23 October 1995 External T.I. 9508525 - 60 MONTH NON-RESIDNET TRUSTS

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:

When does a 60 month non-resident trust become a deemed resident under paragraph 94(1)(c)? (and other related questions).

Position TAKEN:

On the first day (i.e. Jan 1) of the first taxation year of the trust during which the criteria in paragraphs 94(1)(a) and (b) are met.

Reasons FOR POSITION TAKEN:

Wording of provision. (See also 5-8820)

XXXXXXXXXX			950852

Attention: XXXXXXXXXX

October 23, 1995

Dear Sirs:

Re: Five Year Immigrant Trusts

We are writing in response to your letter dated March 21, 1995 in which you requested our views on the application of sections 94, 107, 128.1 and 150 of the Income Tax Act (Canada) (the "Act") in respect of a non-resident discretionary trust subject to paragraph 94(1)(c) of the Act, where the requirements of subclause 94(1)(b)(i)(A)(III) are met during the taxation year of the trust.

It would appear that your query involves a factual situation involving a possibly completed transaction. As indicated in paragraph 21 of Information Circular 70-6R2, we are not in a position to deal with factual proposed transactions other than in the form of an advance ruling request where the identity of the parties is known and all the facts surrounding the proposed transaction are presented to us. Issues involving completed transactions should be addressed by the appropriate Taxation Services Office of Revenue Canada.

However, we can offer the following comments which we hope will be of assistance to you. A discretionary trust which is not resident in Canada would be deemed by paragraph 94(1)(c) of the Act to be a person resident in Canada on the first day of the first taxation year of the trust during which the criteria in paragraphs 94(1)(a) and (b) of the Act are met. We note in particular that if the condition in subclause 94(1)(b)(i)(A)(III) is met "at any time in or before the taxation year of the trust" as stated in the preamble to paragraph 94(1)(b), "the following rules apply for that taxation year of the trust: (c)...(i) the trust shall be deemed to be resident in Canada...." Accordingly, the trust will be taxable in respect of that entire taxation year in accordance with the determination of taxable income in paragraph 94(1)(c) of the Act.

Since such a trust would be deemed to become resident on January 1 of the applicable year in which the 60 month period referred to in subclause 94(1)(b)(i)(A)(III) ends, the trust will also have a deemed year end immediately before that time and would be deemed to begin a new taxation year at the time the trust becomes resident, that is, January 1, pursuant to paragraph 128.1(1)(a) of the Act. Pursuant to paragraphs 128.1(1)(b) and (c) of the Act, the trust would be deemed to have disposed of its property, other than property described in subparagraphs 128.1(1)(b)(i) to (v), at fair market value immediately before becoming resident and then to have acquired the property at a cost equal to the same proceeds of disposition. Since the deemed disposition occurs "immediately before the time that is immediately before" the time the trust becomes resident, any gain that accrued on such property before the trust became resident will generally not be taxable under the Act. However, since property described in subparagraphs 128.1(1)(b)(i) to (v) is not eligible for the deemed disposition and acquisition in paragraphs 128.1(1)(b) and (c) of the Act, such property will retain its original cost to the trust. Accordingly, any gain resulting from a subsequent disposition of the latter type of property will be fully taxable under the Act.

In circumstances where the trust is wound up following the commencement of the taxation year to which paragraph 94(1)(c) applies, subsection 107(2) of the Act will apply on a distribution of the trust's assets in satisfaction of the capital interests of the beneficiaries of the trust, provided that the trust is a personal trust as defined in subsection 248(1). Under paragraph 107(2)(a), the trust is deemed to dispose of the distributed property at the cost amount to the trust. Depending on the facts, the application of subsection 107(2) may result in the beneficiaries receiving the property of the trust at the trust's cost amount. Note that this rollover under subsection 107(2) of the Act may not be available where subsection 75(2) has been applicable at any time in respect of any property of the trust by virtue of subsection 107(4.1) of the Act, nor is it available for certain property when the beneficiary is a non-resident pursuant to subsection 107(5) of the Act.

Paragraph 94(1)(c) of the Act will not apply if the trust is wound up while it is still a non-resident, that is by December 31 of the taxation year preceding the year in which the trust would have become a deemed resident. If the trust is wound up in the year it becomes resident, including a scenario where it is wound up before the end of the 60 month period referred to in subclause 94(1)(b)(i)(A)(III), the trust must file a return for that year. The taxation year of an inter-vivos trust is December 31, regardless of when it is wound up.

These general comments apply whether or not the assets of the trust are sold for fair market value before the end of the 60 month period. We note, however, that if the trust disposes of capital property (other than taxable Canadian property any gain on which would be subject to taxation under clause 94(1)(c)(i)(A) of the Act) after it becomes a deemed resident, the portion of any capital gain or loss that accrued before the trust is deemed resident is excluded from the computation of foreign accrual property income pursuant to paragraph 95(2)(f) of the Act.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and Foreign Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch