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.
International Tax Programs Directorate Rulings Directorate 957-8953
Attention: Mr. K. Cochrane
Non-Resident Trusts and the 21-year rule
This is in reply to your memorandum dated November 8, 1993, wherein you requested an interpretation regarding the 21-year deemed disposition rule applicable to non-resident trusts. Also, you ask if Part I-3 of the Taxation Act (Quèbec) (the "Quèbec Act") provides such 21-year rule, and in the affirmative, you would like to know if the Income Earned in Quèbec - Income Tax Remission Order, 1988 ("the Order") is applicable to such deemed disposition. We apologize for the delay in responding to your request.
21-YEAR DEEMED DISPOSITION RULE APPLICABLE TO NON-RESIDENT TRUSTS
We confirm that subsection 104(4) of the Income Tax Act ("the Act") is also applicable to non-resident trusts who own taxable Canadian properties as described in paragraph 115(1)(b) of the Act. At the 1993 Manitoba Bar Association, Round Table question 7, pertained to the application of the 21-year deemed disposition rule to non-resident trusts. Revenue Canada's answer was as follows:
"Subsection 104(2) of the Income Tax Act (the "Act") provides that a trust shall, for purposes of the Act, be deemed to be in respect of the trust property, an individual. An individual is defined in subsection 248(1) of the Act as "a person other than a corporation". A taxpayer includes "any person whether or not liable to pay tax". It is a well established principle of interpretation that the word "disposition" when used in the Act includes "deemed dispositions" provided for by other specific provisions of the Act. Therefore, "taxable capital gains from dispositions described in paragraph (b)" referred to in subparagraph 115(1)(a)(iii) of the Act include gains arising from deemed dispositions of taxable Canadian property. A trust which at no time in a taxation year was resident in Canada is subject to the provisions of subparagraph 115(1)(a)(iii) of the Act. Every trust, whether resident or non-resident, whether liable for tax or not, is subject to the provisions of subsection 104(4) of the Act. Should a taxable capital gain arise from a deemed disposition of taxable Canadian property pursuant to subsection 104(4) of the Act, the non-resident trust must include this gain in its income pursuant to subparagraph 115(1)(a)(iii) of the Act."
Subsection 104(4) of the Act specifies the date of the deemed disposition. The timing of the deemed disposition differs if the trust is a spousal trust created before 1972, a spousal trust created after 1971 or an other type of trust. Trusts, other than spousal trust created after 1971, can elect under subsection 104(5.3) of the Act to defer the first deemed realization day if there is at least one "exempt beneficiary" in the trust. The 1992 - T3 Guide and Trust Return summarizes clearly the 21-year deemed disposition rule as well as the election under subsection 104(5.3) of the Act (see page 22 and following of the enclosed T3 Guide).
Under subsections 104(4) and 104(5) of the Act, non-resident trusts would be deemed to have disposed of their taxable Canadian properties, at the end of the day specified under subsections 104(4) or 104(5.3) of the Act, at fair market value and considered to have reacquired them, immediately thereafter, at a cost equal to the same fair market value. Non-resident trusts must include in their income taxable capital gains or losses and recapture, if any, arising from the deemed disposition which are not allocated or designated. A spousal trust created after 1971 can not allocate or designate taxable capital gains and recapture resulting from the deemed disposition. The portion of taxable capital gains and recapture allocated or designated will be added to beneficiaries' income instead of trusts' income. It is to be noted that the categories of income lose their identity when allocated by non- resident trusts. More specifically, if non-resident trusts allocate or designate a taxable capital gain, the beneficiary, whether resident or non-resident, will have to add the full gain to his income and will lose the preferential tax treatment granted to capital gains.
There is a 21-year deemed disposition rule, under the Quèbec Act, for non-resident trusts holding taxable Quèbec properties. However, Quèbec's rule is not exactly the same as those provided under the Act. As an example, we are of the opinion that the Quèbec Act does not have any concordant provision to the election provided under subsection 104(5.3) of the Act, which permits postponement of the deemed disposition day. We suggest that you address your request concerning the interpretation and application of the Quèbec Act to the Provincial and International Relations Division. Your request will be transferred to Revenue Quèbec, if need be.
INCOME EARNED IN QUEBEC - INCOME TAX REMISSION ORDER, 1988
In your memorandum you mentioned that actual dispositions by non- resident trusts, of property in Quèbec, are allocated to Quèbec for the purpose of calculating tax payable in accordance with the provisions of the Order. In our opinion, section 3 of the Order, is also applicable to deemed dispositions.
However, on December 11, 1992 section 8 of that Order was amended to provide that sections 3 to 6 are applicable in respect of the 1983 to 1992 taxation years. Consequently, we are of the opinion that section 3 of the Order is not applicable to taxable capital gains realized after 1992 unless the application period is extended further.
Acting DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch
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