15 December 2010 External T.I. 2010-0371391E5 - Distribution to NR Beneficiary by a NR 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.

Principal Issues:
1) Would 107(2.1) apply to the distribution?
2) What would be the ACB of the property to the NR beneficiaries
3) Would 116 apply to require the trust to obtain a Certificate of Compliance with regards to the distribution

Position:
1) Yes
2) FMV
3) Depends

Reasons:
1) Pursuant to proposed amendments to 107(5) released by DFIN on July 16/2010 and effective distribution after Feb 27/2004
2) FMV pursuant to 107(2.1)
3) New definition of taxable Canadian property in 248(1) included in Bill C-9 that received Royal Assent Mar 4/2010

XXXXXXXXXX
									2010-037139
									Dominic Tiu
									(613) 957-8981
December 15, 2010

Dear XXXXXXXXXX :

Re: Distribution to Non-Resident Beneficiary by a Non-Resident Trust

This is in reply to your letter of May 25th, 2010 requesting our comments on the tax implications of a distribution of taxable Canadian property by a non-resident trust (estate) to a non-resident beneficiary. We understand that you are seeking an update on the comments we provided to you on the same questions on February 1, 2005 in our document E 2004-0083201E5.

The specific provisions of the Act you have asked to readdress are:

1. Would subsection 107(2.1) of the Income Tax Act (the "Act") apply to the distribution?

2. What would be the ACB of the property to the non-resident beneficiaries?

3. Would section 116 apply to require the trust to obtain a Certificate of Compliance with regards to the distribution?

Our Comments:

As the information described in your letter appears to relate to a factual situation, involving specific taxpayers, we would note that, as discussed in Information Circular 70-6R5, Advance Income Tax Rulings, it is not this Directorate's practice to comment on completed transactions involving specific taxpayers. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide you with the following general comments, which we trust will be helpful.

With respect to your first two questions, we would note that, on July 16th, 2010, the Department of Finance (DFIN) released proposed amendments to the Act that included many changes formerly proposed in Bill C-10 (2007), including the previously proposed changes to subsection 107(5) of the Act that were discussed in our earlier opinion. As amended, subsection 107(5) will provide that subsection 107(2.1) of the Act will apply (and subsection 107(2) will not) to a distribution of property (other than a share of the capital stock of a non-resident-owned investment corporation or a property described in any of subparagraphs 128.1(4)(b)(i) to (iii) of the Act) by any trust to a non-resident beneficiary in satisfaction of all or part of the non-resident beneficiary's capital interest in the trust. The proposed amendments will apply to distributions made after February 27th, 2004.

Where subsection 107(2.1) of the Act applies to a distribution of property, the trust is deemed to have received proceeds of disposition equal to the fair market value of the property, and non-resident beneficiary is deemed to have acquired the property for the same amount.

With respect to your third question, we would note that Bill C-9, an Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures, received Royal Assent on July 12th, 2010. The new definition of "taxable Canadian property" in subsection 248(1) of the Act, of a taxpayer at any time in a taxation year means a property of the taxpayer that is

(a) real or immovable property situated in Canada,

(b) property used or held by the taxpayer in, eligible capital property in respect of, or property described in an inventory of, a business carried on in Canada, other than

(i) property used in carrying on an insurance business, and

(ii) where the taxpayer is non-resident, ships and aircraft used principally in international traffic and personal or movable property pertaining to their operation if the country in which the taxpayer is resident does not impose tax on gains of persons resident in Canada from dispositions of such property,

(c) if the taxpayer is an insurer, its designated insurance property for the year,

(d) a share of the capital stock of a corporation (other than a mutual fund corporation) that is not listed on a designated stock exchange, an interest in a partnership or an interest in a trust (other than a unit of a mutual fund trust or an income interest in a trust resident in Canada), if, at any particular time during the 60-month period that ends at that time, more than 50% of the fair market value of the share or interest, as the case may be, was derived directly or indirectly from one or any combination of

(i) real or immovable property situated in Canada,

(ii) Canadian resource properties,

(iii) timber resource properties, and

(iv) options in respect of, or interests in, or for civil law rights in, property described in any of subparagraphs (i) to (iii), whether or not the property exists,

(e) a share of the capital stock of a corporation that is listed on a designated stock exchange, a share of the capital stock of a mutual fund corporation or a unit of a mutual fund trust, if, at any particular time during the 60-month period that ends at that time,

(i) 25% or more of the issued shares of any class of the capital stock of the corporation, or 25% or more of the issued units of the trust, as the case may be, were owned by or belonged to one or any combination of

(A) the taxpayer, and

(B) persons with whom the taxpayer did not deal at arm's length, and

(ii) more than 50% of the fair market value of the share or unit, as the case may be, was derived directly or indirectly from one or any combination of properties described under subparagraphs (d)(i) to (iv), or

(f) an option in respect of, or an interest in, or for civil law a right in, a property described in any of paragraphs (a) to (e), whether or not the property exists,

and, for the purposes of section 2, subsection 107(2.001) and sections 128.1 and 150, and for the purpose of applying paragraphs 85(1)(i) and 97(2)(c) to a disposition by a non-resident person, includes

(g) a Canadian resource property,

(h) a timber resource property,

(i) an income interest in a trust resident in Canada,

(j) a right to a share of the income or loss under an agreement referred to in paragraph 96(1.1)(a), and

(k) a life insurance policy in Canada;

The full text of Bill C-9 may be viewed at http://www2.parl.gc.ca/HousePublications/ Publication.aspx? Language=E&Parl=40&Ses=3&Mode=1&Pub=Bill&Doc=C-9_4.

Recent amendments to section 116 of the Act may also be relevant to your third question. Section 116 does not apply to a disposition of property that is "excluded property". For dispositions after 2008, subsection 116(6) has been amended to add, as "excluded property" for purposes of that section, a property that is, at the time of its disposition, a "treaty-exempt property" of the person. New subsection 116(6.1) provides, for purposes of subsection 116(6), that a property is "treaty-exempt property" of a non-resident person if, at the time of disposition by the non-resident to a person (the "purchaser") it is "treaty-protected property" and, if the purchaser and the non-resident person are related, the purchaser provides notice under new subsection 116(5.02) in respect of the disposition. "Treaty-protected property" is defined in subsection 248(1) as property, any income or gain from the disposition of which would be exempt from tax under Part I because of a tax treaty with another country.

For additional information about Certificates of Compliance, we would refer you to the information on the CRA website for trust administrators entitled "Residency and other information" at http://www.cra-arc.gc.ca/tx/trsts/menu-eng.html?=slnk.

Yours truly,

Robin Maley
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch