22 July 2023 Internal T.I. 2021-0883241I7 - Entity classification of Liechtenstein stiftung

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: Whether a particular Liechtenstein stiftung is properly classified as a trust or a corporation for Canadian tax purposes.

Position: The particular Liechtenstein stiftung is properly classified as a trust for Canadian tax purposes.

Reasons: Based upon the "two-step approach" to entity classification, the particular Liechtenstein stiftung has more in common with a trust than it does with a corporation under Canadian commercial law.

      Mark Turnbull						HEADQUARTERS
      Jerry Koppenol						Income Tax Rulings Directorate
      XXXXXXXXXX 						      Kanwal Graham
      International Large Business Division
      Compliance Programs Branch								

								      2021-088324

Liechtenstein stiftung

This is in reply to your e-mail request of March 3, 2021 regarding the classification of a XXXXXXXXXX (the “Taxpayer”), a Liechtenstein stiftung, for purposes of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (“Act”).

We understand that the Taxpayer disposed of taxable Canadian property, a term defined in subsection 248(1) of the Act, and filed a T2 corporation income tax return reporting the disposition. You have asked whether the view expressed in CRA document 2008-0266251I7 and repeated in CRA document 2010-0388611I7 that the provisions of the Act applicable to trusts are applicable to a Liechtenstein stiftung extend to the Taxpayer.

Our comments

Consistent with the conclusion in 2008-0266251I7, the Taxpayer in this case is a trust for Canadian tax purposes for the reasons indicated below.

The CRA generally uses the following approach to determine the provisions of the Act that are applicable to foreign business associations that do not exist in Canada:

1. determine the characteristics of the foreign business association under the relevant foreign commercial law and the terms of its organizational documents;

2. compare these characteristics and terms with the characteristics and terms of recognized categories of business associations under Canadian commercial law to determine the Canadian form of business association that is the closest to, or most appropriately matches, the particular foreign business association; and

3. apply to the business association the provisions of the Act that are applicable to its corresponding Canadian form of business association.

Characteristics of Taxpayer

A Liechtenstein stiftung, or foundation, is an entity that can be formed under the Principality of Liechtenstein’s Personen und Gesellschaftsrecht or Law on Persons and Companies (“PGR”). Under the PGR, a foundation has legal personality and owns the property allocated by the founder. A private-benefit foundation formed under the PGR may only conduct business in a commercial manner to the extent required by proper investment and management of the foundation’s assets.

The Taxpayer was created on XXXXXXXXXX with a capital contribution of XXXXXXXXXX as a family foundation, and was later changed to a private-benefit foundation. The Taxpayer’s Articles of Association provide, inter alia, the following:

• The Taxpayer’s purpose is the investment and management of its assets, and the distribution of the same to beneficiaries.
• The beneficiaries of the Taxpayer have no legal right to the dissolution of Taxpayer, individual parts of the Taxpayer’s assets or the division thereof, to appointment as beneficiaries, or to payments from the income or parts of the assets of the Taxpayer.
• The Taxpayer has three executive bodies:

o The board of curators (“Curators”), who shall supervise compliance with the laws, articles of association, by-laws, regulations and distributions to the beneficiaries. The Curators have irrevocable powers to elect or remove members of the foundation council, and to appoint the auditors.
o The foundation council (“Council”), which is the supreme executive body of the Taxpayer and is responsible for managing the foundation, including the obligation to manage, preserve and increase assets in line with the Taxpayer’s purpose, determining the class of beneficiaries, the extent of their beneficial interests and the moment of distributions to beneficiaries. The Council has the right to amend and/or supplement the Articles of Association and issue/amend by-laws and regulations.
o The auditors, who shall carry out audits of the Taxpayer’s annual accounts and compliance with the Taxpayer’s Articles of Association and regulations.

• The oldest member of oldest generation, and the oldest member of the second oldest generation, of the class of beneficiaries of the Taxpayer are authorized to appoint individual members of the Curators. The Curators elect members of the Council.
• The Taxpayer’s duration is unlimited and irrevocable (subject to dissolution provisions).
• In the event of dissolution, the Taxpayer’s assets shall be distributed to the ultimate beneficiary.
• The Taxpayers by-laws provide, inter alia, the following:
• The class of beneficiaries shall comprise XXXXXXXXXX and her legitimate biological descendants, as well as institutions and companies formed for the benefit of the same persons.
• Within the framework of the class of beneficiaries, the oldest living generation of a family branch shall be appointed as beneficiaries, unless other recommendations are submitted by the Curators to the Council.
• The Council shall determine the ultimate beneficiary from among the class of beneficiaries at its absolute and unfettered discretion.
• The Council has absolute and unfettered discretion as to whom, when and in what amounts distributions are to be made. Such decisions are directed particularly to beneficiaries who might be in need of special assistance as a result of distress, illness or invalidity as well as for training and education.

Characteristics of corporations under Canadian commercial law

To be classified as a corporation under Canadian law, an entity would generally be expected to have the following characteristics:

• legal personality and existence separate and distinct from the members;
• ability to carry on its activities in its own name;
• ability to acquire and own in its own name, property used in carrying on its business;
• capability of being sued or taking legal proceedings in its own name; and
• capacity to acquire rights and assume liabilities, and any rights acquired or liabilities assumed by it, must not be the rights or liabilities of the members.

As noted in Income Tax Technical News No. 38 (“ITTN 38”) and document 2008-0289461I7, a separate legal personality is no longer considered a distinctive feature of corporations alone, and is not in itself a determinative characteristic. Even after considering the characteristics of an entity, the most important attributes are the nature of the relationship between the various parties and the rights and obligations of the parties under the applicable laws and agreements.

Characteristics of trusts under Canadian commercial law

It is commonly understood that a trust is constituted when three certainties exist: certainty of intention, certainty of subject matter, and certainty of objects. In common law jurisdictions, the term “trust” generally refers not to a legal entity, but to a relationship between a trustee, who holds legal title to property, and the beneficiaries, who are entitled to the use and enjoyment of the property and for whose benefit the trustee owns the property.

A trust constituted under a civil law jurisdiction, such as Quebec, has certain distinctions from a trust constituted under a common law jurisdiction. Revenue Quebec defines a trust as follows: (footnote 1)

“A trust is an entity that results from an act (an onerous or gratuitous contract, or a will), whereby a person transfers property from his or her patrimony to another patrimony that he or she constitutes; the property is appropriated for a particular purpose, and a trustee undertakes to hold and administer it.”

Liechtenstein is civil law jurisdiction. Describing a trust by reference to dual ownership or equity in an international context would have the result of ignoring all civil law arrangements that have adopted the trust idea of the administration of assets for the benefit of others.

Comparison of Taxpayer’s characteristics to those of business associations under Canadian commercial law

The Taxpayer has some characteristics common to corporations under Canadian commercial law. However, unlike a corporation, the Taxpayer has no form of “share capital” or other ownership interests which convey a right to distributions of earnings or capital and, under Article 5 of the Taxpayer’s Articles of Association, the Taxpayer shall not operate a commercially conducted business.

The Taxpayer also has characteristics common to trusts under Canadian commercial law, including the characteristics discussed in various CRA documents including 2007-0236981I7, Pennsylvania Business Trust.

Conclusion

In our view, the Taxpayer has more in common with a trust than it does with a corporation under Canadian commercial law, as demonstrated by the following characteristics:

• The Taxpayer was created by an endowment from a founder much like a settlor gives property to settle a trust.
• Like a trust, the Taxpayer has beneficiaries, named in its by-laws, which are similar to the terms of a trust indenture. The beneficiaries may derive a present or future advantage from the assets of the foundation, be it a share in the revenues or a share in the assets of the foundation on the basis of a resolution of the Council.
• As a trustee of a trust would do, the executive bodies of the Taxpayer administer and use the property transferred by the founder for the benefit and advantage of the beneficiaries: the Curators supervise compliance with the Taxpayer’s articles of association, by-laws, regulations and distributions to beneficiaries; the Council is obligated to manage, preserve and increase assets in line with the Taxpayer’s purpose.

Unlike a corporation, the Taxpayer cannot carry on a commercially conducted business.

As a result, the provisions of the Act applicable to trusts are applicable to the Taxpayer and as such, the Taxpayer should have reported the disposition of the taxable Canadian property on a T3 Trust Income Tax and Information Return.

We trust our comments have been of assistance.

Unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency’s electronic library. After a 90-day waiting period, a severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. You may request an extension of this 90-day period. The severing process removes all content that is not subject to disclosure, including information that could reveal the identity of the taxpayer. The taxpayer may ask for a version that has been severed using the Privacy Act criteria, which does not remove taxpayer identity. You can request this by e-mailing us at: ITRACCESSG@cra-arc.gc.ca. A copy will be sent to you for delivery to the taxpayer.

Yours truly,

Charles Taylor
Acting Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 What Is a Trust? | Revenue Québec (revenuquebec.ca)