2 June 2026 STEP Roundtable Q. 13, 2026-1091001C6 - Income of non-resident trust which has elected to have paragraph 94(3)(f) apply

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.

Principal Issues: (1) When a non-resident trust makes a valid election to have paragraph 94(3)(f) apply beginning in a particular taxation year, what income should be reported by the electing trust for the year? (2) How are expenses incurred in the particular year allocated between the electing trust and the non-resident portion trust?

Position: General comments provided.

Reasons: See below.

2026 STEP CRA Roundtable – June 2, 2026

QUESTION 13. Income of Trust which has Elected to Have Paragraph 94(3)(f) Apply

Where, in a particular year, one of the “resident contributors”(footnote 1) to a trust, which is deemed to be resident in Canada pursuant to paragraph 94(3)(a) (the “DRT”), ceases to be a “resident contributor” and there is no “resident beneficiary” under the DRT, the DRT can file an election pursuant to the definition of “electing trust” provided all of the other conditions therein have been met.

When so elected, paragraph 94(3)(f) will apply to the DRT, which generally speaking, deems a second inter vivos trust to be created, and removes from the taxable base of the DRT the income earned by this second trust (referred to as the non-resident portion trust).

Consider the following scenario:

• There are three “resident contributors” to the DRT, all of whom are individuals: Contributor A, Contributor B and Contributor C;
• Contributor A passed away on September 1, 2025;
• Section 94 has applied to the DRT for several years. Contributors B and C continue to be “resident contributors” to the DRT throughout the DRT’s 2025 taxation year;
• Prior to the death of Contributor A, the DRT has never had a “non-resident portion”;
• The “contributions” made by each of Contributor A, Contributor B, and Contributor C continue to be held in the DRT throughout the 2025 taxation year;
• All “contributions” to the DRT were direct transfers of property to the DRT;
• None of the “contributions” is a transfer described by any of paragraphs 94(2)(a), (c), (d) or (f);
• All beneficiaries under the DRT have always been and will continue to be non-residents of Canada. Accordingly, although there are “connected contributors” to the DRT, there are no “resident beneficiaries” under the DRT; and
• The property which forms the DRT’s “non-resident portion” earned dividend income of $5,000 from January 1, 2025 to August 31, 2025, and $10,000 from September 1, 2025 to December 31, 2025.

1. Can the CRA confirm what income should be reported by the DRT in its return of income for the particular year?

2. Can the CRA also confirm how expenses incurred in the particular year should be allocated between the DRT and the non-resident portion trust?

CRA Response

Part 1.

Paragraph 94(3)(a) deems a non-resident trust to be resident in Canada for the specific purposes mentioned therein, when the following conditions are met at a “specified time” in the trust’s taxation year (normally the trust’s taxation year end):

• the trust is factually a non-resident of Canada;
• the trust is not an “exempt foreign trust”; and
• the trust has either a “resident contributor” or a “resident beneficiary”.

Where subsection 94(3) applies, the DRT is inter alia, subject to tax under Part I of the Act on its world-wide income. When certain conditions are satisfied however, a DRT may file an election to be an “electing trust”.

If a trust makes a valid election in writing to have paragraph 94(3)(f) apply to it for its first taxation year in which it is deemed to be resident in Canada pursuant to subsection 94(3) and holds property that is part of its “non-resident portion”, it will be deemed to have its non-resident portion be held in a separate inter vivos trust (the non-resident portion trust). Further, the trust will be treated as if it were two trusts, one that is deemed resident in Canada and one that is not resident in Canada for that taxation year and each subsequent taxation year.

In the present scenario, Contributor A passed away in 2025. Therefore, in that year, to be an “electing trust” the DRT must:

• for the first time, hold property which is at any time during the trust’s 2025 taxation year part of the DRT’s “non-resident portion”;
• be deemed by subsection 94(3) to be resident in Canada throughout that year; and
• make a valid election to have paragraph 94(3)(f) apply to the DRT.

It has been established that the trust is a DRT throughout the DRT’s 2025 taxation year; therefore, the DRT must hold property for the first time that is, at any time in 2025, part of its “non-resident portion”. The “non-resident portion” of a trust at any time, is all property held by the trust to the extent that it is not, at that time, part of the “resident portion” of the trust. Therefore the DRT’s “resident portion” must first be determined which occurs at a particular time. Since Contributor A passed away on September 1, 2025, the time immediately after the death of Contributor A on September 1, 2025 will be the particular time that will be used to test whether the DRT has a “resident portion”.

At the particular time, in the scenario described, the DRT holds property which has been contributed on or before the particular time to the DRT by a “contributor” that is, at that time, a “resident contributor”. This would be all property contributed to the trust by Contributors B and C.

Also, at the particular time, immediately after the death of Contributor A on September 1, 2025, the “contributions” of Contributor A would not form part of the DRT’s “resident portion”(footnote 2) since that property, which continues to be held by the DRT, is not property in respect of which a “contribution” has been made at or before the particular time to the DRT by a “contributor” who is a “resident contributor” at that time. Nor was the “contribution” made by a “contributor” who is, at that time, a “connected contributor” where there is a “resident beneficiary” under the DRT.

As noted above, Contributor A, being deceased, is not a “resident contributor” after death on September 1, 2025, and although Contributor A is a “connected contributor” to the DRT after death on that day, there is no “resident beneficiary” under the DRT.

Therefore, on September 1, 2025, at any time (after the death of Contributor A), the DRT will have a “non-resident portion”.(footnote 3)

As long as the DRT makes a valid election pursuant to the definition of “electing trust”, the DRT will be an “electing trust” for the DRT’s 2025 taxation year and for each subsequent taxation year of the DRT. As noted above, paragraph 94(3)(f) will apply to the DRT and the following will, inter alia, occur:

• a non-resident portion trust will be deemed to be created on January 1, 2025, for the purposes of the Act (other than for the purposes of subsection 104(2))(footnote 4) [94(3)(f)(i)];
• all of the DRT’s property that is part of the DRT's “non-resident portion” will be deemed to be the property of the non-resident portion trust and not to be, other than for the purposes of paragraph 94(3)(f), and the definition of “electing trust”, property of the DRT [94(3)(f)(ii)];
• for greater certainty, the non-resident portion trust is deemed not to have a “resident contributor” or a “connected contributor” to it [94(3)(f)(iv)(C)];
• the non-resident portion trust is deemed to be, without affecting the liability of its trustees for their own income tax, in respect of its property an individual [94(3)(f)(v)];
• the property that becomes, at a particular time (on September 1, 2025), part of the DRT's “non-resident portion”, is deemed to have been transferred to the non-resident portion trust at that time [94(3)(f)(vi)]; and
• the DRT and the non-resident portion trust are deemed at all times to be affiliated with each other and to not deal with each other at arm's length [94(3)(f)(viii)].

As noted above, the DRT is deemed have transferred the property that forms its “non-resident portion” to the non-resident portion trust on September 1, 2025. Accordingly, the DRT will be considered to have disposed of that property on that date. Since the DRT and the non-resident portion trust are deemed not to deal with each other at arm’s length, subsection 69(1) will be applicable such that the DRT is deemed to have received proceeds of disposition equal to the fair market value of the property deemed to have been transferred, with the effect that any realized capital gains will be reportable by the DRT in its return of income for the DRT’s 2025 taxation year.

Further, since the DRT is deemed to have transferred the property that forms its “non-resident portion” to a separate trust on September 1, 2025, any income, gains or losses realized on such property after that time will be income of the non-resident portion trust. However, such property will continue to form part of the DRT’s resident portion prior to that time. Accordingly, the DRT must include the income earned on, and capital gains and losses realized on, that property during the period from January 1, 2025 to August 31, 2025 in its return of income for the DRT’s 2025 taxation year. In respect of the scenario described, the DRT would be required to include the dividend income of $5,000 earned between January 1 and August 31, 2025 on the property transferred to the non-resident portion trust, in its return of income for the DRT’s 2025 taxation year. The $10,000 earned between September 1 and December 31, 2025 on that property would be considered to belong to the non-resident portion trust and would only be subject to Part I tax to the extent of the application of subsection 2(3).

Part 2.

Subsection 9(1) defines a taxpayer's income for a taxation year from a business or property as the taxpayer's profit from that business or property for the year. “Profit” is not defined in the Act but has been considered by the courts. In Canderel v. R., [1998] 1 S.C.R. 147, the Supreme Court of Canada laid out principles for determining profit. In particular, a taxpayer can choose any method of determining profit that provides an accurate picture of the taxpayer's profit for the year, provided that it is not inconsistent with the provisions of the Act, rules of law (i.e., case law), and well-accepted business principles.

Dawn Dannehl
2026-109100
June 2, 2026

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1. Each term in quotations is defined in subsection 94(1) of the Income Tax Act (the “Act”), unless otherwise noted. Further, every statutory reference herein is a reference to the relevant provision of the Act, unless otherwise expressly stated.

2. See the definition of “resident portion” which provides further components of the “resident portion” which have not been referred to herein.

3. Note that if the above two definitions were tested for at any time on August 30, 2025, the DRT would have only a resident portion as all contributions of property made before that date, or property substituted therefor, would have been made by persons who were resident contributors on August 30, 2025.

4. The non-resident portion trust is deemed to continue in existence until the earliest of the times described in clause 94(3)(f)(i)(B).