given scenario.
We trust our comments will be of assistance to you.
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2012
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2012