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 position outlined in CRA Document 2013-0509111E5 valid?
Position: The result is correct; however, there is an inaccurate statement.
Reasons: See below.
2019 STEP CRA Roundtable – June 7, 2019
QUESTION 1. Non-resident trust ceasing to be a deemed resident
In an article in the 2016 Canadian Tax Journal titled, “Non-Resident Trusts: Selected Interpretive and Planning Issues—Part 1” by Elie S. Roth and Kim Brown, the authors indicated that some of the statements made by the CRA in technical interpretation 2013-0509111E5, dated February 24, 2014 were unclear.
The hypothetical fact situation described in the 2014 technical interpretation was as follows:
- 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) 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.
Can the CRA please confirm their position and if necessary, correct any inaccurate statements made in the 2014 technical interpretation?
The following passage is taken from the technical notes provided by the Department of Finance regarding paragraph 94(2)(t) of the Act:
“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.”
It is our view that paragraph 94(2)(t) of the Act applies to expunge the contribution after the time of the sale (i.e., from the time of the sale forward, the contribution is considered to have never occurred). As such, at the end of the 2011 taxation year (i.e., December 31, 2011) of Trust A, paragraph 94(3)(a) would not apply as there is no resident contributor. Conversely, subsection 94(5) would apply since the conditions therein are met, including that at the end of the 2011 taxation year, there is no resident contributor.
Accordingly, pursuant to subsection 94(5) of the Act, Trust A is deemed to cease to be a resident when it ceases to have any resident contributor. As a result, subsection 128.1(4) applies to create a deemed year-end immediately before that time. Trust A would be deemed resident under subsection 94(3) for the taxation year ending August 15th, 2011 since at the end of that particular taxation year, there is a resident contributor. However, Trust A would not be deemed resident for its taxation year beginning on August 16th, 2011 and ending December 31st, 2011 since at the end of that particular taxation year, there is no resident contributor.
As such, the following statement made in the 2014 technical interpretation is inaccurate and should be disregarded:
“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.”
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