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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Does 104(4) apply to a non-resident trust that is not subject to tax in Canada?
Reasons FOR POSITION TAKEN:
Purpose of 104(4) and review of court cases.
XXXXXXXXXX T. Murphy
December 6, 1994
Re: Deemed Disposition Rules and Non-Resident Trusts
This is in reply to your letter of July 25, 1994 concerning the application of subsections 104(4) and 107(2) of the Income Tax Act (the "Act") to a situation involving a non-resident trust and a Canadian resident beneficiary. We apologize for the delay in responding to your letter.
The relevant facts as set out in your letter are as follows:
1.The non-resident trust is a testamentary trust created before 1960 by the last will and testament of a non-resident (the "deceased").
2.The sole income and capital beneficiary of the trust is the great grandchild of the deceased. The beneficiary is a resident of Canada.
3.The assets of the trust consist of cash and securities of U.S. companies.
4.Pursuant to the terms of the will, the trust is to be wound-up and the assets are to be distributed to the beneficiary in satisfaction of the capital interest.
You have asked us to confirm that the non-resident trust described above is subject to subsection 104(4) of the Act such that the cost of the trust's capital property is increased to its fair market value on January 1, 1993 and that on the wind-up of the trust the Canadian resident beneficiary will acquire those properties at the increased cost to the trust pursuant to paragraph 107(2)(b) of the Act.
The fact situation outlined above appears to be an actual situation and as such should be the subject of an advance income tax ruling. We offer the following general comments which may be of assistance to you.
The purpose of the "21-year rule" in subsection 104(4) of the Act is to prevent a trust from indefinitely deferring gains for Canadian income tax purposes on certain types of properties. Subsection 107(2) of the Act provides a "rollover" on the distribution of property by a personal or prescribed trust to a beneficiary in satisfaction of all or part of the beneficiary's capital interest in the trust, thus deferring the gain on the property until such time as it is disposed of by the (former) beneficiary.
In our opinion, a non-resident trust that is not subject to taxation in Canada (i.e., a non-resident trust that: (1) does not carry in business in Canada, (2) does not hold taxable Canadian property or (3) is not subject to section 94 of the Act) is not subject to the deemed disposition rules in subsection 104(4) of the Act. See by analogy, Oceanspan Carriers Limited v. The Queen, 87 DTC 5102 (F.C.A.) and Holiday Luggage Mfg. Co. Inc. and Falcon Luggage Inc. v. The Queen, 86 DTC 6601 (F.C.-T.D.).
However, where the beneficiary is a Canadian resident and the non-resident trust is a personal trust, paragraph 107(2)(b) of the Act is applicable in determining the cost to the Canadian beneficiary of the property acquired on the wind-up of the trust.
As an ancillary point, it should also be noted that by virtue of paragraph (g) of the definition of trust in subsection 108(1) of the Act, subject to certain limited exceptions, subsection 104(4) of the Act does not apply to a trust "all interests in which have vested indefeasibly and no interest in which may become effective in the future."
The above comments represent our general views on the subject matter of your letter and are provided in accordance with the comments in Information Circular 70-6R2. As such, they are not binding on Revenue Canada.
Manufacturing Industries, Partnerships
and Trusts Division
Policy and Legislation Branch
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