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 the estate of a Canadian resident considered to be a contributor' to a child's trust created in a foreign jurisdiction?
Position: Yes.
Reasons: Pursuant to the definitions of 'contributor' and 'contribution' in subsection 94(1) and the application of paragraph 94(2)(g) of the Act.
XXXXXXXXXX
V. Srikanth
2013-051477
June 26, 2014
Dear XXXXXXXXXX:
Re: Residency of a trust
This is in response to your correspondence dated December 9, 2013 wherein you requested our views on the application of subsection 94(3) of the Income Tax Act (the "Act") to a particular situation. Specifically, you have described a scenario wherein a Canadian resident in his will leaves an unconditional bequest to a trust (the "Trust") that was previously settled outside Canada by a non-resident and the trustee of which is not resident in Canada. The sole beneficiary of the Trust, the child of the deceased, is also not resident in Canada. It was further provided, as a fact in the given scenario, that the Trust is factually non-resident, in that its central management and control occurs outside of Canada. You would like our views on whether the Trust is deemed to be resident in Canada pursuant to subsection 94(3) of the Act.
Our Comments
This technical interpretation provides general comments about the provisions of the 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 Canada Revenue Agency Tax Services Office. Residency of a trust is a question of fact. Generally, a trust is factually resident where the central management and control of the trust is exercised. However, pursuant to subsection 94(3), a trust which is otherwise factually non-resident, will be deemed to be resident in Canada if at the end of the taxation year (provided the trust exists at that date) or the time in the taxation year immediately before it ceases to exist (known as the "specified time"), there is a "resident contributor" or a "resident beneficiary", each term as defined in subsection 94(1) of the Act.
As you have correctly indicated in your analysis, in the given scenario, with the sole beneficiary being a non-resident of Canada, there is no "resident beneficiary" to the Trust, as defined in subsection 94(1). It is therefore, to be determined if there is a "resident contributor". The concept of residence necessarily implies that the person must be in existence. Therefore, a deceased natural person would not be a resident of Canada. Hence the deceased is not considered in the determination of a "resident contributor".
Generally, by virtue of the definition of "trust" in subsection 248(1), an estate is a trust under the Act. For purposes of the non-resident trust rules in section 94, the "trust" definition in subsection 94(1) clarifies that, for greater certainty, a reference to a trust includes an estate. In order to determine if in the given scenario the estate of the deceased (the "Estate") is considered to be a contributor to the Trust, one must consider the definitions of "contributor" and "contribution" in subsection 94(1) of the Act.
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" (within the meaning assigned by subsections 94(1) and (2)) to the trust.
Pursuant to the definition of "contribution" in subsection 94(1), a contribution to a trust by a particular person or partnership includes a transfer or loan (other than an arm's length transfer) of property to the trust by the particular person or partnership.
Pursuant to paragraph 94(2)(g) of the Act, when the Trust acquires its interest in the Estate, the Estate will be deemed to have transferred the interest to the Trust. Accordingly, the Estate will be considered to be a contributor to the Trust. Where it is determined that the Estate is resident of Canada, there will be a "resident contributor" to the Trust, and consequently, the Trust will be deemed to be resident in Canada pursuant to subsection 94(3) of the Act, throughout the particular taxation year.
Furthermore, pursuant to paragraph 94(2)(n) of the Act, "a contribution made at any time by a particular trust to another trust is deemed to have been made at that time jointly by the particular trust and by each person or partnership that is at that time a contributor to the particular trust
". Therefore, in the given instance, the deceased is also considered to be a contributor to the Trust.
We trust our comments will be of assistance to you.
Yours truly,
Phil Kohnen
Manager, Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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