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. 116 filing requirements of estates with NR executors.
Position: 1. Regardless of whether the NR estate is "deemed" to be Canadian residence per the proposed NRT legislation...116 filing is required.
Reasons: 1. proposed 94(3) deems estate to be Cdn resident if "resident contributor" or "resident beneficiary" as those terms are defined for specific purposes of the Act but not for s. 116.
Lena Holloway, CA
January 4, 2013
Re: Interpretation Request Section 116 of the Income Tax Act
This is in reply to your letter received on May 22, 2012 in which you requested a technical interpretation with respect to the filing and reporting requirements in a situation involving an estate and non-residents.
The scenario presented in that letter and the related questions posed follow:
Is a T2062 form required to be filed when an estate with American resident executors disposes of taxable Canadian property to Canadian resident beneficiaries where the testator was an American resident? Would the answer be the same in a similar scenario where the only difference is that the testator was a resident of Canada?
As you are probably aware the Supreme Court of Canada (SCC) released its decision in St. Michael Trust Corp. v. The Queen (sub nom. Garron) on April 12, 2012. The SCC's decision indicated that it is the central management and control over the trust, rather than the residence of the trustees that is the appropriate test for determining trust residence for purposes of the Income Tax Act (the Act). Therefore in order to address your concerns we will assume in the hypothetical scenario presented that the central management and control over the estate rests with the executors who are residents of the United States of America and therefore the estate is not resident in Canada.
Subject to certain exceptions, section 116 of the Act applies where a non-resident person (including a trust or an estate) proposes to dispose or disposes of taxable Canadian property. If the trust/estate is factually resident in Canada when the disposition of the property occurs, section 116 of the Act does not apply in respect of the disposition and the filing of form T2062 is not required. Otherwise, the non-resident trust has to notify the Canada Revenue Agency (CRA) about the disposition by filing form T2062 either before it disposes of the property or within ten days after the disposition.
In the case of a non-resident trust, the CRA will issue a certificate of compliance to the non-resident trust when form T2062 has been filed and when the CRA has received either an amount to cover the tax on any gain the vendor may realize upon the disposition of property, or appropriate security for the tax. If the non-resident trust does not comply with the requirements of subsection 116(3) of the Act and the CRA has not issued a certificate of compliance, the purchaser (in this case the beneficiary) may become liable under subsection 116(5) of the Act to pay a specified amount of tax on behalf of the vendor. You will find more information on the Procedures concerning the disposition of taxable Canadian property by non-residents of Canada - Section 116 in Information Circular 72-17R6 (attached).
Pursuant to draft legislation released in the Notice of Ways and Means Motion dated October 19, 2012, proposed subsection 94(3) provides, inter alia, that a non-resident trust will be deemed to be resident of Canada for certain purposes including for the purposes of computing its income. One of two conditions must be met in order for this deeming provision to have effect: there needs to be either a "resident contributor" to the trust or a "resident beneficiary" under the trust at the end of the particular year of the trust.
A "resident contributor", to a trust at any time, means a person that is, at that time, resident in Canada and a contributor to the trust, but does not include
(a) an individual (other than a trust) who has not, at that time, been resident in Canada for a period of, or periods the total of which is, more than 60 months (other than an individual who, before that time, was never non-resident); or
(b) an individual (other than a trust), if
(i) the trust is an inter vivos trust that was created before 1960 by a person who was non-resident when the trust was created, and
(ii) the individual has not, after 1959, made a contribution to the trust.
A "contributor" to a trust at any time, means a person (other than an exempt person but including a person that has ceased to exist) that, at or before that time, has made a contribution to the trust.
As noted above, to be a "resident contributor", the person must be resident in Canada and a "contributor". The definition of "contributor" indicates that, a deceased natural person will continue to qualify as a contributor because of the reference to a person that has ceased to exist. However, the concept of residence necessarily implies that the person must be in existence. Therefore, a deceased natural person would no longer be a resident of Canada and hence the definition of "resident contributor" in both examples you have presented (American testator or alternatively the Canadian testator) would not be met.
The second test which could render proposed section 94 applicable is whether there is a resident beneficiary. The definition of resident beneficiary is, through various other definitional references, a multi-part test.
A person will be a resident beneficiary under a trust if:
the person is a "beneficiary" under the trust,
the person is not an "exempt" person,
the person is not a "successor beneficiary",
the beneficiary is a resident in Canada, and
there is a "connected contributor" to the trust.
For illustrative purposes we will assume that none of the resident beneficiaries in your example are exempt persons or successor beneficiaries (as those terms are defined in proposed subsection 94(1)).
For the purpose of these rules, a beneficiary is broadly defined to include anyone who is "beneficially interested" in the trust. "Beneficially interested" has an extended definition under the Act and includes persons named as beneficiaries, persons who have contingent rights as beneficiaries, and even persons who may become an object of a power of appointment.
As noted, the last aspect of the resident beneficiary definition is that there must be a "connected contributor". This is generally someone who contributed property to the trust either during Canadian residency, within 60 months before coming to Canada, or within 60 months after leaving Canada. In the case of a testamentary trust, the 60-month period after leaving Canada is shortened to 18 months.
When determining if an estate created on someone's death has a connected contributor, the relevant consideration is whether the deceased was a resident of Canada immediately before death or within 18 months of death. If so, there will be a connected contributor. Therefore, in the scenarios you have presented, only where the American testator was a Canadian resident and left Canada within 18 months of dying, or in the second case the testator was Canadian can the definition of resident beneficiary be met and the estate described would be deemed to be resident in Canada.
Proposed subsection 94(3) will operate on a yearly basis at the end of each taxation year of the trust. Either the "resident contributor" test or the "resident beneficiary" test must be met for proposed subsection 94(3) to be applicable. Once either of those tests are met they will not necessarily always be met for each and every taxation year of the trust during the trust's existence. While section 94 as proposed to be amended - will apply to deem a trust that is factually resident outside of Canada to be a resident of Canada if there is a "resident contributor" or a "resident beneficiary", the trust or estate will only be deemed to be resident for certain purposes of the Act and is not deemed to be resident for the purpose of section 116.
Therefore in both scenarios presented, even where the estate is deemed to be resident in Canada under the proposed amendments to section 94, section 116 will apply if the non-resident person (in this case the estate) proposes to dispose or disposes of taxable Canadian property.
We trust the above comments will be of some assistance.
Trusts Section I
Financial Industries 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, 2013
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, 2013