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: Discussion of tax treatment of an interest in a U.S. revocable living trust (also known as a grantor trust) held by a Canadian resident beneficiary.
Position: General comments given.
Reasons: Fact specific information would require a ruling.
XXXXXXXXXX Lena Holloway, CPA, CA
July 12, 2016
Re: U.S. “living trust”
We are writing in response to your letter of December 3, 2014, wherein you requested clarification on the Canadian tax treatment of a situation involving a specific taxpayer holding an interest in a U.S. “living trust”.
The confidentiality provisions of the Income Tax Act (the “Act”) preclude us from discussing specific taxpayer information and as such this technical interpretation will provide general comments on the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations dated April 22, 2016, issued by the Canada Revenue Agency (CRA). All references to legislation hereunder, unless otherwise noted, will be to the Act.
A U.S. revocable living trust is a trust that is usually controlled by and established for the benefit of those who created the trust (“grantors”) during their lifetime. Such a trust is often referred to as a grantor trust, a revocable trust or a living trust. Where the grantor can change the terms of, or completely revoke the trust during their lifetime, they effectively retain control of the trust assets. Given this retention of control, it is our understanding that the U.S. Internal Revenue Service treats any property put into the trust as though it still belongs to the grantor and therefore such a trust is not recognized for U.S. tax purposes, and that any income generated by the trust would be reported by the grantors of the trust on a personal U.S. income tax return.
For Canadian tax purposes, the first determination that must be made is whether or not for purposes of the Act, a trust is an excluded trust as described in subsection 104(1). Such will be the case where the arrangement is such that the trust/trustee can reasonably be considered to act as an agent for all the beneficiaries unless the trust is described in any of paragraphs (a) to (e.1) of the definition of trust in subsection 108(1). This determination is a legal question of fact, and depending on the specifics of each case a particular grantor trust may in fact be such an excluded trust. Where for purposes of the Act, a trust exists, it will be considered to be a Canadian resident trust if the central management and control over the trust property is conducted in Canada. In general, where a trust is considered to be a Canadian resident trust, any income earned or gains realized by it, unless distributed out to the beneficiaries would be taxable in the trust. For income tax purposes, a trust is deemed to be an individual under subsection 104(2) and is taxed as such at the highest marginal rates under subsection 122(1). In general, where income from a trust has been paid or becomes payable in the year to a beneficiary of a trust, that amount must be included in the beneficiary’s income in accordance with subsection 104(13) and may be deducted in computing the trust’s income for that year as provided by subsection 104(6).
Where a person who has contributed property to the trust, maintains control over the trust property, (for example if the contributor is a beneficiary, which is generally the case in a U.S. revocable living trust) subsection 75(2) of the Act may apply. Subsection 75(2) of the Act provides that where property is held on condition that it, or property substituted for it, may revert to the person from whom the property was received, any income or loss from the property or from property substituted for the property, and any taxable capital gain or allowable capital loss from the disposition of the property or property substituted for the property shall during the existence of the person, while the person is resident in Canada, be deemed to be income or a loss as the case may be or a taxable capital gain or allowable capital loss as the case may be of the person. Even where all income earned by a trust is otherwise attributed to be income of the contributor, a T3 trust return must be filed whenever a trust holds property that is subject to subsection 75(2) of the Act. Note that subsection 75(2) will only apply to allocate income to the contributor that is property income. Business income generated in the trust does not get attributed to the contributor under subsection 75(2) but rather will be taxable in the trust unless it is made payable or is paid to a beneficiary as described above.
Where U.S. tax is paid on trust income by the grantors, a foreign tax credit may be available to the grantor/beneficiary in Canada. The available credit would depend on whether amounts are considered to be paid or payable from the trust for Canadian tax purposes and whether the timing of the income inclusion by the beneficiary coincides with the payment of tax in the U.S. If income that is not otherwise subject to the application of subsection 75(2) is not distributed out to the grantor/beneficiary in the same year in which it is generated, the trust will pay Canadian taxes on the income, but will not be able to offset these taxes with foreign income tax credits since they are based on the taxes paid personally in the U.S. by the grantors.
Under subsection 104(4), most trusts are deemed to dispose of certain properties at fair market value 21 years after the day the trust was created (and every 21 years thereafter), and are deemed to reacquire such properties at that same fair market value amount. There are some exceptions to the 21- year disposition rule (for example unit trusts and trusts governed by certain deferred income plans) and there are also some modifications for other trusts such as spousal/common-law partner trusts, alter ego trusts and joint partner trusts. In particular a spousal trust, a joint partner trust and an alter ego trust will have a deemed disposition on the date of death of the spouse in the case of a spouse trust, on the death of the survivor of the settlor and his or her spouse in the case of a joint partner trust or the date of death of the settlor in the case of an alter ego trust. Unless the exceptions apply, a U.S. revocable living trust that is a Canadian resident trust for tax purposes will also be subject to the 21-year deemed disposition rule.
In general, Canadian resident taxpayers (including trusts) that, at any time during the year, own “specified foreign property” with a total cost amount more than $100,000 must comply with the foreign property reporting requirements by filing Form T1135. Specified foreign property is defined in subsection 233.3(1) to include tangible property situated outside Canada. Where a Canadian resident trust holds specified foreign property with a cost amount more than $100,000, the trustee would be required to file the T1135 on behalf of the trust.
We trust our comments will be of assistance to you.
Manager, Trusts Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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