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 resident Canadian taxpayer is liable under s. 162(7) for filing Form T1142 late.
Position: Yes; unless distributions are made from the estate.
Reasons: S. 233.6(1) only exempts distributions from the estate.
March 23, 2010
Vancouver Tax Services Office HEADQUARTERS
Income Tax Rulings
Attention: Bob Smith Directorate
Chief of Appeals Lindsay Frank
(613) 948-2227
2009-033252
Returns Respecting Distributions from Non-Resident Trusts
This is in reply to an email from Gilbert Lee, requesting clarification on issues relating to the above-referenced issue.
A resident Canadian taxpayer has challenged a penalty, assessed under subsection 162(7) of the Income Tax Act (the "Act"), for late filing Form T1142. That form is the information return that taxpayers that are required to file, where they received funds or property from, or have been indebted to, a non-resident trust. The taxpayer has argued that, because he is the beneficiary of a U.S. testamentary trust, he has met the exemption stated in subsection 233.6(1) of the Act, as the trust is an estate that arose on and as a consequence of the death of an individual.
Subsection 233.6(1) states that:
"Where a specified Canadian entity ... for a taxation year or fiscal period receives a distribution of property from, or is indebted to, a non-resident trust (other than a trust that was an excluded trust in respect of the year or period of the entity or an estate that arose on and as a consequence of the death of an individual) in the year or period and the entity is beneficially interested in the trust at any time in the year or period, the entity shall file with the Minister for the year or period a return in prescribed form ..."
The filing deadline for the information return ("Form T1142") is similar to the deadline for the entity's filing its income tax return.
Subsection 162(7) of the Act imposes a penalty on a person (other than a charity) or partnership for filing Form T1142 late. The assessment of such a penalty does not connote absolute liability; accordingly, a defence of due diligence exists. However, in order to establish such a defence, a taxpayer would be expected to comply with the requirements of the Act with a high degree of attention and care. The courts have stated that there is no valid basis for maintaining absolute liability on administrative penalties, such as those levied under section 162 of the Act and section 280 of the Excise Tax Act, see Consolidated Canadian Contractors v. R., [1998] G.S.T.C. 91 (F.C.A.), Pillar Oilfield Projects Ltd. v. Canada, [1993] G.S.T.C. 49 (T.C.C.), Carlisi v. R., [2001] 1 C.T.C. 2734 (T.C.C.), and Quantz v. R., [2003] 1 C.T.C. 2714 (T.C.C.).
Mr. Lee learned from Technical Interpretation 2007-0233741 that only distributions from the estate are exempt from filing Form T1142, and such distributions must have arisen before the estate is fully administered. In other words, the taxpayer's assertion in this instant case is unfounded, and consequently, subsection 162(7) applies.
Mr. Lee has posed the following additional questions in respect of the interpretation:
1. What is the basis for this Technical Interpretation?
2. What is the difference between "an estate that arose on the death of an individual" and an "on-going testamentary trust that was created under the terms of the will"?
3. How does one determine when an estate is fully administered?
4. Which CRA public document advises taxpayers of this interpretation in order for them to comply with the filing requirements and avoid the subsection 162(7) penalty?
Question No 1.
What is the basis for the Technical Interpretation?
Answer to Question No. 1
Section 233.6(1) is the basis for the answer provided in Technical Interpretation 2007-0233741.
Question No. 2
What is the difference between "an estate that arose on the death of an individual" and an "on-going testamentary trust that was created under the terms of the will"?
Answer to Question No.2
Subsection 108(1) of the Act defines "a testamentary trust" as "a trust or estate that arose on, and as a consequence of, the death of an individual, other than a trust created by a person other than the individual". In other words, subsection 108(1) excludes from the definition of "testamentary trust" a "trust created by a person other than an individual on and as a consequence of his or her death".
Question No. 3
How does one determine when an estate is fully administered?
Answer to Question No. 3
An estate is considered fully administered, when the assets of the estate have been distributed and a clearance certificate is requested pursuant to section 116 or 159 of the Act.
Question No. 4
Which CRA public document advises taxpayers of this interpretation, in order for them to comply with the filing requirements, and avoid the subsection 162(7) penalty?
Answer to Question No. 4
The General Income Tax and Benefit Guide ("the Guide") makes reference to beneficiaries of non-resident trusts. The Guide cautions taxpayers that, if they received funds or property from, or have been indebted to, a non-resident trust, they may have to complete and file Form T1142. To obtain more information, they are invited to refer to the actual Form. A checklist is provided on the back of the Form, indicating the criteria that would necessitate its filing.
In closing, to reiterate, a taxpayer could also avoid paying the late filing penalty by demonstrating a high degree of diligence. Meanwhile, should you require clarification or additional information, please do not hesitate to contact Lindsay Frank at the number provided above.
B.J. Skulski
Manager
Insolvency and Administrative Law Section
Ontario Corporate Tax Division
Income Tax Rulings Directorate
c.c. Gilbert Lee
Appeals Division
Vancouver Tax Services Office
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