12 March 1998 External T.I. 9805215 - Barbados trust deemed resident of Canada

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:

Would Canada retain the right to tax a trust which is resident in Barbados which is deemed to be resident in Canada pursuant to paragraph 94(1)(c)?

Position:

Yes.

Reasons:

See letter. See OECD Commentary, Vogel.

XXXXXXXXXX 980521
J. Stalker
Attention: XXXXXXXXXX

March 12, 1998

Dear Sirs:

We are writing in response to your letter of March 3, 1998 which asked for additional clarification to our letter to you of February 16, 1998 in respect of the application of subsection 94(1) of the Income Tax Act (Canada) (the "Act") and the Canada-Barbados Income Tax Agreement (the "Treaty").

You asked why a trust would not be treated as an individual for the purpose of the Treaty and why the tie breaker rules in paragraph 2 of Article IV of the Treaty would not apply to it. It is our view that a trust is a entity on its own, distinguishable from an individual for the purposes of the Treaty. This interpretation is consistent with the scheme of the Treaty as well as the clear distinction which is made between an individual and a trust in the definition of "person" in Article III of the Treaty. In addition, the wording in paragraph 2 of Article IV and the relevant literature indicate that paragraph 2 is intended to deal with human beings only. The Income Tax Act (Canada) (the "Act") generally subjects a trust to the same rules as an individual; however, this does not mean that the Act is equating the two entities. As evidenced by the numerous separate provisions for trusts in the Act (for example, see the deeming rules in subsection 104(2)), the Act treats an individual as a separate entity from a trust.

You also question why there would be a referral to competent authority. Whenever there is an issue of dual residency, the taxpayer may request that the issue be referred to competent authority. However, where there is a potential for tax avoidance it is highly unlikely that the competent authority of Canada would enter into an agreement with the competent authority of Barbados that would result in Canada's giving up its right to tax. Our February 16, 1998 letter stated that "it is our view that Canada would retain the right to tax" a paragraph 94(1)(c) trust. This position is not dependent on Barbados giving up its right to tax. We did not say that we would try to convince Barbados to give up its right to tax, as shown by our reference in that letter to relief for double taxation, if any.

Yours truly,

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