13 August 1990 Ministerial Letter 59688 F - Distribution of Property to Non-resident Beneficiary of Testamentary Trust

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.

SUBJECT: Distribution of Property to Non-Resident Beneficiary of Testamentary Trust

This is in reply to your round trip memorandum of March 2, 1990 in which you requested our comments with respect to the requests made by in his letter dated February 12, 1990 (copy enclosed). 

24(1)  He was concerned with the possible application of subsection 116(5.1) to the distribution of property, that is not taxable Canadian property, by the testamentary trust to a non-resident beneficiary, in satisfaction of the beneficiary's interest therein.

Subsection 107(c) applies in a situation where a personal trust distributes property, that is not Canadian resource property or taxable Canadian property, to a non-resident beneficiary in satisfaction of her capital interest therein.  Paragraph 107(5) deems the beneficiary to have disposed of her capital interest for proceeds equal to its adjusted cost base (a.c.b.) consequently, there is no capital gain on its disposition.

24(1) Although subsection 107(1.1) generally deems the cost of a  capital interest in a testamentary trust bequested to a taxpayer to be nil, the a.c.b. is not necessarily nil.  The a.c.b. of a capital interest in a personal trust is calculated in paragraphs 107(1)(a) and (b) for the purpose of computing capital gains and losses respectively. 24(1)

Paragraph 107(1)(a) deems the a.c.b. of the capital interest to be the greater of its a.c.b. otherwise determined, which would be equal to its cost of nil per subsection 107(1.1), and the cost amount to the trust of the bonds and similar securities would be their a.c.b. which is deemed by paragraph 70(5)(c) to be equal to the fair market value when acquired by the trust. Therefore the a.c.b. to the trust of those securities would likely be the fair market value of the securities when acquired by the trust.

Subparagraph 115(1)(b)(vi) deems the capital interest to be taxable Canadian property and any taxable capital gain resulting from its disposition is taxed thereunder.  As explained in paragraph 22 of Information Circular 72-17R3, the objective of section 116 "is to protect the revenues of the Crown by obtaining a prepayment of an amount which may be exigible on the income and capital gains realized by non-resident on these dispositions." To remove the purchaser's liability for such prepayments, certificates of compliance are issued under subsections 116(2) and (4) when the non-resident vendor notifies the Department of such transactions and pays an amount equal to 33 1/3% of the excess of the estimated or actual proceeds of disposition over the a.c.b.  When paragraph 107(5)(c) applies to the disposition of such taxable Canadian property, this excess is nil since the proceeds of disposition are deemed to equal the a.c.b.

19(1) is concerned about the effects of subsection 116(5.1) which applies to transactions in which a non-resident disposes of taxable Canadian property to a person with whom he is not dealing at arm's length for proceeds of disposition less than its fair market value.  Paragraph 17(b) of Interpretation Bulletin IT-419 indicates that the Department generally considers a trust and its beneficiary not to be dealing at arm's length.  The fair market value of the capital interest in the trust would probably be equal to the fair market of the property distributed in satisfaction thereof.  The proceeds of disposition would be the proceeds deemed by paragraph 107(5) (c) to equal the a.c.b. would likely be equal to the fair market value of the securities when acquired by the trust, and if the trust disposed of them shortly after acquiring them, there would be little or no change in their fair market value.  In such a situation the proceeds of disposition of the taxable Canadian property would generally be equal to its fair market value and subsection 116(5.1) would have no application.   

However, if the proceeds of disposition as deemed by paragraph 107(5)(c) were less than the fair market value of the capital interest being disposed, then, technically subsection 116(5.1) would apply to change the amount to be remitted under subsections 116(2) and (4).  This would result in an amount being withheld as a prepayment of taxes on a transaction which has no tax effect. It would seem more appropriate in such circumstances to issue the certificates without the prepayment technically required as a result of the application of subsection 116(5.1), since army prepayment would be refunded when the nil assessments are issued.

We have contacted the Non-Resident Taxation Division on this matter and they agreed that subsection 116(5.1) could apply, but that no payment of tax would be required in order to eliminate the processing of a nil return.  Also, to provide some measure of protection to the trustee, a certificate of compliance could be issued showing the certificate limit or the proceeds of disposition to be the fair market value.

Regarding  24(1)

We trust that our comments will be of assistance to you.

for Director Financial Industries DivisionRulings Directorate