CRA finds that s. 116 applies to distributions to non-residents from estates that held Canadian realty where a 2nd-tier trust is utilized

An interest in an estate will be taxable Canadian property if, at any time within the previous 60 months, more than 50% of the fair market value of that interest was derived directly or indirectly from Canadian real estate. CRA considers that a capital distribution on such an interest is subject to s. 116 clearance certificate obligations.

Can this be avoided if the estate is required (following its sale of the real estate) to distribute a portion of the estate residue to a resident trust with a non-resident beneficiary ("Son’s Trust"), with Son’s Trust (which has never held real estate) then making a capital distribution to the non-resident beneficiary (Son)?

CRA noted that if (as appears likely) the distribution to Son’s Trust does not result in a change in the beneficial ownership of the distributed property, s. 248(25.1) will deem Son’s Trust to be a continuation of the estate, so that Son’s interest will be taxable Canadian property based on the estate’s previous ownership of Canadian real estate. On the other hand, if s. 248(25.1) does not apply, so that Son’s Trust is separate from the estate, CRA nonetheless would consider that Son had an interest in the residue of the estate which, as it was derived from Canadian real estate, would cause Son’s trust interest to be taxable Canadian property.

Neal Armstrong. Summary of 19 June 2015 STEP Roundtable, Q. 10 under s. 248(1) - taxable Canadian property.