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: To clarify technical notes stating that the application of 94(2)(t) will not affect the application of 94(2)(g) in respect of the original transfer by the corporation to the trust
Position: See letter
Reasons: See letter
February 24, 2014
Re: Non-Resident Trust Ceasing to be a Deemed Resident
We are responding to your October 18th, 2013 query requesting clarification with respect to the technical notes provided by the Department of Finance on new paragraph 94(2)(t) of the Income Tax Act (the "Act"). More specifically, you wanted to understand the interaction between paragraphs 94(2)(t) and (g) of the Act in the following passages within the said technical notes: (emphasis added)
Paragraph 94(2)(t) generally expunges a contribution of shares or indebtedness of a Canadian corporation from the corporation to a trust if the corporation issued (in circumstances described in subparagraph 94(2)(g)(i) or (iv)) the shares or the debt to the trust and the trust later sells the shares or indebtedness in circumstances in which the parties to the sale deal with each other on an arm's length basis. However, the application of paragraph 94(2)(t) will not affect the application of paragraph 94(2)(g) in respect of the original transfer by the corporation to the trust or the other person or partnership: such transfers will continue to be treated as transfers under section 94.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings. Where the particular transactions are completed, the inquiry should be addressed to the audit division of the applicable CRA Tax Services Office.
For clarity, we will use the following hypothetical fact situation:
- In 2010, Trust A, a factual non-resident trust was deemed a resident by reason of subsection 94(3) of the Act because Corp X, a Canadian resident corporation, issued 100 common shares to Trust A thereby triggering paragraph 94(2)(g) of the Act and making Corp X a resident contributor of Trust A. Trust A is not an exempt foreign trust.
- In calendar 2011, none of the trust circumstances changed except that Trust A ceased to have a resident contributor when the trust sold its 100 common shares of Corp X at fair market value to an unrelated third party on August 15th, 2011 in a transaction, the terms of which met the requirements of paragraph 94(2)(t) of the Act.
Pursuant to paragraph 94(3)(a) of the Act, in the absence of subsection 94(5), Trust A would have remained deemed resident throughout the 2011 taxation year and would not have ceased to be deemed resident until December 31st, 2011. In our view, the statement that "the application of paragraph 94(2)(t) will not affect the application of paragraph 94(2)(g) in respect of the original transfer by the corporation to the trust", in the technical notes, makes the point that the impact of paragraph 94(2)(t) is not retroactive. In the example herein, Corp X only ceases to be a resident contributor, for purposes of section 94, following the sale of common shares.
By virtue of subsection 94(5) of the Act, Trust A is deemed to cease to be a resident immediately before it ceases to have any resident contributor. As a result, subsection 128.1(4) applies to create a deemed year-end. Trust A would be deemed resident under subsection 94(3) for the taxation year ending August 15th, 2011. Trust A would be a non-resident for its taxation year ending December 31st, 2011.
By virtue of paragraph 94(4)(e) of the Act, paragraph 94(3)(a) of the Act does not deem a trust to be resident in Canada for the purposes of determining whether, in applying subsection 128.1(4) of the Act, the trust ceases to be resident in Canada at a particular time. Therefore, the deemed change in residency of Trust A occurs only because of subsection 94(5) and not again when subsection 94(3) no longer applies.
We trust our comments will be of assistance.
Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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