8 June 2007 Roundtable, 2007-0235231C6 - 2007 STEP Conf-Q.9-Departure from Canada

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: In 1920, the great grandfather of our taxpayer established an inter vivos trust for the benefit of his issue. Great grandfather was a U.S. citizen resident in the United States, and the property transferred to the trust included shares of a U.S. operating company and U.S. real estate (a ranch which continues to operate). Our taxpayer (Mother) came to Canada as a student in 1979, married a Canadian citizen and had two children (one now attending university in the United States and the other still a minor). When her father died in 1990, our Canadian resident (but U.S. citizen) taxpayer became entitled to receive income during her lifetime, and on death, she has the power to appoint the capital of the trust to her husband and children in her will. Since the elder child is attending school in the United States, the family has decided to move south, closer to old family connections. What are the departure tax consequences to our taxpayer, her husband and children in respect of the trust created by the great grandfather?

Position: As husband is an appointee under a general power of appointment and not a beneficiary under the trust, he has no rights or property that is deemed disposed of on departure. Assuming that mother and children are beneficiaries of the trust based on the fact that the trust provides for great-grandfather's descendants, each of them would have a deemed disposition of her respective interest in the trust.

Reasons: Since Mother has been resident in Canada for 26 years as of December 31, 2006, the exception in subparagraph 128.1(4)(b)(iv) does not apply nor is her interest in the trust an "excluded right or interest" as defined in subsection 128.1(10). The two excluded rights relating to an interest in a personal trust are contained in paragraphs (j) of that definition - which deals with personal trusts resident in Canada - and (k) -which deals with non-resident testamentary trusts. Likewise, these exceptions will not apply to the children's interests in the trust.

2007 STEP Round Table
Q. 9 Departure from Canada

In 1920, the great grandfather of our taxpayer established an inter vivos trust for the benefit of his issue. Great grandfather was a U.S. citizen resident in the United States, and the property transferred to the trust included shares of a U.S. operating company and U.S. real estate (a ranch which continues to operate). Our taxpayer ("Mother") came to Canada as a student in 1979, married a Canadian citizen and had two children (one now attending university in the United States and the other still a minor). When her father died in 1990, our Canadian resident (but U.S. citizen) taxpayer became entitled to receive income during her lifetime, and on death, she has the power to appoint the capital of the trust to her husband and children in her will. Since the elder child is attending school in the United States, the family has decided to move south, closer to old family connections. What are the departure tax consequences to our taxpayer, her husband and children in respect of the trust created by the great grandfather?

Response

Subsection 128.1(4) of the ITA deems a taxpayer who has ceased to be resident in Canada to have disposed of each property owned by that taxpayer immediately before the taxpayer ceased to be resident in Canada, subject to the exceptions listed in subparagraphs 128.1(4)(b)(i) to (v) of the ITA. The definition of "property" in subsection 248(1) of the ITA clarifies that property includes a right of any kind. As a result, and subject to the exceptions described in subparagraphs 128.1(4)(b)(i) to (v) of the ITA, a beneficiary of a trust will be deemed to have disposed of his or her right as a beneficiary, whether that right is immediate or future, absolute or contingent or whether it is conditional on, or subject to, the exercise of any discretion by any person. Consequently, the answer to this question depends in large part on the terms and conditions of the trust establishing who has rights as a beneficiary under the trust and in particular, on the terms and conditions of the power of appointment. For example, does the power of appointment include a gift over in default of appointment and does Mother hold the power of appointment as a trustee? With respect to powers of appointment generally, some legal commentators have taken the view that, under a general power of appointment, the potential appointees are not be considered beneficiaries at law until appointed, but that under a special power of appointment, a potential appointee could be viewed as a beneficiary at law from the date the power of appointment was granted.

For the purpose of this example, we will assume that the power to appoint is a general power of appointment that is only exercisable in Mother's will and that if she fails to exercise it, the capital of the trust will be distributed among the remaining beneficiaries of the trust. As a result, the husband will be a potential appointee under the power of appointment and will not be a beneficiary of the trust at the time of departure. Although the husband is a "successor beneficiary" of the trust for the purpose of proposed sections 94 and 94.1, as a potential appointee under a general power of appointment, he does not have any rights under the trust at the time of departure and thus does not realize a deemed disposition in respect of the trust for the purpose of section 128.1 of the ITA.

If the terms of the trust as established by Mother's great grandfather provide benefits for all of his issue, one would expect that the children would also currently be beneficially interested in the trust since they too are his descendents. As a result, they would each have a beneficial interest in the trust at the time of departure even though their right to any of the income or capital of the trust would presumably be contingent at that time.

Assuming that both Mother and her children are currently beneficiaries of the trust, both Mother and her children would realize deemed dispositions of their respective interests in the trust on their departure unless one of the exceptions in subparagraphs 128.1(4)(b)(i) to (v) of the ITA applies. Since Mother has been resident in Canada for 26 years as of December 31, 2006, the exception in subparagraph 128.1(4)(b)(iv) does not apply nor is her interest in the trust an "excluded right or interest" as defined in subsection 128.1(10) of the ITA. The two excluded rights relating to an interest in a personal trust are contained in paragraphs (j) of that definition - which deals with personal trusts resident in Canada - and (k) -which deals with non-resident testamentary trusts. Likewise, these exceptions will not apply to the children's interests in the trust.

Thus, Mother and the children will realize a deemed disposition of their respective beneficial interests in the trust on their departure from Canada. The application of paragraph 107(1)(a) of the ITA may reduce the amount of the gain realized on the capital interests as noted in the example given in CRA document 2004-0061841E5. Paragraph 107(1)(a) of the ITA will have no application in computing Mother's income inclusion under paragraph 106(2)(a) of the ITA as a result of the deemed disposition under paragraph 128.1(4)(b) of the ITA for any portion of her interest in the trust that is an income interest in the trust.

If either Mother's or children's interest in the trust is a participating interest in a foreign investment entity as defined in proposed section 94.1 of the ITA, any amount that is included in their respective income under that provision before their departure would increase the adjusted cost base of their respective interests for the purpose of computing the capital gain arising as a result of the deemed disposition. In addition, if Mother's interest in the trust is a participating interest as defined in proposed section 94.1 of the ITA, all of her interest in the trust will be a capital interest in the trust, and not an income interest, in the trust because of the proposed changes found in Bill C-33 to the definition of "income interest" in subsection 108(1) of the ITA.

With respect to paragraph (j) of the definition of "excluded right or interest" in subsection 128.1(10) of the ITA, it should be noted that this trust would not be deemed resident in Canada under proposed subsection 94(3) because there is no "resident contributor" or "connected contributor" to the trust. With no "connected contributor" (a person who contributed property while resident in Canada or within 60 months before becoming resident in Canada or within 60 months of ceasing to be resident in Canada), the trust does not have a "resident beneficiary" as that term is defined in proposed subsection 94(1) of the ITA and is not deemed resident in Canada. If the trust had been deemed resident in Canada under proposed subsection 94(3), both Mother's interest in the trust and that of her children would have been an excluded right as defined in subsection 128.1(10) of the ITA for the purpose of the deemed disposition rules.