13 November 1998 External T.I. 9812505 - FOREIGN REPORTING RULES

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: Trust’s requirement to file information return in respect of foreign affiliates under section 233.4 of the Act

Position: Trust is a reporting entity by virtue of 94(1)(c) of the Act and thus required to file information return.

Reasons: A reporting entity is defined as a taxpayer resident in Canada of which a non-resident corporation is a foreign affiliate. A trust that is deemed to be a person resident in Canada under 94(1)(c) is a reporting entity in respect of any foreign affiliates of the trust and must file the requisite information returns.

XXXXXXXXXX 981250
B. Bloom
Attention: XXXXXXXXXX

November 13, 1998

Dear Madam:

Re: Application of Foreign Reporting Rules

We are writing in response to your letter of May 13, 1998, wherein you requested our views with respect to the application of the foreign reporting rules in section 233.4 of the Income Tax Act (the “Act”) to the following facts.

Facts

A non-resident individual (the “Settlor”) transferred all the shares of two non-resident corporations (“ForCo1” and “ForCo2”) to a non-resident trust (the “Trust”) on May 31, 1991. The only beneficiaries of the Trust are the Settlor’s two children (“Child 1” and “Child 2”; collectively, the “Beneficiaries”). The Settlor, Child 1 and Child 2 became residents of Canada on July 1, 1991. Child 1 became a non-resident in August, 1994. The Settlor and Child 2 remain residents of Canada. On January 1, 1996, the Trust was deemed to be a person resident in Canada for the purposes of Part I and sections 233.3 and 233.4 of the Act by reason of paragraph 94(1)(c). At that time, ForCo1 and ForCo2 became foreign affiliates of the Trust within the meaning of subsection 95(1) of the Act. On January 3, 1996, the Trust distributed the shares of ForCo1 to Child 1 and the shares of Forco2 to Child 2 in satisfaction of their capital interests. Thereafter, the Trust had no other assets and ceased to exist. The trustee is a non-resident trust company wholly owned by either Canadian or foreign banks. No provision was made in the trust deed for the trustee to file, or pay for the costs of filing, any Canadian information or tax returns.

Your Questions

You ask the following questions:

1. Who is responsible for filing the 1996 T1134 information returns?

2. If the trustee agrees to sign the T1134s, and the costs associated with preparing the forms are borne by (a) the Settlor in respect of ForCo1 and ForCo2, or (b) Child 1 in respect of ForCo1, and Child 2 in respect of ForCo2, could the trust be “retroactively” considered to have received financial assistance or property (directly or indirectly, in any manner whatever) from someone who has been resident for more than 60 months? Also, in the case of (b), could there be a subsection 75(2) problem, retroactively applied?

3. If the trustee refuses to sign the T1134s, and instead the Settlor or the Beneficiaries sign the forms, would there be any adverse tax consequences for the Settlor, or the Beneficiaries?

Our Comments

1. Subsection 233.4(4) requires a “reporting entity” for a taxation year to file an information return in respect of each foreign affiliate of the entity in the year or period. A “reporting entity” is defined in paragraph 233.4(1)(a) as a taxpayer resident in Canada of which a non-resident corporation is a foreign affiliate at any time in the year. According to the facts, the Trust was deemed by paragraph 94(1)(c) to be a person resident in Canada on January 1, 1996 (i.e., for its 1996 taxation year), at which time ForCo1 and ForCo2 became foreign affiliates of the Trust under the Act. Therefore, the Trust is a reporting entity and is required to file an information return for each of its foreign affiliates, namely ForCo1 and ForCo2, for its 1996 taxation year. Presumably, the trustee would file the information returns for the Trust.

2. Payments made by the Beneficiaries or the Settlor to the trustee in a later year for preparation and filing of the information returns for that year on behalf of the Trust would not cause the Trust to retroactively lose the benefit of any exemption it may have had from the rules in section 94 in previous years, nor would this cause subsection 75(2) to be invoked for such previous years.

3. The third question you ask is whether there would be any adverse tax consequences for the Beneficiaries or the Settlor if they filed the requisite information returns in the event that the trustee refused to do so. The preliminary question, we think, is whether anyone would be required by law to file the information returns in the event that the trust or trustee failed to do so. We ask this question first because a person’s “tax consequences” will vary depending on whether he or she is legally obligated to file an information return. Subsection 94(2) of the Act provides that where a trust is deemed to be a person resident in Canada by virtue of paragraph 94(1)(c), then each person described in clause 94(1)(b)(i)(A) or (B) has, jointly and severally with the trust, the rights and obligations of the trust by virtue of Divisions I and J and is subject to the provisions of Part XV. The obligation to file an information return under section 233.4 is in Part XV of the Act. Moreover, the penalties for failure to file, or for the late-filing of, such returns or for false statements or omissions in such returns are in Division I of the Act. Therefore, if the Settlor, Child 1 or Child 2 is a person described in clause 94(1)(b)(i)(A) or (B), that person would be required by law to file the information returns in respect of ForCo1 and ForCo2, assuming that the Trust or trustee did not file the returns. Consequently, that person would be potentially liable to the penalties for failure to file, or for the late filing of, an information return in section 162 of the Act and, assuming that he or she filed an information return, to the penalties for false statements or omissions in an information return in section 163 of the Act. However, any such liability would be limited, by virtue of paragraphs 94(2)(a) and (b), to amounts paid to the person by the Trust and amounts received by the person on the disposition of an interest in the Trust. In addition, the more significant penalties for failure to file in subsections 162(10) and (10.1) of the Act, as well as the penalty for false statements and omissions in 163(2.4), apply only where the taxpayer’s offensive conduct is done knowingly or amounts to gross negligence. It should also be noted that, in certain circumstances, a person who fails to file a return as and when required by the Act may be guilty of an offence under section 238 of the Act, and that a person who makes a false statement in a return may be guilty of an offence under section 239 of the Act. If a person who is not legally obligated to file an information return under section 233.4 of the Act nevertheless chooses to file such a return on behalf of the Trust, that person would be potentially liable to the above-mentioned civil penalties for false statements or omissions in an information return in section 163, as well as the offences under section 239 of the Act. In contrast to persons described in clause 94(1)(b)(i)(A) or (B), subsection 94(2) would not limit the person’s liability to the amounts described in paragraphs (a) and (b) of that subsection. However, such a person can not be liable to the above-mentioned late-filing penalties in section 162 or the offences under section 238 of the Act in respect of the section 233.4 information return, since the person is not legally obligated to file the return. Finally, it may be useful to note that, as ForCo2 became a foreign affiliate of Child 2 in 1996, Child 2 is required under section 233.4 to file an information return in respect of ForCo2 for Child 2’s 1996 taxation year.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and, therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

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

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