2 November 2011 External T.I. 2011-0407681E5 - Taxation of dual resident

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) Whether a dual resident of Canada and XXXXXXXXXX must fill out a T1142 if she is a beneficiary of a foreign trust and received a distribution in the year. (2) Does a dual resident have to pay tax on foreign rental income if she earns less than XXXXXXXXXX in foreign rental income? (3) Is it relevant that the income is in respect of property that had formerly been used by the dual resident's mother, for her own personal use?

Position: (1) Yes. (2) Yes. (3) No.

Reasons: (1) A dual resident of Canada and XXXXXXXXXX is considered a resident of Canada and liable to tax on all of her worldwide income and must generally file form T1142 if she is a beneficiary of a trust and has received a distribution in the year. The only exceptions from the requirement to file form T1142 is if the trust is an excluded trust, or the distribution is from an estate. 2) As a resident of Canada the dual resident will be taxed on her worldwide income, including all foreign rental income. (3) The fact that the income came from property that was previously used by the dual resident's mother is not in itself relevant to the treatment of the income; however, if the income is an income distribution from an estate of a deceased individual that income will be exempt in the year of the distribution and before the estate is fully administered

XXXXXXXXXX
                        2011-040768
                        Shelley Helmer LL.B.
                        (613) 957-2118
November 2, 2011

Dear XXXXXXXXXX :

Re: Trust Distributions to Dual-Resident Canadians

We are writing in response to your letter dated May 18, 2011. In that letter you raised several issues, including the following technical issues:

(1) Whether a dual resident of XXXXXXXXXX and Canada must fill out a form T1142 if that person has received a distribution from or is indebted to a non-resident trust;
(2) Whether a dual resident of XXXXXXXXXX and Canada is required to pay tax on any foreign rental income if that income does not exceed $XXXXXXXXXX per year; and
(3) Whether a dual resident of XXXXXXXXXX and Canada is required to pay tax on any foreign rental income, when the property that produces the rental income was formerly property held for that person's "mother's own personal use" before her mother passed away?

You further enquired into the nature of a specific charity and requested that we look into your personal returns to ensure that they were correctly assessed.

Our Comments

The circumstances outlined in your letter relate to a specific fact situation. We note that, as discussed in Information Circular IC 70-6R5, Advance Income Tax Rulings, which can be found on the Canada Revenue Agency website at www.cra-arc.gc.ca, written confirmation of the tax implications arising out of a proposed transaction are given by this Directorate only where the circumstances or events are the subject matter of an advance income tax ruling request and the transactions are not yet completed. Our Directorate also provides non-binding technical interpretations at no charge with respect to hypothetical scenarios. We do not provide detailed responses pertaining to completed transactions or review filed tax returns. The CRA's Tax Service Offices do however provide over-the counter advice and opinions pertaining to completed transactions. You may also consider consulting a Canadian tax professional. We can however offer the following general comments with respect to the above-mentioned technical issues which may be helpful to you.

Residence

As you may be aware, Canada imposes tax on the basis of residence. Generally, a resident of Canada is subject to tax in Canada on all his or her income from all sources.

T1142

Form T1142, Information Return in Respect of Distributions from and Indebtedness to a Non-resident Trust, must be filed pursuant to section 233.6 of the Income Tax Act, by a Canadian resident individual that is beneficially interested in a non-resident trust (other than an "excluded trust" as defined in subsection 233.6(2) or an estate that arose on death) at any time in the tax year; and has received a distribution from or was indebted to that non-resident trust in the tax year.

We note that beneficiaries are exempt from filing Form T1142 in respect of "an estate that arose on death" when such distributions have arisen before the estate is fully administered (which is normally the year following the death of the individual). However, once the estate has been administered, a Canadian beneficiary of any ongoing non-resident testamentary trust must file form T1142 in any year where a distribution is received from the trust or where the Canadian beneficiary becomes indebted to the trust.

Foreign Rental Income

A resident of Canada must report and pay taxes on all income from renting property in or outside of Canada. This rule applies regardless of whether the property was previously used by any non-resident of Canada for their own personal use. We do note however that if the foreign rental income was distributed through a non-resident estate, the amount distributed before the estate was administered would be exempt from Canadian taxation.

We trust that these comments will be of assistance.

Yours truly,

Olli Laurikainen C.A.
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch