23 July 1996 External T.I. 9602225 - DISTRIBUTION OF PROPERTY BY A NON-RESIDENT 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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Whether paragraph 107(2)(b) applies to determine the cost base of property distributed to a beneficiary resident in Canada by a non-resident testamentary trust.

2.If paragraph 107(2)(b) applies and the non-resident trust was established prior to 1972, is the beneficiary entitled to step up the cost base of the property pursuant to ITAR 26(3).

3.If ITAR 26(3) is not applicable, is there any provision in the Canada-U.S. Tax Convention (1980) which would provide a step-up in the cost base to the Canadian beneficiary.

Position:

1.Yes.

2.No.

3.No.

Reasons:

1.Previous opinions (E941969).

2.Based on recent case law and to be consistent with our position on subsection 104(4), a non-resident trust that is not subject to tax in Canada is not considered a "taxpayer".

3.It appears that there is no provision in the tax treaty that would allow a step-up in such circumstances.

		5-960222
XXXXXXXXXX	J. Leigh

July 23, 1996

Dear Sir:

Re: Distribution of Property by a Non-resident Trust

This is in reply to your letter of January 8, 1996 in which you requested our views on the application of subsection 107(2) of the Income Tax Act (the "Act") to a situation involving a distribution of property by a non-resident trust to a beneficiary resident in Canada. We apologize for the delay in responding to your letter.

The situation described in your letter appears to relate to an actual fact situation. To the extent that you require assistance in determining the tax treatment with regard to a completed transaction, you should contact your district tax services office. To the extent that you require confirmation of the tax consequences of proposed transactions, your request should be the subject of a request for an advance income tax ruling. However, we can provide you with the following general comments which are not binding on the Department.

We confirm your understanding that section 94 of the Act would not apply to deem a non-resident trust to be resident in Canada for income tax purposes if the trust is a testamentary trust that arose as a consequence of the death of an individual before 1976.

In the situation where a non-resident trust that is a "personal trust", as defined in subsection 248(1) of the Act, distributes property to a beneficiary resident in Canada in satisfaction of the beneficiary's capital interest in the trust, we agree that paragraph 107(2)(b) of the Act would apply in determining the cost of the distributed property to the Canadian beneficiary notwithstanding that the non-resident trust may not be subject to tax in Canada.

With regard to the beneficiary's capital interest in the non-resident trust, paragraph 107(2)(c) of the Act deems the beneficiary to have disposed of his or her capital interest for proceeds equal to the cost at which the beneficiary is deemed by paragraph 107(2)(b) of the Act to have acquired the property, minus any debt or other legal obligation assumed by the beneficiary if the distribution of the property to the beneficiary was conditional on the assumption by the beneficiary of the debt or obligation. By virtue of paragraph 107(1)(a) of the Act and the definition of "cost amount" in subsection 108(1) of the Act, no capital gain will arise on the disposition of the beneficiary's capital interest in the trust.

You indicate in your letter that a trust that has never been taxable in Canada may nevertheless be a "taxpayer" as defined in subsection 248(1) of the Act. As a result, subsection 26(3) of the Income Tax Application Rules (the "ITAR") would appear to apply to determine the adjusted cost base of the property to the trust. We are unable to confirm your view in this regard. It is our view that subsections 26(3) and (5) of the ITARs would not apply to a non-resident trust that is not subject to income tax in Canada (i.e., a non-resident trust that does not carry on business in Canada, does not hold taxable Canadian property and is not subject to section 94 of the Act). Our opinion is based on the decisions in Oceanspan Carriers Limited v. The Queen, 87 DTC 5102 (F.C.A.), and Holiday Luggage Mfg. Co. Inc. and Falconer Luggage Inc. v. the Queen, 86 DTC 6601 (F.C.-T.D.).

With respect to your final point concerning the Canada-U.S. Tax Convention, we are not aware of any provision which would allow the Canadian beneficiary to step up his or her cost base of property distributed from a non-resident trust in the circumstances described in your letter.

A copy of this letter will be sent to the Department of Finance for their information and consideration.

We trust that our comments are of assistance to you.

Yours truly,

Chief
Financial Institutions Section
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch