Section 94

Father, a resident Canadian, makes a loan on arm’s length terms to a factually non-resident trust (the “Trust”) six months after the Trust’s settlement. The Trust’s sole beneficiaries are his two resident children. Is Father not considered to have made a contribution because the loan qualified as an arm’s length transfer on the basis that “it is reasonable to conclude that none of the reasons … for the transfer is the acquisition at any time by any person or partnership of an interest as a beneficiary under a non-resident trust”.?

CRA indicated the quoted words did not establish a test that the beneficiary’s interest must be acquired as a result of the particular transfer being considered and that the definition instead seeks to ensure that there is no connection between the transfer, and the person or partnership that already has an interest in the non-resident trust, or would have such an interest in the future.

Accordingly, it must be reasonable to conclude that none of the reasons for Father making the loan was his children being Trust beneficiaries. Such a conclusion would be highly unlikely given his relationship to them – so that he would be considered to have made a contribution to the trust, he would be a resident contributor and the trust would be deemed to be resident for the purposes listed in s. 94(3)(a).

CRA declined to comment on what amount of dividends paid by a closely-held corporation would satisfy (b)(i) of the arm's length transfer definition, stating that this was a question of fact.

A Liechtenstein foundation, which is not resident in Canada, was created in XX and its founders never resided in Canada. Until his death in XX, Father was the sole beneficiary. Father was resident in Canada only for a few years before 1980, and he made only one "contribution" in favour of the Foundation as defined in s. 94(1). His "Daughter" was named as the replacement sole beneficiary through an amendment to the Foundation Deed. From the time of the amendment, Daughter has been a Canadian resident. Neither she nor any other Canadian resident has made any "contribution" to the Foundation since its formation as defined in s. 94(1). Father and Daughter were never founders of the Foundation, nor directors or trustees, and Daughter has no veto on decisions of directors or trustees. The Foundation is not an "exempt foreign trust." Does s. 94(3) apply? CRA responded (TaxInterpretations translation):

[T]he attributes of a foundation formed under the Liechtenstein legislation generally are those of a common law trust and this entity generally will be considered to be a trust for purposes of the Act. …

After paraphrasing the definitions of "resident contributor," "contributor" and "resident beneficiary" (which latter definition referenced a "connected contributor to the trust,") CRA stated:

Under subsection 94(1), a "connected contributor" includes any contributor to the trust at a particular time other than a person all of whose contributions to the trust made at or before the particular time were made at a non-resident time of the person as defined in subsection 94(1).

…[S]uch a foundation would never be considered to have a resident contributor, nor a connected contributor, as defined in subsection 94(1). Following the decease of the sole beneficiary in XX, this foundation did not have a resident beneficiary…and, subject to subsections 94(2) and 94(11), the rules provided under subsection 94(3) would not apply to this foundation,… .[T]he provisions of subsections 94(8.1) and (8.2) would not apply as no transfer or loan of property was made by a resident beneficiary in favour of the foundation.

Respecting an estate with American resident executors, Canadian resident beneficiaries and a testator who was an American (or, alternatively a Canadian) resident, CRA stated:

When determining if an estate created on someone's death has a connected contributor, the relevant consideration is whether the deceased was a resident of Canada immediately before death or within 18 months of death. If so, there will be a connected contributor. Therefore, in the scenarios you have presented, only where the American testator was a Canadian resident and left Canada within 18 months of dying, or in the second case the testator was Canadian can the definition of resident beneficiary be met and the estate described would be deemed to be resident in Canada.

After a UK resident (under age 55) became resident in Canada, the commuted value of the individual’s member benefits under a UK defined-benefit pension plan was transferred directly to a UK self-invested personal pension plan (SIPP) of which the individual was the sole beneficiary.

In finding that such commuted value was to be included at the time of the transfer in the individual’s income pursuant to s. 56(1)(a)(i), CRA stated that “the Individual is considered to have constructively received the benefit on the basis that, by virtue of the Transfer, the benefit has been set apart for the Individual” - and further found that even if the constructive receipt doctrine were found not to apply, s. 56(2) would apply to include the commuted value in the individual’s income on the basis that the individual had directed or concurred in the payment of an amount to a third party (the UK SIPP) and that amount, had it been paid to the individual, would have been included under s. 56(1)(a)(i). This would also mean that the individual had made a “contribution” to the UK SIPP plan.

Father, a resident Canadian, makes a loan on arm’s length terms to a factually non-resident trust for the benefit of his resident children. This loan will not be considered to be a contribution by him (so that it will not cause the trust to be resident for various purposes under s. 94(3)(a)) if it is an “arm’s length transfer,” whose definition relevantly requires that it reasonably be considered “that none of the reasons … for the transfer is the acquisition at any time by any person or partnership of an interest as a beneficiary under a non-resident trust.”

CRA indicated the quoted words did not establish a test that the beneficiary’s interest must be acquired as a result of the particular transfer, and the definition instead seeks to ensure that there is no connection between the transfer, and the person or partnership that already has (or will have) an interest in the non-resident trust.

Accordingly, it must be reasonable to conclude that none of the reasons for Father making the loan was his children being trust beneficiaries. CRA indicated that such a conclusion would be highly unlikely given his relationship to them – so that his loan would be considered to be a contribution to the trust causing him to be a resident contributor and the trust to come within s. 94(3)(a).

Can the election described in the s. 94(1) definition of “electing contributor” be late-filed?

The election is made in respect of a particular year of the contributor – which we will call the “initial year” because it is. CRA indicated that in order for the election to be effective for the initial year that the election is to take effect (the “initial year”) (in which event, it will continue to apply for all subsequent taxation years), the election must be filed in writing on or before the filing due date of the contributor for the initial year - even if the contributor filed that individual's personal income tax return after such due date. Furthermore, this election is not listed in Reg. 600, so that CRA does not have discretion to allow a late-filing of the election.

If the contributor misses this deadline for a particular year, this does not preclude the contributor from filing this election for a subsequent taxation year, which would then become the initial year.

Can the election described in the s. 94(1) definition of “electing trust” be late-filed?

CRA indicated that as long as the election is filed with the trust’s income tax return for its first taxation year throughout which it is deemed to be resident in Canada and in which it holds property that is part of its non-resident portion, the election would not be considered to be filed late even if the trust return for that year is filed late. Where the election is not included with the income tax return filed, the election is considered late. The Minister does not have the discretion to allow a taxpayer to late-file this election.

Where the trustee of an investment trust has discretion as to the timing of distributions of income or capital without any discretion as to the share of income or capital distributable to each beneficiary, would such discretion result in the trust not being eligible under para. (h) of the exempt foreign trust definition? CRA responded:

If the discretionary power of the trustee relates only to the choice of the payment date of an amount of income or capital ... this power would not normally have an impact on the status as an eligible trust for the purposes of paragraph (h) of the definition... . On the other hand ... the amount of income or capital of a beneficiary would depend on the exercise or the failure to exercise a discretionary power in a situation where the income or capital is allocated among the beneficiaries on the basis of the share held in the trust at a particular time and where the discretionary power as to the timing of the distributions, is also a discretionary power in respect of the particular time chosen for the allocation of the income or capital among the beneficiaries. In this last case, the share of income or capital allocated to each of the beneficiaries could vary in a taxation year depending on the exercise of this discretion.

Mr. X, who had previously ceased to be resident in Canada upon emigrating, transferred property to Trust B and Trust A, which were factually resident outside Canada, and whose beneficiaries were his Canadian-resident children. Did s. 94 apply to deem the trusts to be resident in Canada? After noting that this question (having regard to the definition of “resident beneficiary”) turned on whether Mr. X was a “connected contributor” which, in turn, depended on whether all his contributions were made at a “non-resident time,” the Directorate noted that the wording of definition of the latter phrase was modified under the coming-into-force provisions respecting contributions made before June 23, 2000, and noted that (as explained in the Finance Explanatory Notes) a contribution made before June 23, 2000 will be considered to have been made by a person at a non-resident time if the person was non-resident in Canada for the period commencing 18 months before the trust year end for the year of the contribution and ending 60 months after the contribution.

Accordingly:

all of Mr. X’s contributions would have been made at a non-resident time. Accordingly, Mr. X would not be a connected contributor to Trust A or Trust B, and … there would not be a resident beneficiary under Trust A or Trust B.

CCRA noted that under the predecessor legislation, s. 94(1)(b)(i)(A)(III) allowed a newcomer to defer the taxation of foreign accrual property income of non-resident trusts for a period of 60 months, and that the 60-month test for new immigrants was found in the definition of "resident contributor" in s. 94(1).

A Canadian resident became a non-resident and, within 60 months, settled a non-resident trust for non-resident family members, except that the trust deed stated that beneficiaries included as a class registered charities, which could benefit at any time. Would this cause the trust to become a deemed resident trust?

CRA noted that s. 94(3) applies inter alia to a trust which is factually non-resident and has a resident beneficiary (with a connected contributor to the trust). However, the registered charity would be an “exempt person,” which is defined in s. 94(1) to include a person exempted under s. 149(1), and thus would be excluded from being a “resident beneficiary” (under the preamble of that term’s definition) – so that s. 94 would not apply to the trust.

In finding that the deceased would not be a resident contributor to an estate, CRA stated:

[T]he concept of residence necessarily implies that the person must be in existence. Therefore, a deceased natural person would not be a resident of Canada. Hence, in the given instance, the deceased would not be considered in the determination of a "resident contributor".

A new immigrant to Canada, who previously had, many years ago, established a foreign trust, becomes resident on August 1, 2015. The foreign trust would be deemed Canadian resident as of January 1, 2015. Agreed? CRA stated:

.…Paragraph 94(3)(a) generally provides that if at a specified time in a non-resident trust's taxation year, there is a resident contributor to the trust, or a resident beneficiary under the trust, the trust is deemed resident in Canada throughout the taxation year for the purposes listed in subparagraphs (i) through (x). Note that paragraph 94(4)(d) provides that the application of paragraph 94(3)(a) does not deem the trust to be resident in Canada for the purpose of applying subsection 128.1(1).

Given that the immigrant settled property on the trust, he or she will be a "contributor" to the trust, as defined in subsection 94(1). …[U]pon becoming resident in Canada on August 1, 2015, the immigrant would be a "resident contributor" to the trust… . Accordingly, the trust will be deemed resident in Canada from January 1, 2015.

An individual, who was never previously Canadian resident, became resident on August 1, 2009 and remained a Canadian resident thereafter so that he or she will have been resident for 60 months as of August 1, 2014. A non-resident trust to which the individual has made a contribution would be deemed resident under s. 94 in 2014, as of January 1. Agreed? CRA stated:

[W]e agree…[that] the 60 month exemption period would otherwise end in 2014, after the Budget Day.

To further illustrate, in a case where the 60 month exemption would otherwise expire in 2015 (i.e., same example as above except the individual became resident on August 1 of 2010) and no contributions were made to the trust on or after Budget day and before 2015, the measure would apply for the trust's taxation year beginning January 1, 2015 and ending December 31, 2015. If however, contributions were made to this trust on or after Budget Day, even though the 60-month time period would not expire until after 2014, the measure would be effective for the taxation year ending December 31, 2014 and this trust would be deemed resident in Canada pursuant to subsection 94(3)… for the purposes outlined therein, with effect from January 1, 2014.

Respecting an estate with American resident executors, Canadian resident beneficiaries and a testator who was an American (or, alternatively a Canadian) resident, CRA stated that as "the concept of residence necessarily implies that the person must be in existence," a (deceased) Canadian testator could not be considered to be a "resident contributor" in respect of the trust.

Mr. A, who was previously non-resident, became a resident of Canada on August 1, 2005, but on October 1, 2007, left Canada. However, since his wife cannot remain in their new country of residence without a work visa, he is considering moving back to Canada on August 1, 2009. In connection with his return to Canada as a resident, he is contemplating transferring assets to a non-resident trust. When is Mr. A considered a "resident contributor" to that trust? CRA responded:

A resident contributor, in respect of a particular trust at any time, is an "entity" (which term includes, inter alia, a natural person) that, at that time, is both resident in Canada and a "contributor" (as defined in this subsection) to the trust. For the purposes of that definition, a resident contributor does not include, inter alia, an individual (other than a trust) who has not, at that time, been resident in Canada for a period of, or periods the total of which is, more than 60 months (other than an individual who, before that time, was never non-resident). For this purpose, we are of the view that any period of residence in Canada even if prior to a period when the person was non-resident in Canada would form part of the total number of months, calculated for the purpose of determining whether an individual is a resident contributor for the purposes of proposed section 94.

Under the hypothetical situation described herein, the 60-month period would include a first 26-month period from August 1, 2005 to September 30, 2007 and a second 34-month period from August 1, 2009 to May 31, 2012. Thus, for the purposes of subsection 94(3), as proposed in Bill C-10, Mr. A would be a resident contributor to the immigration trust after May 31, 2012.

When must the dual condition of being resident in Canada and being a contributor be satisfied for a trust to be deemed resident in Canada for a particular taxation year? CRA responded:

[A] resident contributor at a particular time does not include an individual - other than a trust and an individual who, before that time, was never a non-resident - who at that time had not been resident in Canada for a period of, or periods the total of which is more than 60 months.

Subject to the exception in the preceding paragraph, a resident contributor in respect of an inter vivos trust established in 1960 or later at any time is an entity that is at that time both resident in Canada and a contributor to the trust. The time referred to in the legislative provisions of subsection 94(3) is the specified time in a particular taxation year of the trust. Consequently, in determining whether the rules in subsection 94(3) (as proposed) apply, we must consider whether the entity was resident in Canada at the specified time and whether it had made a contribution to the trust on or before the specified time. The specified time is generally the trust's taxation year-end.

Q.7A

How is the “resident portion” (as defined in s. 94(1)) computed where (i) a Canadian resident beneficiary uses a residential property owned by a non-resident trust (which has made a valid (resident portion) election under s. 94(3)(f)) and pays certain expenses of the property directly, (ii) a loan is made by the trust to a Canadian resident beneficiary, or (iii) such loan is then repaid?

Re (i), after noting that such payment of expenses constituted a contribution under s. 94(2)(a) by reason of reducing a trust liability, CRA noted that under s. (a)(ii)(A)(II) of the definition of resident portion, the trust must select property to be allocated to the resident portion having an FMV at least equal to the absolute value of the decrease in the liability or potential liability of the trust.

Re (ii), CRA noted that s. 94(2)(g)(iv) provides that the loan to the beneficiary involves the acquisition by the trust of the debt entailing a deemed transfer by the debtor – so that, here, there is a deemed transfer of property from the beneficiary to the trust. Accordingly, under para. (a) of the “resident portion” definition, the amount of the loan owing by the beneficiary would be considered as a contribution by the beneficiary (viewed in this regard as a resident contributor) and would be included in the resident portion.

Re (iii), the repayment of the loan would be considered to be a contribution to the trust by the resident beneficiary so that the cash repayment proceeds would be added to the resident portion. Since the debt ceased to exist, it is expected that it would no longer be included in the resident portion.

Q.7B

49% of the shares of a non-resident corporation owned by the trust subject to s. 94(3) were included in the resident portion but the trust held 100% of the shares in all. Was the corporation a “controlled foreign affiliate” (CFA) as defined in s. 95(1) and if so, how would foreign accrual property income (“FAPI”) be calculated?

CRA noted that s. 94(3)(f)(viii) provides that the resident portion trust and the non-resident portion trust are deemed to not deal with each other at arm’s length and s. 94(3)(a)(x) provides that a deemed resident trust is deemed to be resident in Canada throughout the particular tax year for purposes of determining whether a foreign affiliate is a CFA of the taxpayer. Accordingly, in light of s. (b)(ii) of the CFA definition (effectively deeming the resident portion trust to hold the shares of a non-arm’s length person), the corporation would constitute a CFA of the resident portion trust. Accordingly, its FAPI would be computed in the usual way based on its participating percentage (based on its 49% shareholding).

A Canadian resident beneficiary uses a residential property owned by a non-resident trust (which has made a valid (resident portion) election under s. 94(3)(f)) and pays certain expenses of the property directly. After noting that such payment of expenses constituted a contribution under s. 94(2)(a) by reason of reducing a trust liability, CRA noted that under s. (a)(ii)(A)(II) of the definition of resident portion, the trust must select property to be allocated to the resident portion having an FMV at least equal to the absolute value of the decrease in the liability or potential liability of the trust.

The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco makes non-interest-bearing loans to LLC1.

Before concluding that because NRTrust thereby will have a resident contributor (Canco), so that NRTrust will be resident under s. 94(3), the Directorate stated:

[T]he loan does not qualify as an arm’s length transfer since it does not meet at least one of the conditions contained in paragraph (b).

… Since LLC1 borrowed funds in a situation where there was no cost to LLC1, the fair market value of the shares of LLC1 have increased as a result of the non-interest bearing loan. …

Therefore … at the time the non-interest bearing loan is made, there is an increase in the fair market value of the shares of LLC1 held by NRTrust. As a result, Canco would be deemed to have made a contribution to NRTrust by virtue of paragraph 94(2)(a).

The application of s. 17 (or s. 247(2)) to that loan would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust.

The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco provided services for no consideration to LLC1.

In concluding that because NRTrust thereby will have a resident contributor (Canco), so that NRTrust will be resident under s. 94(3), the Directorate stated:

If Canco provided services to LLC1, other than exempt services defined in section 94(1), paragraph 94(2)(f) would apply to deem Canco to have transferred property to LLC1. Since Canco is deemed to have transferred property to LLC1, if this transfer would result in an increase in the fair market value of the shares of LLC1, paragraph 94(2)(a) would apply to deem Canco to have made a contribution to NRTrust.

It would seem reasonable to be of the view that services provided to LLC1 for no consideration would result in an increase in fair market value of the shares of LLC1. …[P]aragraph 94(2)(a) applies at the time the services are rendered for no consideration resulting in an increase in the fair market value of the shares of LLC1 at that time.

Respecting any application of the s. 247(2) transfer-pricing rules, the Directorate stated:

This test would continue to be met regardless of subsequent transactions or deemed income inclusions by virtue of subsection 247(2).

The Will of the resident deceased establishes a trust for the benefit of his U.S.- resident child and her non-resident issue. Although the Will is administered in Canada by the resident executor, the trustee of the child's trust is resident in the US and the trust's central management and control is in the US. Is the deceased's estate considered to be a contributor to the child's trust or is the only contributor the deceased himself? CRA stated:

…Pursuant to paragraph 94(2)(g), when the child's trust acquires its interest in the deceased's estate, the estate will be deemed to have transferred the interest to the child's trust. Accordingly, the deceased's estate will be considered to be a contributor to the child's trust.

A Canadian resident leaves an unconditional bequest to a trust (the "Trust") with a non-resident settlor, trustee and beneficiary (the deceased's child) and whose central management and control is outside Canada. In finding that the Trust is deemed to be resident in Canada, CRA stated:

[T]he "trust" definition in subsection 94(1) clarifies that…a reference to a trust includes an estate. …Pursuant to paragraph 94(2)(g)…, when the Trust acquires its interest in the Estate, the Estate will be deemed to have transferred the interest to the Trust. Accordingly, the Estate will be considered to be a contributor to the Trust. Where it is determined that the Estate is resident of Canada, there will be a "resident contributor" to the Trust, and consequently, the Trust will be deemed to be resident in Canada pursuant to subsection 94(3) of the Act, throughout the particular taxation year.

The Will of the resident deceased establishes a trust for the benefit of his U.S.- resident child and her non-resident issue. Although the Will is administered in Canada by the resident executor, the trustee of the child's trust is resident in the US and the trust's central management and control is in the US. Is the deceased's estate considered to be a contributor to the child's trust or is the only contributor the deceased himself? CRA stated:

…Pursuant to paragraph 94(2)(g), when the child's trust acquires its interest in the deceased's estate, the estate will be deemed to have transferred the interest to the child's trust. Accordingly, the deceased's estate will be considered to be a contributor to the child's trust.

Furthermore, pursuant to paragraph 94(2)(n), "a contribution made at any time by a particular trust to another trust is deemed to have been made at that time jointly by the particular trust and by each person or partnership that is at that time a contributor to the particular trust...". Therefore, in the given instance, the deceased is also considered to be a contributor to the child's trust.

A Canadian resident leaves an unconditional bequest to a trust (the "Trust") with a non-resident settlor, trustee and beneficiary (the deceased's child) and whose central management and control is outside Canada. In finding that the Trust is deemed to be resident in Canada, CRA stated:

[A] deceased natural person would not be a resident of Canada. Hence the deceased is not considered in the determination of a "resident contributor". …[T]he "trust" definition in subsection 94(1) clarifies that…a reference to a trust includes an estate. …Pursuant to paragraph 94(2)(g)…, when the Trust acquires its interest in the Estate, the Estate will be deemed to have transferred the interest to the Trust. Accordingly, the Estate will be considered to be a contributor to the Trust. Where it is determined that the Estate is resident of Canada, there will be a "resident contributor" to the Trust, and consequently, the Trust will be deemed to be resident in Canada pursuant to subsection 94(3) of the Act, throughout the particular taxation year.

Furthermore, pursuant to paragraph 94(2)(n) of the Act, "a contribution made at any time by a particular trust to another trust is deemed to have been made at that time jointly by the particular trust and by each person or partnership that is at that time a contributor to the particular trust…". Therefore, in the given instance, the deceased is also considered to be a contributor to the Trust.

If a non-resident trust is "tainted" as a resident trust under s. 94(2)(g) by being issued shares by a resident corporation, it potentially can re-acquire non-residency status under s. 94(2)(t) if it makes a qualifying sale of the shares. When this occurs, it changes its status immediately, so that it is non-resident for the stub period beginning with the sale, is resident for the stub period before the sale, and has a potential deemed disposition of its property under the emigration rule (s. 128.1(4)) as a result of the status change.

2013-0509111E5 confirmed the above results. However, 2018-0781041I7 essentially amended 2013-0509111E5 by expunging a confusing paragraph that suggested that for certain purposes the trust remained a deemed resident until year end. In this similar interpretation, CRA noted that the comments in that paragraph considered what would happen hypothetically “in the absence of s. 94(5),” and that such conclusions were, of course, not applicable to the actual state of the law. Thus, the sale triggers the change back to non-resident status for all relevant purposes.

In 2010, Trust A, a factual non-resident trust was deemed a resident by s. 94(2)(g) because Corp X, a Canadian resident corporation, issued 100 common shares to Trust A. On August 15th, 2011, the trust sold its 100 common shares of Corp X at fair market value to an unrelated third party as described ins. 94(2)(t). CRA stated:

[P]aragraph 94(2)(t) … applies to expunge the contribution after the time of the sale (i.e., from the time of the sale forward, the contribution is considered to have never occurred). As such, at the end of the 2011 taxation year (i.e., December 31, 2011) of Trust A, paragraph 94(3)(a) would not apply as there is no resident contributor. Conversely, subsection 94(5) would apply since the conditions therein are met, including that at the end of the 2011 taxation year, there is no resident contributor.

Accordingly, pursuant to subsection 94(5) of the Act, Trust A is deemed to cease to be a resident when it ceases to have any resident contributor. As a result, subsection 128.1(4) applies to create a deemed year-end immediately before that time. Trust A would be deemed resident under subsection 94(3) for the taxation year ending August 15th, 2011 since at the end of that particular taxation year, there is a resident contributor. However, Trust A would not be deemed resident for its taxation year beginning on August 16th, 2011 and ending December 31st, 2011 since at the end of that particular taxation year, there is no resident contributor.

In 2010, Trust A, a factual non-resident trust was deemed a resident by s. 94(2)(g) because Corp X, a Canadian resident corporation, issued 100 common shares to Trust A. On August 15th, 2011, the trust sold its 100 common shares of Corp X at fair market value to an unrelated third party as described ins. 94(2)(t).

Although Trust A otherwise would have remained a deemed resident until December 31, 2011 by s. 94(3)(a), by virtue of s. 94(5) it is deemed to cease to be a resident immediately before it ceases to have any resident contributor which, under s. 94(2)(c), occurs upon the sale. Consequently, s. 128.1(4) applies to create a deemed year-end of August 15th, 2011, so that . Trust A would be a non-resident for its stub year ending December 31st, 2011.

The statement in the Technical Notes that "the application of paragraph 94(2)(t) will not affect the application of paragraph 94(2)(g) in respect of the original transfer by the corporation to the trust" merely "makes the point that the impact of paragraph 94(2)(t) is not retroactive."

(a) January 1 effective date of deemed residency

A person who had contributed property to a non-resident trust becomes resident upon immigrating to Canada.

CRA confirmed that the trust is deemed resident in Canada by virtue of s. 94(3)(a) as of January 1 of the taxation year in which the contributor immigrated to Canada. Under s. 94(3)(a), if there is a resident contributor to a non-resident trust that is not an exempt trust at a specified time in a taxation year, the trust is deemed to be resident in Canada throughout the year. “Resident contributor” per s. 94(1) is “a person that is, at that time, resident in Canada and a contributor to the trust”.

A contributor itself is defined as “a person (other than an exempt person but including a person that has ceased to exist) that, at or before that time, has made a contribution to the trust.” When that particular individual has previously contributed property to that trust, he will be a contributor and, as that contributor has now immigrated, he will be a resident contributor. Thus, the non-resident trust will be deemed to be resident in Canada throughout the taxation year.

(b) Non-resident trust can be retroactively (going back 5 years) deemed to have been resident in Canada if a non-resident contributor immigrates

A non-resident trust has resident beneficiaries with a current potential entitlement to receive income or capital and its contributor had made a contribution to the trust less than 60 months before becoming resident.

CRA indicated that in light inter alia of the lookback rule in s. 94(10), the trust is deemed to be resident for the five taxation years before the taxation year in which the individual became resident in Canada. Thus, the trust will be subject to interest and late-filing penalties for failure to have filed T3 returns (reporting its income for those years) and (where applicable) T1135 or T1134 returns for those years.

In addition to illustrating the above propositions with an example involving "Mr. X," CRA indicated that where the contributor was not a non-resident for 60 months prior to making the contribution (i.e., in a second example, Mr. Z became a non-resident in 2010 and made the contribution in 2013, before becoming resident again in 2018), the non-resident trust would be deemed to be resident in Canada by virtue of subsection 94(3) commencing in the taxation year during which the contributor made the contribution to the non-resident trust (i.e., 2013).

A non-resident trust, which is deemed to be resident for various purposes under s. 94(3)(a), is nonetheless considered to be a “non-resident person” for purposes of the application of Part XII.2 tax to a resident trust of which it is a beneficiary.

The fact that a trust which is factually non-resident is deemed to be resident in Canada for the purposes specifically listed in s. 94(3)(a) will not cause a Canadian corporation controlled by it to qualify as a Canadian-controlled private corporation.

///?p=37586#Q7b">19 June 2015 STEP Roundtable, oral Q.7(a)): Will an individual who becomes resident in Canada for the first time, and who has previously contributed property to a non-resident trust, thereby being considered a resident contributor, cause s. 94(3)(a) to deem the trust to be resident from January 1 of that taxation year? CRA stated:

Since the individual has previously contributed property to the trust, the individual will be a contributor. Since the individual is a contributor and is resident in Canada, the individual will be a resident contributor.

Therefore, the non-resident trust will be deemed [by s. 94(3)(a)] to be resident in Canada throughout the taxation year, even if the taxation year commenced before the individual became a resident of Canada.

A new immigrant to Canada, who previously had, many years ago, established a foreign trust, becomes resident on August 1, 2015. The foreign trust would be deemed Canadian resident as of January 1, 2015. Agreed? CRA stated:

.…Paragraph 94(3)(a) generally provides that if at a specified time in a non-resident trust's taxation year, there is a resident contributor to the trust, or a resident beneficiary under the trust, the trust is deemed resident in Canada throughout the taxation year for the purposes listed in subparagraphs (i) through (x). Note that paragraph 94(4)(d) provides that the application of paragraph 94(3)(a) does not deem the trust to be resident in Canada for the purpose of applying subsection 128.1(1).

Given that the immigrant settled property on the trust, he or she will be a "contributor" to the trust, as defined in subsection 94(1). …[U]pon becoming resident in Canada on August 1, 2015, the immigrant would be a "resident contributor" to the trust… . Accordingly, the trust will be deemed resident in Canada from January 1, 2015.

The "return" referred to in subsection 233.4(4) of the Act (i.e., Form T1134) and subsection 233.3(3) of the Act (i.e., Form T1135) is not a "return of income" (i.e., it is an information return). However, both the T1134 and T1135 are "forms" for the purposes of the CIF provisions for section 94. Therefore the CIF provisions would extend the filing deadline for Form T1134 by the Trust if it were otherwise due before October 24, 2013. Similarly, if Form T1135 were otherwise due before October 24, 2013, the CIF provisions would extend the filing deadline by the Trust to June 26, 2014.

The estate of an individual, who was resident in Canada for more than 60 months, was non-resident on general principles, as the executor was a US resident, but was deemed to be resident in Canada under s. 94 because the deceased was deemed by draft s. 94(2)(j) to have contributed his property to the estate and because one of the two beneficiaries was a Canadian resident.

At the time of his death, the deceased held shares of a taxable Canadian corporation which were not taxable Canadian property, and his Canadian principal residence. The estate was deemed by s. 84(3) to receive a dividend when shares of the corporation were redeemed, and also realized a capital loss on those shares. A capital loss also was realized on the disposition by the estate of the residence. The executor had elected under s. 164(6)(c) to carry back these losses to the terminal return of the deceased.

After having previously referred to the position in E9507245 that a non-resident trust may only carry back losses under s. 164(6) on shares that are taxable Canadian property, CRA stated (TaxInterpretations translation):

Since the Estate is deemed to be resident in Canada for the purposes of Division I (sections 150 to 168) of Part I of the Act, we are of the view that it has the right to make an election pursuant to paragraph 164(6)(c) in respect of capital losses incurred in its first taxation year, without distinction as to the nature of the property disposed of.

Respecting the recognition of the capital loss from the residence, the Directorate referred to E2008-0280751E5 and E2002-0148955, where CRA had stated that a capital loss from the disposition of a personal residence of the deceased was eligible under s. 164(6) if it was not personal use property to any beneficiary or a related person.

A factually non-resident, inter vivos, personal trust which has one resident beneficiary and no resident contributors was subject to s. 94 in its 2020 taxation year, in which it earned taxable income. However, no distribution of property occurred until a capital distribution of $100,000 was made to the resident beneficiary on December 30, 2022.

CRA illustrated the operation of the rule under s. 94(3)(d) for joint and several liability of the resident contributor for unpaid taxes of the trust for its 2020 taxation year, subject to limitation by the “recovery limit” provisions of ss. 94(7) and (8), by focusing on two dates: January 1, 2021 (i.e., just after completion of the trust’s 2020 taxation year); and December 31, 2022 (i.e., one day after the distribution). Of particular note was para. (a) of the recovery limit formula in s. 94(8), which totaled the various amounts which were, for example, paid to the particular person, here, the resident beneficiary.

The formula produced a nil result on January 1, 2021, and an amount of $100,000 on December 31, 2022. Accordingly, although on January 1, 2021, the resident beneficiary was jointly and severally liable for the taxes owing by the trust for its 2020 taxation year, CRA could not collect an amount from the resident beneficiary as of that date. It could, however, assess the resident beneficiary for an amount not exceeding $100,000 on December 31, 2022 given that the conditions in s. 94(7) were by assumption satisfied for the 2020 year – and this was so even if s. 94(3) had ceased to apply to the trust for its 2021 or 2022 taxation year.

A trust was settled in the U.S. with marketable securities having an adjusted cost base and fair market value of $100,000. The settlor moved to Canada and, following the 60-month period referred to in former s. 94(1)(b)(i)(A)(III), the ACB of the securities was stepped up to $180,000 under s. 128.1(1)(c) as a result of the trust being deemed to have become resident in Canada. The trust then disposed of the securities and realized capital gains of $100,000 and $20,000, and incurred gains tax of $10,000 and $2,900, for U.S. and Canadian purposes, respectively (but before taking into account any foreign tax credit in the case of the Canadian capital gains tax).

For purposes of determining the foreign non-business income tax credit of the trust, would the $10,000 of U.S. tax need to be pro-rated to reflect the $2,000 portion of the gain that is taxable in Canada (so that the credit would be reduced from $2,900 to $2,000)?

After noting that under s. 94(3)(b)(ii) there is no limiting wording similar to that in former s. 94(1)(c)(ii)(B) requiring that the foreign tax paid "can reasonably be regarded as having been paid in respect of that income" in order to qualify for the credit, CRA stated:

While Canada and the U.S. may have different rules for calculating the income from a particular source, the amount of foreign non-business income tax paid is not limited if the amount of income computed for Canadian tax purposes from that same source happens to be less. Accordingly… the foreign tax credit allowable pursuant to subsection 126(1) would be $2,900.

However, if s. 75(2) applied to attribute the gain of the trust to the beneficiary, no credit would be available to the beneficiary.

A non-resident trust (the “Trust”) took the position that its shares of various private non-resident corporations (“NRCos”) were not taxable Canadian property (“TCP”), so that it was deemed under s. 94(3)(c) to have acquired its NRCo shares at a cost equal to their fair market value (“FMV”). The only assets of the NRCos, other than any intercompany receivables, were shares in private operating corporations resident in Canada (“Opcos”). The Opcos held timber resource properties, Canadian real property, other properties not listed in the definition of TCP and, in some cases, shares of lower tier Opcos.

The Rulings Directorate indicated that its established position is that (i) the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the fair market value of the NRCo shares was derived directly or indirectly from the Canadian real property etc., and (ii) that for these purposes the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from the Canadian real property etc.

A downstream loan within the group is effectively ignored and is treated instead as increasing the FMV of the shares of the particular wholly-owned subsidiary. However, recognizing an upstream loan would result in double counting because the assets acquired by the parent out of the proceeds thereof would already be counted for purposes of the tests – so that the loan’s value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary. The treatment of a loan made to a sister depends on a range of factors but, generally, will be treated similarly to a downstream loan if that is reflective of the ultimate use of the funds, and otherwise generally will be recognized (if it is not part of a back-to-back loan made by the parent to a subsidiary).

CRA concluded that a non-resident trust that has never filed Canadian returns was deemed to be a resident trust under s. 94(3)(a) for a particular taxation year. Can the trust make an election for purposes of s. 94(3)(f) (so as to deem the creation of a “non-resident portion trust” to hold the non-resident portion of the taxpayer’s property) in a return for that year (namely, the “first taxation year” as described in s. (b)(i) of the s. 94(1) definition of “electing trust”) that was (1) filed before a CRA assessment of the year, or (2) filed after an arbitrary assessment by CRA of that year pursuant to s. 152(7)?

After noting that “a paragraph 94(3)(f) election cannot be filed separately from a return of income as to do so would not meet the necessary condition noted in paragraph (c) of the definition of ‘electing trust’,” the Directorate indicated, regarding the first scenario:

A paragraph 94(3)(f) election would be considered valid if it is filed with the return of income for the “first taxation year” even if that return is filed past its due date. …

Given the fact that a non-resident that receives a letter containing proposed assessed amounts would almost certainly make a valid paragraph 94(3)(f) election before an audit assessment is actually issued, it appears unlikely that such a non-resident would ever be prevented from making a valid election. This result appears to be contrary to the intention of the Department of Finance, as noted in the explanatory notes for “electing trust”.

Regarding the second scenario, the Directorate indicated that the making of a s. 152(7) assessment did not eliminate the taxpayer’s obligation to file a return and, therefore, would not “necessarily” preclude the election from being made.

In confirming that neither the non-resident portion trust nor the particular trust is required to file form T1135 under s. 233.3 where a deemed resident trust has elected to have s. 94(3)(f) apply, and after noting that the particular trust does not hold any foreign property, CRA stated:

A specified Canadian entity is defined by subsection 233.3(1) as a taxpayer resident in Canada with certain exceptions which are not applicable.. . Since the non-resident portion trust is not a deemed resident trust, it is not resident in Canada and is not a specified Canadian entity.

Subparagraph 94(3)(f)(ii) of the Act provides that all of the particular trust’s property that is part of the non-resident portion is deemed to be property of the non-resident portion trust and not to be property of the particular trust… . [A]s… the particular trust does not have any foreign property… it would not have any specified foreign property as defined by subsection 233.3(1)… .

Regarding the application of Part XIII to a non-resident trust that is deemed to be resident in Canada pursuant to s. 94 and which owns a Canadian rental property, CRA indicated that such trust is not subject to Part XIII tax on amounts paid or credited to it, but is not considered to be resident in Canada for the purposes of determining the liability of a person other than the trust to withhold and remit under s. 215 – so that there is still a requirement for the Canadian tenant(s) to withhold and remit Part XIII tax on the rent paid by them. Per s. 94(3)(g), to the extent that the amount on which the Part XIII tax is paid has been included in computing the trust’s income, the withholding amount is deemed to have been paid on account of the trust tax under Part I for the particular taxation year.

A discretionary family trust (the "Trust") with Canadian resident beneficiaries is deemed to be non-resident in Canada by s. 94(3)(a). If it receives a capital dividend from a Canadian-resident corporation held by it (Canco), could it treat the withholding as being on account of its Part I tax liability for the year (Q.1), or could it obtain a refund thereof (Q.2)? What if the Trust receives an ordinary dividend from Canco, and distributes it to a Canadian beneficiary so that a s. 104(6) deduction is claimed?

Q.1

CRA responded:

As paragraph 83(2)(b) provides that no part of the capital dividend "shall be included in computing the income of any shareholder…"..paragraph 94(3)(g) does not apply and the Trust cannot treat the amount as being paid on account of its Part I tax liability… .

Q.2

CRA responded:

[S]ubparagraph 94(3)(a)(viii) provides that…the Trust is exempt from Part XIII tax on amounts paid or credited to it. Given this exemption, an application for a refund of taxes withheld under subsection 227(6) may be appropriate… .

Q.3

CRA responded:

where a taxable dividend received by a deemed resident trust is paid or made payable to a beneficiary and the trust is entitled to a subsection 104(6) deduction (unrestricted by the application of subsections 104(7) to 104(7.1)), given that the dividend was included in income before the optional 104(6) deduction is taken, paragraph 94(3)(g) would apply such that any Part XIII taxes withheld in respect of that dividend will be treated as having been paid on account of the trust's liability for tax under Part I.. .

The Estate of a Canadian resident, with two of his children as (apparently non-resident) beneficiaries, was not resident in Canada by virtue of having a non-resident liquidator, but was deemed to be resident in Canada as described in s. 94(3)(a). The Estate's income included pension and third-party investment income on which there had been no withholding and a deemed dividend from shares (which were not taxable Canadian property) of a taxable Canadian corporation upon which Part XIII tax was withheld.

Head Office noted that although s. 94(3)(a)(viii) deemed the Estate to be resident in Canada for Part XIII tax liability purposes, s. 94(4)(c) required Part XIII withholding without regard to s. 94(3)(a)(viii). However, by virtue of s. 94(3)(g), the Part XIII tax withheld from the deemed dividend was deemed to have been paid on account of the Estate's tax under Part I for the year.