8 March 1996 Internal T.I. 9530166 - NON-RESIDENT BENEFICIARIES AND SECTION 216

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.

Principal Issues:

Is trust income of a non-resident beneficiary eligible for the subsection 216(1) election?

Position:

No

Reasons:

the income loses its identity when it pays out from the trust unless otherwise provided in the Act

		March 8, 1996

	Lois Pollock, Chief	Foreign Section
	International Audit Division	S. Leung
	International Tax Directorate	957-2115

	Attention: Esta Mikhail
		953016

Non Resident Beneficiaries of Resident Trusts and Section 216 of the Income Tax Act (the "Act")

We are writing in response to your memorandum of October 6, 1995 wherein you requested our comments as to whether a non-resident beneficiary who receives income from a trust resident in Canada where the income represents rent from real property situated in Canada or a timber royalty is allowed to make an election under subsection 216(1) of the Act to be taxed on that income under Part I of the Act.

It is your opinion that such an election could not be made. We agree.

Loss of Distinctiveness of Character of Income Distribution

For purposes of both Part I and Part XIII of the Act, by virtue of paragraph 108(5)(a) and subsection 212(11) of the Act, an amount received by a beneficiary of a trust loses its original character and identity to be a particular type of income to the beneficiary as it was to the trust.¹ Therefore, unless otherwise specified in the Act, such an amount would be deemed to be income of or from the trust, regardless of the source from which the trust derived it. For Part I tax purposes, the Act provides several exceptions to paragraph 108(5)(a) of the Act by allowing the income of the trust resident in Canada which is distributed to the beneficiaries to retain its character. These exceptions can be found in subsections 104(19) (taxable dividend), 104(20) (dividend other than taxable dividend), 104(21) (taxable capital gains), 104(22) (foreign source income), 104(27) (pension benefits), and 127(7) (investment tax credit) of the Act, etc. These provisions are generally regarded as the flow-through provisions.

Subsection 212(11) in Part XIII of the Act is the counterpart of paragraph 108(5)(a) in Part I of the Act. However, there is no flow-through provisions in Part XIII of the Act. Instead, certain items of income are exempt from the application of paragraph 212(1)(c) of the Act. These exemptions can be found in subsection 104(21) where the taxable capital gains are those of a mutual fund trust, subsections 212(9) and 212(10) of the Act. Since rental income or timber royalty of a trust distributed to a non-resident beneficiary is not found in any of those exemptions, such income will be taxed under paragraph 212(1)(c) of the Act. As subsection 212(11) of the Act operates for the purposes of paragraph 212(1)(c), that subsection will apply to treat such income as income of the trust (i.e., not retaining the character of rent or timber royalty any more). Since by virtue of the preamble of subsection 216(1) of the Act only a non-resident person who receives rent from real property in Canada or a timber royalty is permitted to make an election to be taxed on such income under Part I of the Act, the beneficiary who receives trust income is therefore not eligible to make such an election.

Amount Distributed Is Already Net of Expenses

Furthermore, since the amount distributed by the trust is already a net income amount because the trust is eligible to claim all the expenses relating to the earning of rent or a timber royalty, there is no need to allow the beneficiary of the trust to elect under subsection 216(1) of the Act. Since all expenses have already been claimed by the trust for income tax purposes, and since usually the beneficiary does not acquire the income interest of the trust for a cost for which he or she may incur interest expenses, there is generally no additional expense that the beneficiary can claim against the income that he received from the trust. In such a case, there is really no advantage for the beneficiary to make an election under subsection 216(1) of the Act. This is especially so if the beneficiary is a resident of the U.S. for purposes of the Canada-United States Income Tax Convention as the tax rate on income from a trust resident in Canada for such a person is limited to 15% as compared to the tax rate of at least 25.84%² under Part I of the Act.

Summary

In summary, it is our view that the non-resident beneficiary of a trust resident in Canada is not allowed to make an election under subsection 216(1) of the Act in respect of rental income from real property in Canada or a timber royalty distributed by the trust.

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch

ENDNOTES

¹ please refer to paragraphs 6 to 8 of Interpretation Bulletin IT-465R for further details.

² i.e., a minimum Federal tax rate of 17% plus additional Federal rate of 52% on basic Federal tax = 17% x 152% = 25.84%

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