29 March 1999 External T.I. 9905515 - TRANSFER OF PROPERTY TO A NON-RESIDENT TRUST

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: Whether a transfer of real estate by a non-resident individual settlor to a non-resident trust with beneficiaries in addition to the settlor would constitute a full fair market value disposition for Canadian tax purposes?

Position: Yes.

Reasons: There is a change in beneficial ownership of the property. The legislative proposals on trusts dated December 23, 1998 do not affect our position.

XXXXXXXXXX T. Murphy
990551
Attention: XXXXXXXXXX

March 29, 1999

Re: XXXXXXXXXX

This is in reply to your letter of February 22, 1999 in which you requested our comments on whether the transfer of the above-noted property XXXXXXXXXX would be a disposition of the property for Canadian income tax purposes. Both XXXXXXXXXX and the trustee/trust are non-residents of Canada.

In your letter you state that the trust has been established to hold and administer assets on XXXXXXXXXX behalf and she is entitled to receive all income and profits during her lifetime. There is provision in the trust to make gifts to her grandchildren but other than that the trust is solely for her benefit with provisions for her death.

Our Comments:

Since your letter deals with a completed transaction, it is subject to review by the XXXXXXXXXX Tax Services Office. Additionally, as we do not have an authorization from XXXXXXXXXX to discuss her tax affairs with you, we cannot comment on her specific situation. We can, however, provide the following general 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”) with the proceeds of disposition being deemed to be equal to the fair market value of the transferred property pursuant to paragraph 69(1)(b) of the Act. The only exception would be where there is a change in the legal ownership of the property with no change in the beneficial ownership of the property. We have enclosed a copy of Income Tax Technical News No. 7 wherein we provide a description and summary of the tax consequences of transfers to “protective trusts” and “revocable living trusts.” As you will note, a transfer of property to a trust which has beneficiaries other than the settlor is a fair market value disposition, even if no payments may be made to the other beneficiaries until the death of the settlor.

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 real property situated in Canada. 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 all or a part of 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.

XXXXXXXXXX of the XXXXXXXXXX Tax Services Office has advised us that the following information and documentation should be submitted in connection with a disposition of property by a non-resident person to a trust:

1. Form T2062,

2. a copy of the trust indenture,

3. the appraisal report substantiating the fair market value of the property on the date of its transfer to the trust,

4. the original deed to the property,

5. if relevant, the appraisal report substantiating the fair market value of the property on December 31, 1971,

6. invoices substantiating any capital improvements made to the property, and

7. if the property was purchased after 1971, invoices substantiating legal fees regarding the purchase of the property.

XXXXXXXXXX

For your information, we have enclosed a copy of 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, and a copy of Form T2062.

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

Yours truly,

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

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