26 February 1999 External T.I. 9827755 - 104(4), 107(2) & NON-RESIDENT TRUSTS

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: Application of 104(4) to a non-resident trust.

Position: Does not have application in certain cases.

Reasons: See file 941969 and the draft legislation released on December 23, 1998.

XXXXXXXXXX 982775
T. Murphy
February 26, 1999

Dear Sir:

Re: Distribution of Property by Non-Resident Trust

This is in response to your correspondence of October 27, 1998, in which you asked for confirmation that:

1. A non-resident trust that meets the criteria laid out in the definition of personal trust in subsection 248(1) of the Income Tax Act (the “Act”) would be considered a personal trust for purposes of the Act.

2. Subsection 107(2) of the Act applies to the distribution of property by a non-resident trust that is a personal trust to a Canadian resident beneficiary.

3. A non-resident trust is subject to the 21-year deemed disposition rule in subsection 104(4) of the Act even though the trust is not otherwise subject to tax in Canada and, consequently, the effect of a distribution to the Canadian resident beneficiary after the applicable deemed disposition date is that the beneficiary acquires the property at the fair market value of the property to the trust on the deemed disposition date.

In our opinion, a non-resident trust that meets the criteria specified in the definition of personal trust in subsection 248(1) of the Act would be a personal trust for purposes of the Act. Subsection 107(2) of the Act can have application where the trust is a personal trust and where subsection 107(4.1) of the Act is not applicable.

With respect to the application of subsection 104(4) of the Act, we have previously opined that a non-resident trust that is not subject to taxation in Canada (i.e., a non-resident trust that (1) does not carry on business in Canada, (2) does not hold taxable Canadian property or (3) is not subject to section 94 of the Act) is not subject to the deemed disposition rule in subsection 104(4) of the Act. See, by analogy, Oceanspan Carriers Limited v. The Queen, 87 DTC 5102 (F.C.A.) and Holiday Luggage Mfg. Inc. and Falcon Luggage Inc. v. The Queen, 86 DTC 6601 (F.C. - T.D.).

The December 23, 1998, draft legislative proposals on trusts, specifically provide that subsection 104(4) of the Act will not apply to exempt property, which is defined as:

...property any income or gain from the disposition of which by the taxpayer at that time would, because the taxpayer is a non-resident or because of the provision contained in a tax treaty, not cause an increase in the taxpayer’s tax payable under this Part [Part I].

While the draft proposals are effective December 23, for the purpose of determining the cost amount to a trust of capital property (other than depreciable property), the draft proposals apply to deemed disposition days that are after 1992. The effect of the proposals is to specifically provide that there is no increase in the cost base of the assets to a non-resident trust that, among other things, is not subject to taxation in Canada.

This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R3.

R.S. Biscaro, CA
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch

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