Audrey Gibeault, "Unexpected Application of Part XII.2 Tax to a Canadian Personal Trust", Canadian Tax Focus, Vol. 3, No. 2, May 2013, p. 10, at 11.
Planning opportunities to deal with the emigration of a beneficiary and the resulting application of Part XII.2 tax to a trust appear to be quite limited. In some non-arm's-length situations, the non-resident might agree to be removed as a beneficiary. Alternatively, the non-resident could avoid receiving any income or capital from the trust for any given fiscal year in the hope that he or she would not be classed as a beneficiary and thus would not trigger the application of the tax to the trust for that year. The basis of this argument is that the Act does not define the term "beneficiary" for the purposes of Part XII.2.
Ashutosh Gupta, "Amendments to Part XII.2 - Addressing Complex Trust Ownership Structures", Taxation Law, Ontario Bar Association, Vol. XIII, No. 3, March 2003, p. 4.
Is a non-resident trust, which is deemed to be resident for various purposes under s. 94(3)(a), considered to be a “non-resident person” for purposes of para. (a) of the definition of “designated beneficiary” in s. 210(1)? CRA responded:
Although paragraph 94(3)(a) deems a particular non-resident trust to be resident in Canada for purposes of the provisions listed in subparagraphs 94(3)(a)(i) to (x), none of the provisions in Part XII.2 are expressly or implicitly referred to in subparagraphs 94(3)(a)(i) to (x). Accordingly, such a non-resident trust is still considered to be a non-resident for purposes of the definition of “designated beneficiary” in subsection 210(1), and is therefore a “non-resident person” for purposes of this definition.
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|Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a)||no application to Pt. XII.2||42|
Brian Kearl, Carl Deeprose, "Leaving Canada's New High Tax Rate Regime: Considerations, Tips and Traps", 2016 Conference Report (Canadian Tax Foundation),32:1-24
Conversion of trusts deemed disposition income into “designated income” for purposes of Part XII.2 (pp. 32:16-17)
If an emigrating individual's interest in a personal trust is exempted from the departure tax and is not subject to part XII.2 tax as discussed below, taxation of any inherent gains in the trust property may be deferred until its actual disposition and the gains may be subject to part XIII withholding tax rather than part I income tax. …
Generally, paragraph 104(4)(a.3) triggers a deemed disposition of the property held by a personal trust if a taxpayer transfers property to the trust and it is reasonable to conclude that the property was transferred in anticipation that the taxpayer would subsequently cease to reside in Canada, and then the taxpayer did subsequently cease to reside in Canada. This anti-avoidance rule is designed to preserve the integrity of the departure tax mechanism referenced above.
Furthermore, the conversion of the trust's deemed disposition income into "designated income" for purposes of part XII.2 tax prevent departure tax gains, which are taxed under part I, from being converted into trust income that is paid or made payable to non-resident beneficiaries at the end of the year and taxed under part XIII. Part XII.2 imposes a 40 percent tax on personal trusts that distribute (and deduct these distributions) to certain "designated beneficiaries", including non-resident beneficiaries. This tax is limited to the "designated income" of the trust, which includes only (1) taxable capital gains from dispositions of taxable Canadian property and property connected to the cessation of Canadian residence by a transferor, the spouse of the transferor, or a beneficiary of the trust; and (2) income from real or immovable properties in Canada (other than Canadian resource properties), timber resource properties, Canadian resource properties (other than properties acquired by the trust before 1972) and businesses carried on in Canada.
In addition to the 40 percent part XII.2 tax paid by the trust, the trust is still required to withhold and remit to the Canadian tax authorities 25 percent (or 15 percent if a tax treaty reduces the withholding rate) of any amounts paid or credited to its non-resident beneficiaries, resulting in an effective tax rate of approximately 49 percent. [Footnote 78 - $100 "designated income" less "40% part X1I.2 tax = $60 after-tax proceeds available to distribute less 25% (or 15%) = $45 or ($51) after tax proceeds.]