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: Various issues regarding non-resident trust structures.
Position: Please review document
Reasons:
XXXXXXXXXX O. Laurikainen
971468
Attention: XXXXXXXXXX
February 20, 1998
Dear Sirs/Mesdames:
Re: Five Year Immigrant Trusts and Foreign Affiliates
This is in reply to your letter of wherein you request our views in reference to the above subject matter.
1) You question whether a taxation year of an inter-vivos trust would end at any particular point in time when it has distributed all of its property to its beneficiaries notwithstanding that such time is before December 31.
It is our view that by virtue of subsections 104(2) and 249(1) of the Act, the last taxation year of an inter-vivos trust ends on December 31 of that year even if the assets of the trust have been distributed at an earlier date.
2) You question whether subsection 75(2) of the Act is considered to have been "applicable" for the purposes of paragraph 107(4.1)(a) of the Act in circumstances where the requisites for its application are fulfilled but where the property in question produces no income.
Notwithstanding that the property transferred may generate no income, it is our view that the fact that subsection 75(2) was applicable at any time means that subsection 107(4.1) will, subject to the exceptions noted in the provision, apply to subsequent distributions of trust property to the beneficiaries.
3) You question whether a non-resident discretionary trust would be subject to paragraph 94(1)(c) of the Act if all of its beneficiaries emigrated from Canada during the taxation year of the trust in which the condition for the application of subsection 94(1) of the Act set out in subparagraph (b)(i) thereof is satisfied.
The condition for the application of subsection 94(1) in subparagraph (a)(i) thereof is that "at any time in a taxation year of a trust...a person beneficially interested in the trust...was a person resident in Canada...". Therefore that condition would be satisfied notwithstanding that the beneficiaries are only part-year residents of Canada who are non-resident at the trust's taxation year end.
If the trust is an inter-vivos trust, paragraph 94(1)(c) will deem the discretionary trust to be a person resident in Canada on the first day of the first taxation year of the trust during which the criteria in both paragraphs 94(1)(a) and (b) are met. Accordingly, if for example, those criteria are met in 1998, then the trust will be deemed to be a resident of Canada on January 1, 1998 and taxable in respect of the entire taxation year in accordance with the determination of taxable income in paragraph 94(1)(c). The trust would be required to file the trust income tax and information return for that year.
Subsection 128.1(4) would apply in respect of any subsequent taxation year of such trust where the criteria in paragraphs 94(1)(a) and (b) are not met. Therefore if there has been appreciation in the assets of trust while it was deemed resident in Canada, the application of paragraph 128.1(4)(b) of the Act may give rise to taxable income in the trust in the taxation year during which it was resident in Canada.
4) Finally you describe a case where a non-resident trust owns 100% of the common shares of a non-resident corporation ("Forco") and an individual resident in Canada ("Mr. B") owns 100% of Forco's voting preferred shares. We were asked to assume that the common and preferred shares of Forco described above comprise all of its issued and outstanding share capital. Forco earns "income from property" as defined in subsection 95(1) from portfolio investments.
A) You suggest that the income from property of Forco is not foreign accrual property income as defined in subsection 95(1) of the Act because it does not fall into component C of the formula (the "FAPI Formula") in that definition.
B) In the event such income is FAPI, you request our view whether it would be taxable in Canada.
A) The income from property of Forco is included in component A of the FAPI Formula. It is our interpretation that component C of the FAPI Formula applies only where a controlled foreign affiliate has an interest in an "offshore investment fund property" for the purposes of subsection 94.1(1) and the purpose test in section 94.1 is satisfied. The simple example set out above does not indicate that to be the case (i.e. Forco owns portfolio investments directly).
B) The information provided is insufficient for us determine whether the FAPI of Forco could be taxed in the hands of the shareholders of Forco or in the hands of the beneficiaries of the trust. Nevertheless if it were determined that any transaction leading up to the above structure was an avoidance transaction as defined in subsection 245(3) of the Act that results in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act, the general anti-avoidance provision in subsection 245(2) of the Act would apply.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of information Circular 70-6R3 and are not binding on Revenue Canada.
We hope that the above will be of assistance to you.
Yours truly,
for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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