17 February 1999 External T.I. 9818815 - LIVING TRUST IN THE U.S.

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:

1. Whether a transfer of shares of a private corporation incorporated in Canada by non-resident individuals to a living trust resident in the U.S. would constitute a full FMV disposition for Canadian tax purposes?

2. Will section 116 apply to the disposition of the shares?

Position:

1. Yes

2. Yes.

Reasons:

1. Consistent with the Department's position in Technical News # 7 on revocable living trusts. The legislative proposals on trusts of December 23, 1998 do not affect our position.

2. Yes. The transfer to the trust constitutes a disposition of a TCP to be reported to the Department under section 116. Although the 1998 budget introduced the new concept of "treaty-protected property" in amended 248(1) of the Act for the purpose of paragraph 115(1)(b) of the Act, it does not impact on section 116. Form T2062 required to be filed whether or not any gain from the disposition of the shares may be subject to an exemption under a tax treaty between Canada and another country.

XXXXXXXXXX M. Lemire
(613) 957-4363
5-981881
February 17, 1999

Dear XXXXXXXXXX:

Re: Living Trust in the U.S.

This is in reply to your letter of July 14, 1998 in which you requested our general comments concerning the Canadian tax consequences of a transfer of shares of the capital stock of a corporation to a living trust as described in your letter. We apologize for the delay in our response.

Facts

Individuals resident in the U.S. own 100% of the shares of the capital stock of a corporation incorporated in Ontario. These shares will be transferred to a living trust resident in the U.S.

Since your letter appears to deal with a factual situation, we are unable to address your specific concerns in a general letter of opinion. Proposed transactions may only be considered when they are presented in the form of a request for an advance income tax ruling and only where the request is made in the manner set out in the Department's Information Circular 70-6R3. However, we can provide the following general comments.

Our comments

Generally, any transfer of property to a trust would constitute a “disposition” as defined in section 54 of the Income Tax Act (the “Act”). Moreover, where property is transferred to a trust which qualifies as a “revocable living trust", it is generally the Department’s position that the trust should be recognized for Canadian tax purposes at the time the legal title to property is transferred to it and that the transfer of the property should constitute a disposition at its full fair market value (“FMV”) at that time.

In the scenario described in your letter, we do not have enough information to conclude that the trust is a “revocable living trust”. However, you may want to refer to our Income Tax Technical News No. 7 of February 21, 1996 which generally sets out a description of such a trust.

Assuming that the trust described in your letter is a revocable living trust, the transfer of the shares of the capital stock of a corporation incorporated in Ontario would constitute a full disposition for proceeds equal to the FMV of the shares pursuant to paragraph (c) of the definition of “disposition” in section 54 (subsection 248(1) of the legislative proposals on trusts released on December 23, 1998) and paragraph 69(1)(b) of the Act.

A non-resident person is generally liable to Canadian tax under subsection 2(3) of the Act on any taxable capital gain from the disposition of a “taxable Canadian property,” as defined in paragraph 115(1)(b) of the Act. A “taxable Canadian property” in paragraph 115(1)(b) of the Act includes a share of the capital stock of a corporation resident in Canada that is not listed on a prescribed stock exchange. A person’s taxable capital gain from the disposition of a property is 75% of the person’s capital gain (i.e., the amount by which the person’s proceeds of disposition exceeds the cost to the person of the property) from the disposition of the property. In some circumstances, article XIII of the Canada-U.S. tax treaty may provide an exemption to a U.S. resident person with respect to a gain realized from the disposition of a taxable Canadian property. Interpretation Bulletin IT-420R3 Non-residents Income earned in Canada discusses the circumstances where a non-resident person may be subject to tax in Canada.

Where a non-resident person disposes of a taxable Canadian property, section 116 of the Act provides a mechanism under which the non-resident person reports to Revenue Canada on Form T2062 the proposed or actual disposition. This would be the case whether or not any gain realized on the disposition of the property may be subject to a tax treaty exemption. The procedures in accordance with section 116 of the Act concerning the disposition of taxable Canadian property by non-residents of Canada are explained in Information Circular IC 72-17R4.

In the scenario described above, it is likely that each of the individuals resident in the U.S. would be required to comply with the provisions in section 116 of the Act as the transferred shares would generally constitute “taxable Canadian property” to them at the time of the disposition to the trust. Each of them should use a separate Form T2062 to report the proposed or actual disposition of their shares to the trust. Any documentation to support the proceeds of disposition (i.e., fair market value in the present case) and the cost of the shares would be needed. If it is determined that there is a capital gain realized on the disposition of the shares to the trust which would be subject to tax in Canada without any tax treaty exemption available, the individuals will then be required to pay an amount to cover the tax owing (generally a flat rate of 33 1/3% of the excess of the proceeds of disposition over the cost of the property) or provide adequate security for the estimated or actual capital gain realized on the disposition of the shares. Form T2062, with the required payment on account of tax or acceptable security, if any, must be sent to the tax services office serving the area in which the transferred shares are located at least 30 days before the shares are transferred to the trust or not later than 10 days after the date the shares are disposed of. In such case, the individuals will also be required to file an income tax return (“T1 return”) for the taxation year of the disposition no later than April 30 of the subsequent taxation year. The Department will credit any payments or security provided to the individuals’ account and make the final settlement of tax when we assess the individuals’ T1 return for the year. The 1998 T1 General Income Tax Guide for Non-Residents and Deemed Residents of Canada (including the T1 return) should be available to the public very soon. Finally, it may be determined that there is a capital gain on the disposition of the shares which is subject to a tax treaty exemption. For example, the capital gain realized on the disposition of the shares may be subject to the exemption in paragraph 5 of article XIII of the Canada-U.S. tax treaty. This would be the case if the individuals have always been resident in the U.S. In such case, each of the individuals will nevertheless have to file Form T2062 and supply the necessary documentation to support their claim as noted in paragraph 26 of IC 72-17R4. You may want to contact our International Tax Services Office at (613) 952-3741 for any question you may have on Form T2062 or the T1 return.

Pursuant to the December 4, 1998 Notice of Ways and Means Motion to amend the Act, paragraph 115(1)(b) of the Act will be amended to exclude gains and losses from taxable Canadian properties that are “treaty-protected properties” i.e., properties any income or gain of the taxpayer from the disposition of which would, because of a tax treaty between Canada and another country, be exempt from tax under Part I of the Act. However, even if a taxable Canadian property may be viewed as a treaty-protected property, Form T2062 is still required to be filed.

For your information, we have enclosed a copy of Information Circular 70-6R3 Advance Income Tax Rulings, Income Tax Technical News No. 7, Interpretation Bulletin IT-420R3 Non-residents -- Income Earned in Canada, Information Circular IC 72-17R4 Procedures Concerning the Disposition of Taxable Canadian Property by Non-Residents of Canada - Section 116, a copy of Form T2062 and a copy of the 1997 General Income Tax Guide for Non-Residents and Deemed Residents of Canada.

Our comments are provided in accordance with paragraph 22 of Information Circular 70-6R3 dated December 30, 1996.

We trust our comments will be of assistance to you.

Yours truly,

T. Murphy
Manager
Trusts section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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