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) Determination of provincial residency of a TFSA trust. (2) Does the existence of an agency agreement impact the residency determination? (3) In which province is a TFSA trust liable to pay tax if it earns income from carrying on a securities trading business or a non-qualified investment?
Position: (1) A TFSA trust is considered to reside in the province where the trustee exercises the central management and control of the trust. (2) Possibly. (3) Business income earned through a permanent establishment in a province is taxable in that province. Non-qualified investment income is taxable in the province where the TFSA trust resides on the last day of the tax year.
Reasons: (1) A TFSA trust resides where its real business is carried on, which is where the trustee factually exercises the central management and control of the trust. (2) See below. (3) Application of provincial income allocation rules in Regulation 2601.
XXXXXXXXXX 2019-080055
D. Odubella
September 28, 2020
Dear XXXXXXXXXX:
Re: Provincial Residency of a TFSA Trust
We are writing in reply to your email of March 14, 2019, in which you asked for our views concerning the province of residence of a trust governed by a tax-free savings account (TFSA). We apologize for the delay in our response.
You provided the following hypothetical scenario:
- The holder of the TFSA resides in the province of Alberta.
- The holder is responsible for making investment decisions and for determining the amount and timing of contributions and withdrawals.
- A trust company with its head office in Ontario is the trustee of the TFSA trust.
- The trustee has entered into an agency agreement with an investment firm that is regulated under applicable provincial securities law. Under the agreement, the trustee has delegated responsibility for the day-to-day administration of the TFSA trust to the agent. The duties of the agent are significant and include custody of the assets, executing investment trades, making payments to and receiving contributions from the holder, record keeping, and completing tax filings for the TFSA trust.
- The agent has branches across Canada. The TFSA trust and holder are served by the agent’s branch located in Alberta.
- These facts are unchanged since the TFSA trust was established.
You asked the following questions:
1. In which province will the TFSA trust be considered to reside?
2. Does the existence of the agency agreement impact the residency determination?
3. In which province will the TFSA trust be liable to pay tax if it earns income from carrying on a securities trading business or a non-qualified investment?
In your email of July 11, 2019, you stated that, since the holder makes the substantial portion of the discretionary decisions in regards to the TFSA trust, the central management and control of the TFSA trust is exercised jointly between the holder and the agent. Therefore, the TFSA trust should be considered to reside in Alberta.
Our comments
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 70-6R9, Advance Income Tax Rulings and Technical Interpretations.
1. Determination of provincial residency of a TFSA trust
In determining the residence of a trust 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, paragraphs 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.
In our view, the central management and control test set out in Fundy Settlement applies in establishing provincial residency of a 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 duties and obligations include: establishing the terms of the trust to comply with the income tax requirements for TFSAs and filing the election to register the trust as a TFSA; monitoring and administering the trust on an ongoing basis to ensure that it continues to comply with the income tax requirements for TFSAs; monitoring investments to minimize the possibility of the trust holding a non-qualified investment; filing information and income tax returns; and ensuring that all contributions, acquisitions and dispositions of property, distributions, and any other transactions involving a TFSA occur at fair market value. In addition to these statutory duties and obligations, the terms and conditions of a TFSA trust often provide additional powers over the operation of the trust to the trustee.
In light of these statutory duties and obligations, it is our view that the central management and control of a TFSA trust rests with and is exercised by the TFSA trustee and that the TFSA trust is considered to reside in the province where the TFSA trustee factually exercises that function.
The level and extent of any involvement by the TFSA holder in investment decisions will not shift the central management and control of the TFSA trust from the trustee to the TFSA holder.
Similarly, as noted below, the involvement of an agent in the administration of the TFSA will not shift the trust’s central management and control to the agent. However, it may be relevant in determining the province in which the trustee exercises the trust’s central management and control.
We would also note that the provincial residence of a TFSA trust is not necessarily determined by the provincial residence of the trust company that acts as the TFSA trustee.
2. Impact of an agency agreement on the residency determination
The Act does not prohibit a trustee of a TFSA from entering into a contractual arrangement (including an agency agreement) with a third party to allow the third party to provide certain administrative or investment functions. However, in such a case, the CRA requires the terms of the TFSA trust to state that the ultimate responsibility for administering the TFSA remains with the trustee.
As noted above, the central management and control of a TFSA trust remains with the TFSA trustee and the trust will reside in the province where the trustee factually exercises that function. In a situation where the level of involvement of an agent in the administration of a TFSA trust is such that the trustee would be considered to exercise the central management and control of the trust through the agent at the location of the agent’s place of business that serves the TFSA trust and holder, the TFSA trust would be considered to reside in the province in which that place of business is located. While this is ultimately a factual determination, we would expect this to be the case in common arrangements involving registered plans where the administrative and investment functions of the plan are largely delegated by the plan trustee to a Canadian-regulated investment firm under an agency agreement.
3. In which province is a TFSA trust liable to pay tax if it earns income from carrying on a securities trading business or a non-qualified investment?
A TFSA trust is generally taxable on any income it earns from carrying on a business or a non-qualified investment in accordance with subsection 146.2(6). The provincial tax liability of a TFSA trust is based on its “income earned in the year in a province,” as defined in subsection 120(4) and section 2600 of the Income Tax Regulations.
Generally, the TFSA trust’s provincial tax liability will depend on which province the TFSA trust resided in on the last day of the taxation year, and whether the TFSA trust carried on business with a “permanent establishment” (defined in subsection 2600(2) of the Regulations) outside of the particular province.
Where the TFSA trust resides in a province on the last day of the taxation year and has no income from a business carried on through a permanent establishment outside the province, the income earned in the taxation year is the TFSA trust’s income for the year (pursuant to subsection 146.2(6)), which will be taxable in that province. In contrast, where the TFSA trust’s income earned in a taxation year includes income from a business carried on through a permanent establishment outside the province of residence, that business income will be taxable in the province in which it was earned.
A TFSA trust will have a permanent establishment in a province if the TFSA trust carries on business in that province through an agent of the trustee who has a fixed place of business in that province and has general authority to contract for the trustee. This would be the case in the situation you have described.
In summary, non-qualified investment income is taxable in the province where the TFSA trust resides on the last day of the tax year and business income is taxable in the province in which it is earned.
In your situation, if it were determined that the trustee exercises the central management and control of the TFSA trust in Alberta, the TFSA trust would be a resident of Alberta. In such a case, the TFSA trust’s taxable income derived from both carrying on a securities trading business in Alberta and non-qualified investments would be taxable in Alberta.
The comments in this letter would generally also apply to a trust governed by a registered retirement savings plan, registered retirement income fund, registered education savings plan, or registered disability savings plan. In addition, the comments would generally apply to a Quebec registered plan that is deemed to be a trust pursuant to paragraph 248(3)(c).
Finally, you had asked us to comment on the determination of provincial residency of a TFSA trust that involves an agent that only offers online services to its clients. We have not previously considered this question, but would be pleased to consider it in the context of an advance income tax ruling request submitted in accordance with Information Circular IC 70-6R9 Advance Income Tax Rulings and Technical Interpretations.
We trust our comments will be of assistance.
Yours truly,
Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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