17 July 1992 Income Tax Severed Letter 9202835 - XXX

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.

920283
D. Patrick
19(1) 957-2125

Dear Sir:

Re: Residence of Trust under the Income Tax Act

This is in reply to your fax dated January 28, 1992, in which you requested our opinion of the residence of a trust when;

• 1. The trustees live in Germany. The Husband is employed by the Armed Forces and his unemployed spouse lives with her husband.
• 2. The trust property is situated in Canada,
• 3. The Beneficiaries of the trust are residents of Canada.

The Department's views with respect to this issue are contained in Interpretation Bulletin IT-447, "Residence of a Trust or Estate" (hereinafter reference being made to "trust" and "trustee"). The residence of a trust is a question of fact to be determined according to the circumstances in each case. We do not have sufficient

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information to provide an opinion regarding the residence status of the above trust. Additional information required to make such a determination would include the following.

• 1. A copy of the trust document, and any amendments to this document which affect the administration of the trust. For example, it would be necessary to see copies of any executed Powers of Attorney with respect to the trust property, or the trust bank accounts.
• 2. Further information, on who are the trustee's, and if they are individuals, as opposed to corporate trustees, and are they in fact non-residents of Canada, or are they temporarily residing outside of Canada. Are they subject to the deemed residence provisions of S. 250(1) of the Income Tax Act.
• 3. The location, description and approximate value of the trust assets.

Nevertheless, we are pleased to provide the following general comments.

A trust is generally considered to reside where the trustee or other legal representative who manages or controls the trust assets resides. In your recitation of facts you indicate that the trustees live in Germany. I have assumed for the purposes of this response that the Husband and wife mentioned previously, are the trustees, and they are temporarily living in Germany due to the husbands employment with the Canadian Armed Forces. If this assumption is accurate S. 250(1)(b) of the Income Tax Act would deem the individuals to be Canadian residents for tax purposes for their personal income taxes. In the event the individuals are deemed to be Canadian Residents pursuant to S. 250(1) of the Income Tax Act, it will still be necessary to determine whether the residence of the trust would be affected by the fact that the trustees are "deemed Canadian residents" . For you information I am enclosing a copy of IT-221R2 concerning the factors to consider in determining an Individual's Residence status for Canadian Income Tax Purposes.

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With respect to the question raised regarding the residency of the Trust, I wish to highlight, paragraph 2 of IT-447 which outlines the powers or responsibilities which the Department considers in determining which trustee has management and control of the trust. However, as stated at paragraph 5 of IT-447 there may be some situations where the facts indicate that a substantial portion of the management and control rests with some other person such as the settlor or the beneficiaries. In these situations the residence of this other person may be considered to be the determining factor of the residence of the trust regardless of any contrary provisions in the trust agreement.

In this regard a determination of each trustees' powers and responsibilities as established under the terms of the trust document, and any other related trust document would be imperative in the determination of the trust's residence. Subject to an analysis of all the facts, the Department's position as described in paragraph 3 of IT-447 will generally apply.

Notwithstanding the above comments regarding the residency of a trust, given the above-noted assumptions, we would caution that because of the lack of jurisprudence on this issue, it is not clear what the decision of a court would be in any particular case.

We would point out that the only significant Canadian tax case dealing with the issue of the residence of a trust is Thibodeau Family Trust v. The Queen (78 DTC 6376). In this case the Court held that a trust was resident of Bermuda and not Canada based upon the following "judicial formula":

• (1) the majority of the trustees were resident at all material times in Bermuda, and
• (2) the trust permitted a majority decision on all matters of trustees' discretion.

Furthermore, the trust property was at all material times in Bermuda and the non-resident trustees made all significant decisions with respect to investments of trust property.

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The above comments are our interpretation of the law as it applies generally. It may, however, not always be appropriate in the circumstances of a particular case and, as stated in paragraph 21 of Information Circular 70-6R2, it is not binding on this Department.

In the event you require a determination of the residence of the trust, forward all documentation to the International Taxation Office, Corporate and Trust Assessing Division, 2540 Lancaster Road, Ottawa, K1A 1A8, since that Division is responsible for making such determinations.

In the event the trust is considered to be situated in Germany, Part XIII Tax would generally be applicable to most types of investment income arising in Canada and paid to the trust. The trust would also be subject to Part I Tax in respect of any business income earned in Canada as well as any taxable capital gains resulting from the disposition of taxable Canadian property. Such Part I or Part XIII Tax would be subject to any relief granted under the Canada- Germany Income Tax Convention. Generally all distributions made to Canadian Beneficiaries from the trust on account of income and not capital will be subject to Part I Tax. In the event that the trust is considered not be a resident of Canada, consideration should, also be given to paragraph 94(l) of the Income Tax Act,

We trust the forgoing comments are of assistance to you.

Yours truly,

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