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: What is the residence of a TFSA trust?
Position: A TFSA trust will always be resident in Canada.
Reasons: A trust resides where its real business is carried on, which is where the central management and control of the trust actually takes place. In the case of a trust governed by a TFSA, RRSP, RRIF, RESP or RDSP, this will always be in Canada where the corporate trustee resides given the duties and obligations imposed on the trustee under the Act.
March 22, 2018
Mihaela Scarlat HEADQUARTERS
Operations Division Income Tax Rulings Directorate
Offshore and Aggressive Tax Planning V. Pietrow
International, Large Business and
Investigations Branch 2018-073820
Residency of TFSA trust
We are writing in reply to your email of December 28, 2017 in which you asked for our views concerning the residence of a trust governed by a tax-free savings account (TFSA) in the following situation:
- The TFSA is a “self-directed” trusteed arrangement that gives the holder primary responsibility for managing investments.
- The CRA reassessed the TFSA trust for several taxation years on the basis that it was taxable on its income from carrying on a securities trading business.
- The CRA determined that the holder of the TFSA was not resident in Canada for a period beginning before the TFSA was established and ending during the period under audit.
- As required by subparagraph (b)(i) of the definition “qualifying arrangement” in subsection 146.2(1) (footnote 1), the trustee of the TFSA trust is a corporation licensed or otherwise authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as trustee.
The TFSA holder argues that, as she was actively trading securities and making all the investment decisions for the trust, the central management and control of the trust rested with her and was exercised outside of Canada. Accordingly, her position is that the TFSA trust was not resident in Canada during the period in which she was non-resident and therefore the TFSA trust was not taxable in Canada on the business income earned during that period.
In determining whether a trust is a resident of Canada for purposes of the Act, the CRA will generally apply the criteria described in Income Tax Folio S6-F1-C1, Residence of a Trust or Estate. In particular, ¶1.2, 1.3 and 1.5 of the Folio state:
1.2 The Supreme Court of Canada (Fundy Settlement v. Canada, 2012 DTC 5063, 2012 SCC 14) has clarified that residence of a trust will be determined by the principle that for purposes of the Income Tax Act a trust resides where its real business is carried on, which is where the central management and control of the trust actually takes place.
1.3 Usually the management and control of the trust rests with, and is exercised by, the trustee, executor, liquidator, administrator, heir or other legal representative of the trust. In this Chapter the word trustee is used to refer to any such person in relation to a trust. In its decision in Fundy Settlement, the Supreme Court of Canada affirmed the view that the residence of the trustee does not always determine the residence of a trust.
1.5 In some situations, the facts may indicate that a substantial portion of the central management and control of the trust rests with someone other than the trustee, such as the settlor or the beneficiaries of the trust. Regardless of any contrary provisions in the trust agreement, the actions of these other persons in respect of the trust must be considered. It is the jurisdiction in which the central management and control is factually exercised that will be considered in determining the residence of the trust.
The Act imposes significant duties and obligations on TFSA trustees, which require the trustee to maintain and exercise key decision-making powers and responsibilities over the trust. These include the following:
- The trustee establishes the terms of the trust so as to comply with the income tax requirements for TFSAs and files the election with the Minister of National Revenue to have the trust registered as a TFSA. (footnote 2)
- The trustee is required to monitor and administer the trust on an ongoing basis to ensure that it continues to comply with the income tax requirements for TFSAs. (footnote 3)
- The trustee is responsible for monitoring investments to minimize the possibility of the trust holding a non-qualified investment. (footnote 4)
- The trustee is required to file information returns. (footnote 5)
- The trustee must file a tax return if the trust owes tax on income earned by the trust from carrying on a business or from non-qualified investments and must pay the tax owing. (footnote 6)
- The trustee must ensure compliance with the requirement of the Act that all contributions, acquisitions and dispositions of property, distributions, and any other transactions involving a TFSA occur at fair market value. (footnote 7)
In light of these statutory duties and obligations, the central management and control of a TFSA trust will rest with, and be exercised by, the trustee in Canada. The level and extent of any involvement by the TFSA holder in investment decisions will not shift the central management and control of the trust from the trustee to the holder. It is our position that a TFSA trust will always be considered resident in Canada for the purposes of the Act.
Similarly, it is our position that a trust governed by a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), a registered education savings plan (RESP), or a registered disability savings plan (RDSP) will always be considered resident in Canada for the purposes of the Act. The duties and obligations imposed by the Act on RRSP, RRIF, RESP and RDSP trustees are comparable to those imposed on TFSA trustees.
Furthermore, besides these statutory duties and obligations, the terms and conditions of TFSA, RRSP, RRIF, RESP, and RDSP trusts often include the following additional express terms and conditions:
- the trustee may decline to make any particular investment in their sole discretion;
- the trustee may sell any property held within the trust to pay any taxes, interest or penalties; and
- the trustee may limit or restrict contributions to, distributions from, or other transactions with the trust.
Terms and conditions of this kind would further support our view that the central management and control of the trust takes place in Canada.
We trust our comments will be of assistance.
Acting Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Except where otherwise noted, all statutory references in this document are to the Income Tax Act (the “Act”).
2 Subsection 146.2(5)
3 Paragraphs 146.2(5)(a) to (c)
4 Subsection 207.01(5)
5 Section 223 of the Income Tax Regulations
6 Paragraph 150(1)(c)
7 ¶1.96 and 1.97 of Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs
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