17 April 1984 Income Tax Severed Letter

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.

Revenue Canada Revenu Canada Taxation Impôt

Head Office Bureau principal

Your file Votre reference Our file Notre reference

J.F. Oulton (613) 995-1787

April 17, 1984

XXXX

This is in reply to your letter dated January 20, 1984 in connection with the application of paragraphs 94(1)(c) and (d) to a non-resident trust and to a beneficiary which is a person resident in Canada.

Your concern relates to the hypothetical situation where a non-resident trust owns all of the shares of a non-resident corporation which is carrying on an active business outside Canada. We have noted your discussion and questions on the taxability of the non-resident corporation's income derived from such an active business and the dividends received by the non-resident trust out of the active business income, as well as the taxability of the distributions out of the non-resident trust.

Comments on the Non-Resident Discretionary Trust under paragraph 94(1)(c)

We agree that for purposes of clause 94(1)(c)(i)(A), the "taxable income earned in Canada" of the non-resident trust would be determined in accordance with Division D of Part I of the Act. Furthermore, we agree that the income derived from the active business carried on by the non-resident corporation would not be included in the non- resident trust's taxable-income earned in Canada under any of the provisions of Division D. As well, dividends paid out of such active business income would not be included in the non-resident trust's taxable income earned in Canada under subsection 115(1) nor would they form part of its foreign accrual property income (FAPI) since the provisions of clause 95(1)(b)(i)(B) of the Act would apply to exclude the dividends in these circumstances.

While there may be no tax consequence to the non-resident trust in the hypothesis assumed, it is our view that "income" of the trust which is paid or becomes payable by the non-resident trust to the Canadian resident beneficiary will be subject to tax in the hands of the beneficiary. Paragraph 104(13)(b) of the Act would apply in these circumstances and for greater certainty, the rule in paragraph 3(a) would also require the inclusion in the Canadian person's income. Although you did not specify the nature of the distributions out of the trust, it is our view that consideration must be given to the distribution rules in subdivision k of Division B in making a final determination of the possible tax implications to the Canadian resident beneficiaries. In this regard, it must be kept in mind that the trust is deemed to be a person resident in Canada for purposes of Part I of the Act.

Comments on the Non-Resident Non-Discretionary Trust under paragraph 94(1)(d)

On the assumption that the Canadian resident beneficiary has not less than a 10% interest in the trust as provided in subparagraph 94(1)(d)(i), the trust will be deemed to be a non-resident corporation, etc. Furthermore, since this is for the purposes of subsections 91(1) to (4) and section 95, it is our view that the trust would then be considered to be a foreign affiliate of the Canadian resident beneficiary. Of course as you pointed out, this means that any FAPI arising in the trust or a foreign affiliate of the trust, will be included in the income of the Canadian resident beneficiary to the extent of his participating percentage.

We agree that any dividends received by the non-resident trust from its foreign affiliate would not be subject to tax in the trust. However, it is our opinion that any "income" of the trust which is paid or becomes payable to the Canadian resident beneficiary will be accorded the same treatment described in the last paragraph (as it relates to the beneficiary) under the previous heading dealing with non-resident discretionary trusts, subject to the provisions of subsection 94(4) of the Act.

We hope that these comments will be of assistance.

Yours truly,

ORIGINAL SIGNED BY ORIGINAL SIGNÉ PAR D.B. MORPHY

for Director Specialty Corporations Rulings Division Corporate Rulings Directorate Legislation Branch