10 July 2007 External T.I. 2006-0184741E5 - Distribution in satisfaction of capital interest

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. Does the word trust used in the Act include an estate?

2. Would section 116 of the Act apply where there is a distribution of property in satisfaction of the rights under the trust or the estate (other than an income interest) of a non-beneficiary resident?

Position: 1. Yes
2. Yes

Reasons: 1. Subsection 248(1) defines trust for the purposes of the Act. The definition of subsection 248(1) refers to the definition of subsection 104(1). In our view, a trust includes an estate pursuant to subsection 104(1) of the Act.

2. The payment in satisfaction of part or all of the capital interest is a disposition. The capital interest is a taxable Canadian property. Section 116 applies where a non-resident proposes to dispose or has disposed of a taxable Canadian property.

XXXXXXXXXX 							2006-018474
								Sylvie Labarre, CA
July 10, 2007

Dear Sir:

Re: Distribution of capital to a non-resident beneficiary

This is in reply to your letter of February 7, 2006 in which you requested our opinion on whether section 116 of the Income Tax Act (the "Act") would apply with respect to certain distributions of property made to a non-resident beneficiary in full or partial satisfaction of his or her capital interest in a Canadian resident trust.

The examples of distributions mentioned in your letter are the following:

- A non-resident beneficiary receives a capital distribution from a Canadian testamentary trust.

- A non-resident beneficiary receives a capital distribution from a Canadian inter vivos trust.

- A non-resident beneficiary receives a capital distribution from an estate in satisfaction of a legacy paid in cash or in kind.

- A non-resident beneficiary receives a capital distribution from an estate in satisfaction of a deferred legacy paid in cash or in kind.

- A non-resident beneficiary receives a capital distribution from an estate in satisfaction of a residual interest paid in cash or in kind.

Our comments

Confirmation of the income tax consequences of proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. To make such a request the advance income tax ruling must be submitted in accordance with the guidelines set out in Information Circular 70-6R5. However, if the situation relates to a completed transaction, a request for the Canada Revenue Agency's views should be made to the International Tax Services Office. We can, however, provide the following general comments.

As set out in paragraph (d) of the definition of disposition in subsection 248(1) of the Act, a payment after 1999 in satisfaction of all or part of a beneficiary's capital interest in a trust will give rise to a disposition of all or part of the beneficiary's capital interest in the trust.

A capital interest in a trust resident in Canada (except, in most cases, an interest in a mutual fund trust) constitutes taxable Canadian property under paragraph (h) of the definition of that term in subsection 248(1) of the Act.

Subsection 248(1) of the Act provides the definition of capital interest for the purposes of the Act. According to that definition, capital interest of a taxpayer in a trust has the meaning assigned by subsection 108(1) of the Act. Subsection 108(1) of the Act provides that "capital interest" of a taxpayer in a trust means all rights of the taxpayer as a beneficiary under the trust (including generally since 2000, a right to enforce payment of an amount by the trust that arises as a consequence of any such right) except an income interest in the trust.

Section 116 of the Act applies where a non-resident proposes to dispose of any taxable Canadian property or has disposed of any taxable Canadian property. Therefore, section 116 of the Act will apply when a trust distributes one or more of its properties to a non-resident beneficiary in satisfaction of all or part of the beneficiary's capital interest in the trust.

Pursuant to subsection 248(1) of the Act, "trust" has the meaning assigned by subsection 104(1) for the purposes of the Act. A trust includes an estate pursuant to subsection 104(1) of the Act. Therefore, a trust includes an estate for the purposes of the Act.

In the situations described in your letter, we understand that the distribution of property to the non-resident beneficiary is in satisfaction of all or part of the beneficiary's rights under the trust or the estate (other than an income interest). In that case, section 116 of the Act would apply in all situations whether the trust is a testamentary trust, an inter vivos trust or an estate.

Section 116 of the Act sets out the procedure for collecting income tax from non-residents who dispose of taxable Canadian property. These rules aim to provide assurance that a non-resident of Canada will respect his or her obligation to pay Canadian income tax on disposition. Where a non-resident beneficiary disposes of his or her capital interest in a trust resident in Canada (including an estate) or part of it, he or she is required to file a Canadian tax return for the taxation year in which the disposition took place.

For the purpose of applying section 116 of the Act, our view is that the trust or the estate making the distribution of capital to the non-resident beneficiary is considered to be the purchaser for the purposes of subsection 116(5) of the Act with the result that the trust or the estate would be liable under subsection 116(5) to pay the amount described in that subsection on behalf of the non-resident beneficiary. (See paragraphs 43 to 50 of Information Circular IC 72-17R5.)

Subsection 116(5) of the Act will not apply in a situation where a certificate under subsection 116(4) has been issued to the purchaser by the Minister of National Revenue in respect of the capital interest.

Where the non-resident beneficiary files form T2062 Request by a Non-Resident of Canada for a Certificate of Compliance Related to the Disposition of Taxable Canadian Property and can show that no capital gain arises as a result of the disposition of the non-resident's capital interest in the trust or the estate (i.e. as shown by the calculation on form T2062), the trust or the estate will not be required to remit or post any amount as security since the amount shown on the certificate of compliance will equal the full amount of the distribution. For the purposes of the form T2062, the trust or the estate will be considered to be the purchaser and the non-resident beneficiary is considered to be the vendor.

You will find more information on the application of section 116 of the Act in Information Circular IC 72-17R5.

We trust the above has been of some assistance and we regret the delay in responding.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch