Section 94

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Administrative Policy

23 February 1998 T.I. 962967

The deemed disposition role in s. 104(4) applies to a trust that is deemed to be resident in Canada only by virtue of s. 94(1)(c)(ii) and whose only property is not taxable Canadian property (i.e., U.S. marketable securities). The 21-year period commences as of the date applicable in s. 104(4) and not on the date that the trust is deemed to become resident in Canada.

Where both s. 75(2) and s. 94(1) apply, s. 75(2) takes precedence.

A discussion of various double taxation issues ensues.

3 December 1997 T.I. 962276

RC noted that, notwithstanding a previous memorandum, it was now its position that "in circumstances where the conditions for the application of both subsection 94(1) and subsection 75(2) of the Act are fulfilled ... the provisions of subsection 75(2) of the Act will apply first".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 41

10 January 1996 External T.I. 5-940686 -

Specific rules set forth in s. 94(1) would generally take precedence over the general provisions of s. 75(2).

A non-resident discretionary trust would be taxable on a gain arising from the deemed disposition of trust property under s. 104(4) where the property owned by the trust is not excluded property (as defined in s. 108(1)).

Where a trust upon becoming a resident of Canada is deemed by s. 128.1(1) to have disposed of properties that are not excluded by virtue of ss.128.1(4)(b)(i) to (v), the resulting taxable capital gains will be included in income pursuant to s. 94(1)(c)(i)(B).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 75 - Subsection 75(2) 23

19 June 1992 Memorandum (Tax Window, No. 23, p. 10, ¶2145)

S.94(1)(d) applies to unit trusts established in Hong Kong as part of an estate plan under which a Canadian resident may acquire units on the death of a family member or may hold units as a result of the transfer of property to the trust, and the trustee does not have any discretion as to the amount of income or capital to be distributed to any particular beneficiary, but only discretion as to when such amounts are distributed.

June 1992 Hong Kong Seminar, Q. B.9 (May 1993 Access Letter, p. 226)

Where the trustee of a unit trust has the discretion as to when the amounts of income or capital are to be distributed to any particular beneficiary, but no discretion as to the amount of income or capital to be distributed, s. 94(1)(d) rather than (c) will apply.

15 January 1991 T.I. (Tax Window, Prelim. No. 3, p. 30, ¶1092)

Where the terms of the trust fixed the proportionate entitlements of the beneficiaries, discretion of the trustees as to the amount and timing of such pro rata distribution does not cause the trust to be considered discretionary and to fall within s. 94(1)(c).

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Cases

St. Michael Trust Corp. v. Canada, 2010 DTC 5189 [at 7361], 2010 FCA 309, aff'd sub nom Fundy Settlement v. Canada, 2012 DTC 5063 [at 6881], 2012 SCC 14

The two Canadian-resident principals of a Canadian-resident corporation ("PMPL"), who held shares of PMPL directly or through a Canadian holding company, caused a reorganization of PMPL such that those shareholdings of PMPL were replaced by preferred shares (largely fixed in value) and had Barbados trusts of which they or their family members were beneficiaries subscribe, for a nominal subscription price, for shares of new Canadian holding companies which, in turn, acquired common shares of PMPL for a relatively nominal subscription price.

In finding that these transactions entailed a transfer by the principals of property "directly or indirectly in any manner whatever" to the Barbados trusts for purposes of s. 94(1)(b), Sharlow, J.A. stated that this phrase was intended by Parliament to "deliberately ... capture every possible means by which the wealth and income earning potential represented by the shares of a Canadian corporation can move to a non-resident trust from a Canadian resident beneficiary of the trust or a person related to that beneficiary". Accordingly, notwithstanding the finding of the Tax Court to the contrary, it did not matter that this approach in effect involved looking through the new Canadian holding companies to find that the Barbados trusts were the recipients of the transferred property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) accessing Treaty residence not abusive 112
Tax Topics - Treaties - Income Tax Conventions - Article 4 82

new

Arm's Length Transfer

Administrative Policy

16 February 2012 External T.I. 2011-0430841E5 - U.S. Grantor Trusts

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.

Connected Contributor

Administrative Policy

20 August 2015 External T.I. 2015-0581681E5 F - Non-resident trust rules

Liechtenstein Foundation with Canadian-resident beneficiary not subject to s. 94(3)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Corporation Liechtenstein Foundation a trust 28

4 January 2013 External T.I. 2012-0448681E5 - s. 116 req. of NR-estates per draft NRT legis.

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.

(f)

Articles

Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012, p. 1583.

Relating awards to non-qualifying services (pp.1587-1588)

The inquiry is thus to determine whether any benefits to be provided by the trust relate to a single service that is non-qualifying service.

Typically, "services" are considered as relating to awards being granted by the employer, as opposed to particular assets held in a trust. For example, if an employee is granted a restricted share unit ("RSU") award that vests and pay our in three years, and the award is for future (as opposed to pre-grant) services, the services rendered during the period from the grant of an award to the vesting of an award are generally treated as the "services" to which the award relates. This may not necessarily correspond to any benefits to be distributed for that award by a trust.

Determining when services are non-qualifying (p. 1588)

If so, then the services rendered for an award may be partly "qualifying" and partly non-qualifying services. For example, an employee may be granted a new three-year vesting RSU award in the fourth year of his or her Canadian residency. The first two years of service following the date of grant may represent qualifying services (as they are within the 60-month holiday), but the portion of the benefit related to the period after the 60th month of Canadian residency is presumably attributable to a non-qualifying service, and would thus disqualify the trust from this exemption. On the other hand, if the award is to be viewed for services rendered in the year prior to the year of grant (with the three-year vesting period being merely a deferral), then the whole award should be treated as relating to qualifying services, even if the vesting occurs after the 60th month of Canadian residency.

(g)

Articles

Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012, p. 1583.

Predominantly single country requirement (p.1586)

Paragraph (g) of the definition of "exempt foreign trust" in subsection 94(1) of the Act provides an exemption for trusts operated exclusively for the purpose of administering or providing pension benefits that are primarily in respect of services rendered in the particular country (where the trust is resident) by non-resident persons. Such an exemption may cover many U.S. qualified plans (such as 401(k) plans) that are primarily for the benefit of U.S. employees. However, it may not cover many U.K. retirement plans that are established in Jersey or Guernsey for legitimate U.K. tax reasons, Further, it may also not cover, for example, French retirement plans of French multinational companies, where the French employees represent only 49% of the total worldwide employee population.

Resident Contributor

Administrative Policy

16 June 2014 STEP Roundtable Q. 11, 2014-0529831C6 - STEP - Q 11- Immigration trust exemption

immigration trust becomes resident effective January 1 of immigration year

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a) immigration trust becomes resident effective January 1 of immigration year 163

16 June 2014 STEP Roundtable, 2014-0529821C6 - Cancellation of Immigrant Trust

January 1 effective date where 60th month falls in 2014

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.

4 January 2013 External T.I. 2012-0448681E5 - s. 116 req. of NR-estates per draft NRT legis.

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.

Resident Portion

Articles

Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012, p. 1583.

Mobile employees/deficits and surpluses (p. 1589)

In many cases, however, mobile employees are providing services for the benefit of different employers during their career. They may be granted awards while under the direction and control of a Canadian employer, and then be transferred to the direction and control of a non-Canadian-related entity, Presumably, only the portion of an award related to services rendered to the Canadian entity, as determined under the sourcing principles discussed above, would form part of the "resident portion".

Even with respect to employees who only provide services to one (Canadian) entity, the challenge here is that specific contributions to the trust are not necessarily traceable to particular assets of the trust, not to particular (Canadian employee) beneficiaries of the trust. Some trusts may have surplus funding, so that the contributions exveed the eventual distributions to beneficiaries. Other trusts may have deficit funding, so that the contributions are vastly below what is required to fund the distributions to beneficiaries, Therefore, if we merely determined a "resident portion" by looking at the beneficial interests of the Canadian employee versus other beneficiaries at any particular time, such ratio may not reflect the actual contributions that have gone into the trust.

Valuation discount where risk of forfeiture (p. 1589)

As well, are all beneficial interests equal? If there are non-Canadian employee participants whose interest has vested, and is just awaiting distribution, and there are Canadian employee participants who have just received the grants, and who still have a significant risk of forfeiture, should there not be a discount for the risk that the Canadian employees may not receive a full distribution on their awards.

Subsection 94(1)

Exempt foreign trust

Paragraph (d)

Administrative Policy

14 June 2016 External T.I. 2016-0647951E5 - Exempt Foreign Trust

exempt foreign charitable trust must satisfy the Canadian common law tests

What is the meaning of “created exclusively for charitable purposes” in (d)(ii) of the definition of “exempt foreign trust” in s. 94(1)? CRA responded:

As the Act does not provide a definition of “charitable” or “charitable purposes,” we must rely on the definition of the term under the common law principles applicable in Canada… . [Accordingly] a purpose must fall within one or more of the four categories of charitable purposes established in Pemsel…, and must be for the benefit of the community or an appreciably important class of the community… . (footnote 3). …

[W]hen a foreign trust grants funds to other organizations…the recipient organization would have to be considered “charitable” according to Canadian common law. ...

[W]hen the charitable activities are carried out by an intermediary…the activities and the underlying resources provided must be subject to the direction and control of the trust… .

[I]n Guaranty Trust Co. of Canada…the Supreme Court of Canada confirmed that… the organization… must be created “exclusively” for those purposes. ...

[A] purpose of a charitable trust, other than a charitable purpose, that is merely a means to the fulfilment of its charitable purposes would not deprive, in itself, the trust of its exempt status… .

[A]charitable trust may conduct commercial activities to the extent that they remain incidental to and only serve as a means of furthering the exclusive charitable purposes of the organization… .

[A]n exempt foreign trust may accumulate and invest funds, so long as the accumulation and investments are incidental to and serve as a means of furthering the exclusive charitable purposes of the organization, rather than being an end in themselves.

Subsection 94(2) - Rules of application

Paragraph 94(2)(g)

Administrative Policy

16 June 2014 STEP Roundtable Q. 12, 2014-0523071C6 - STEP Q12 - Non-resident trust

resident estate as deemed contributor to non-resident trust

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(n) resident estate as deemed contributor to non-resident trust 190

26 June 2014 External T.I. 2013-0514771E5 - Residence of a trust

Canadian residence of estate taints non-resident trust beneficiary

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(n) Canadian residence of estate taints non-resident trust beneficiary 236
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) deceased individual is not a "resident" contributor 74

16 June 2014 STEP Roundtable Q. 12

resident estate as deemed contributor to non-resident trust established under Will

The Will of the resident deceased establishes a trust for the benefit of his U.S.- resident child and her non-resident issue. The Will is administered in Canada by the resident execuor. However 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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(n) resident estate as deemed contributor to non-resident trust established under Will 190

Paragraph 94(2)(k.1)

Articles

Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012, p. 1583.

Indirect provision of benefits for employment services provided to Canadian employees (p.1585)

As discussed, the NRT rules only apply if there is a resident contributor, That would certainly be the case where a Canadian subsidiary of a foreign parent has made contributions to a global EBP trust for the benefit of its employees. However, the rules extend the concept to (Canadian) employers where transfers are made (by any person) to the trust with the purpose or effect that may be reasonably considered to be to provide benefits (where immediate or future, absolute or contingent, or conditional or discretionary) for services rendered as an employee to a Canadian employer. For this purpose, the Canadian employer does not even have to bear any costs of the contributions to the trust (for example, through a reimbursement of the transferor under a recharge agreement).

Foreign employee seconded to Canada (p.1585)

Where the employee is seconded or transferred to the direction and control of the Canadian company; in such a case, it makes sense to treat the individual as providing services as an employee of the Canadian entity, even if he or she is still formally employed by, or even continues to be on the payroll of, the foreign entity.[f.n. 1...CRA...has adopted the "direction and control" test in other contexts... .]

In determining whether the actions of the employee trigger a permanent establishment in Canada for the foreign entity, or whether the costs borne by the Canadian entity through the recharge constitute "remuneration" for purposes of exempting the non-resident employee from Canadian tax under the personal (dependent) services provision (generally, Article 15) of a tax treaty.

Determining relationships between transfer rule and Canadian employee benefits (p.1586)

The deeming provision of paragraph 94(2)(k.1) of the Act requires a relationship between the transfers made (by any person) to a trust and the benefits to be provided to an employee of a Canadian person.

Say that a foreign parent has made contributions to a global EBP trust in 2010, at a time in which there were no awards made to employees of any Canadian entity. In 2013, an award is made to an employee of a Canadian entity, with the possibility of such award being satisfied by the assets of the trust, some of which may derive from assets contributed in 2010. As there was a contingent possibility in 2010 that the contributions may be used to satisfy awards to Canadian employees, does the Canadian employer become a resident contributor in 2010?

Allocation where treasury share funding obligation (p.1586)

Another factor complicating the analysis is that many global deferred compensation plans maintain a great deal of flexibility as to how awards will be settled, For example, many U.K. plans provide the foreign parent with the flexibility to settle any award through either newly issued or treasury shares delivered directly by the parent to the employee, or by shares (usually, but not always, acquired in the market) held by a trust, or by cash paid by the local employer entity.

For example, if the current value of all awards to a firm's global employees is $1,000,000, with say, the Canadian employees representing 1% of the total global employees at a particular time, and the trust only holds assets worth $200,000, who is to say which portion of that $200.000 will be used to satisfy the Canadian awards, if at all.

Paragraph 94(2)(n)

Administrative Policy

16 June 2014 STEP Roundtable Q. 12, 2014-0523071C6 - STEP Q12 - Non-resident trust

resident estate as deemed contributor to non-resident trust

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(g) resident estate as deemed contributor to non-resident trust 123

26 June 2014 External T.I. 2013-0514771E5 - Residence of a trust

Canadian residence of estate taints non-resident trust beneficiary

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(g) Canadian residence of estate taints non-resident trust beneficiary 143
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) deceased individual is not a "resident" contributor 74

16 June 2014 STEP Roundtable Q. 12

resident estate as deemed contributor to non-resident trust established under Will

The Will of the resident deceased establishes a trust for the benefit of his U.S.- resident child and her non-resident issue. The Will is administered in Canada by the resident execuor. However 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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(g) resident estate as deemed contributor to non-resident trust established under Will 190

Paragraph 94(2)(t)

Administrative Policy

24 February 2014 External T.I. 2013-0509111E5 - NRT ceasing to be a Deemed Resident

sale has immediate impact on residency

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."

Subsection 94(3) - Liabilities of non-resident trusts and others

Administrative Policy

26 June 2014 External T.I. 2013-0514771E5 - Residence of a trust

deceased individual is not a "resident" contributor

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. Before finding that the Trust is deemed to be resident in Canada under s. 94(2)(g) or (n), 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".

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(g) Canadian residence of estate taints non-resident trust beneficiary 143
Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(n) Canadian residence of estate taints non-resident trust beneficiary 236

11 October 2013 APFF Roundtable Q. 3, 2013-049281 F -

Question 3a - Factual dual residency

How will CRA apply the tiebreaker rules in the Canada-US Convention in the case of dual residency?

Competent authorities in each country shall attempt to reach an agreement under Article IV(4). The Canadian competent authority will consider (as a non-exhaustive list): the residency of the settlor and beneficiaries, the location of the trust property, the reason the trust was established in its jurisdiction, etc..

Although Article IV(4) obliges the authorities to attempt to resolve residency questions, it does not require them to actually reach a resolution. A failure to resolve a residency question may thus result in a dual residency.

Question 3b - Deemed dual residency in Canada under s. 94(3)

As s. 4.3 of the Income Tax Conventions Act prevails over the Convention, the Convention's tiebreaker rules cannot be applied where s. 94(3) deems a trust to be resident in Canada.

CRA considers Sharlow JA's remarks on s. 94 in St Michael Trust Corp., to the effect that s. 94 "falls short of displacing the treaty definition of residence" (St Michael at para. 87), to be obiter dicta.

Question 3c - Resolving deemed dual residency

The rules in s. 94 should generally ensure that a foreign tax credit will be available in the event of double taxation. CRA is willing to work with particular taxpayers "in the unlikely event" of double-taxation.

4 January 2013 External T.I. 2012-0448681E5 - s. 116 req. of NR-estates per draft NRT legis.

CRA, when asked whether a s. 116 certificate was required when an estate with American resident executors disposed of taxable Canadian property to Canadian resident beneficiaries where the testator was an American (or, alternatively a Canadian) resident, first addressed whether the trust would be deemed to be resident in Canada for various purposes under s. 94(3). CRA noted 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. Turning to the "resident beneficiary" requirement, which required that there be a "connected contributor," 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.

Articles

Peter Megoudis, "The Canadian Non-resident Trust Rules and Global Employee Benefit Plan Trusts", Taxation of Executive Compensation and Retirement (Federated Press), Vol. 24, No. 3, October 2012, p. 1583.

Distinguishing trust from agency (p.1584)

The NRT rules only apply to non-resident trusts. They thus presumably do not apply to other relationships, such as agency or nominee arrangements.

One possible test for distinguishing the two types of arrangements is the notion that "trusts" involve employer contributions whereas "agencies" involve employee contributions.

Hybrid trust/ custodial plan (p.1584)

Many UK sharesave plans have both a share purchase plan component (where the employee acquires ("investment" or "participating") shares on a monthly basis through a custodian, and receive dividends and voting rights immediately, with the ability of withdrawing such shares at any time), and a matching share component (where shares, together with dividend and voting rights, are only transferred to the employee at a later vesting date). …

It may be reasonable to view the custodian's holding of investment shares as an agency or bare nominee arrangement, and its holding of matching shares as more closely resembling that of a trust.

Jurisdiction without trust law (p.1585)

All of these issues are compounded when the foreign parent company, as well as the custodian, are residing in a jurisdiction that does not share the same concept of "trust".

Paragraph 94(3)(a)

Administrative Policy

29 May 2018 STEP Roundtable Q.14

effective date of deemed residency where NR contributor immigrates

(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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(10) a non-resident trust can be retroactively (going back 5 years) deemed to have been resident in Canada if a non-resident contributor immigrates 373

9 February 2017 External T.I. 2016-0657531E5 - Deemed resident trust and "designated beneficiary"

no application to Pt. XII.2

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 210 - Designated Beneficiary - Paragraph (a) s.94(3) trust can cause a trust of which it is beneficiary to be subject to Part XII.2 tax 114

10 June 2016 STEP Roundtable Q. 7, 2016-0634911C6 - Deemed Resident Trust and CCPC Status

CCPC status not included in s. 94(3)(a)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 125 - Subsection 125(7) - Canadian-Controlled Private Corporation control by a s. 94 trust does not produce CCPC status 86

18 June 2015 STEP Roundtable Q. 7a, 2015-0572141C6 - 2015 STEP– Q7-Deemed Res Trust-subsection 94(10)

retroactive application of s. 94(3)(a) to immigration trust to beginning of year

///?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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(10) retroactive application of s. 94(3)(a) to immigration trust to beginning of year 507

19 September 2015 STEP Roundtable, Q.7(b)

retroactive application of s. 94(3)(a) to immigration trust to beginning of year

An individual who becomes resident in Canada for the first time, and who has previously contributed property to a non-resident trust, will be considered a resident contributor, so that the trust would be deemed resident under s. 94(3).

CRA agreed that in these circumstances, s. 94(3)(a) deems the trust to be resident from January 1 of that taxation year, i.e., from a time preceding the individual becoming a Canadian resident.

16 June 2014 STEP Roundtable Q. 11, 2014-0529831C6 - STEP - Q 11- Immigration trust exemption

immigration trust becomes resident effective January 1 of immigration year

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - new - Resident Contributor immigration trust becomes resident effective January 1 of immigration year 163

26 November 2013 External T.I. 2013-0508931E5 - Form T1134

T1134 and T1135 and coming-into-force "CIF" provision

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.

12 February 2013 Internal T.I. 2012-0437211I7 F - NRT rules and subsection 164(6)

estate of resident deceased with one resident beneficiary was subject to s. 94(3)

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 164 - Subsection 164(6) s. 94 deemed resident trust could carry back under s. 164(6) re capital loss on non-TCP shares 306
Tax Topics - Income Tax Act - Section 54 - Personal-Use Property personal residence of deceased potentially would not be personal-use property to estate 108

Subparagraph 94(3)(a)(vi)

Administrative Policy

13 July 2016 External T.I. 2015-0608671E5 - Foreign Reporting Requirement under 233.4

no T1134 filing obligation where a s. 94 trust holds an interest in a non-resident corp through an LP

If a U.S.-resident trust resident to which s. 94 applies is a member of a U.S. partnership holding a U.S.-resident corporation, who is required to file the T1134? CRA considered that noone is, given inter alia that the trust is not deemed to be resident in Canada for s. 233.4(1)(c) purposes.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 233.4 - Subsection 233.4(1) - Paragraph 233.4(1)(c) deemed resident s. 94 NRT member of U.S. LP is not resident in determining whether the LP is a reporting entity 198

Subparagraph 94(3)(a)(viii)

Administrative Policy

25 February 2015 External T.I. 2014-0517511E5 - Withholding tax and deemed resident trust

recovering Part XIII tax on a capital dividend

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 obtain a refund of the withholding thereon?

After noting that s. 94(3)(g) would not permit the Trust to treat the withholding as paid on account of the Trust's Part I tax liability, CRA stated:

[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… .

See summary under s. 94(3)(g).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(g) Part XIII withholding on capital or taxable dividend then distributed by trust to resident beneficiaries can be recovered 257

Paragraph 94(3)(b)

Administrative Policy

28 May 2013 Internal T.I. 2013-0476381I7 - Deemed Resident Trusts & Foreign Tax Credit

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) no pro-ration of FTC by s. 94 trust where Canadian gain was smaller than US gain 283
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) no s. 20(12) deduction available where only a capital gain 148

Paaragraph 94(3)(c)

Administrative Policy

1 May 2017 Internal T.I. 2015-0624511I7 - 248(1)(e)(ii) of the definition of TCP

methodology for determining whether shares of NR corps indirectly holding some Cdn real property and resource properties through Opcos with interco loans were taxable Cdn property

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).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) upstream and downstream loans within a wholly-owned corporate group generally are to be treated differently/gross asset and proportionate value approach used 552

Paragraph 94(3)(f)

Administrative Policy

27 June 2016 External T.I. 2014-0532601E5 - Paragraph 94(3)(f) electing trust and form T1135

no T1135 filing required by non-resident portion trust (or by particular trust if it has no foreign property)

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)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 233.3 - Subsection 233.3(1) - Specified Canadian Entity non-resident portion trust not a specified Canadian entity 131

Paragraph 94(3)(g)

Administrative Policy

25 February 2015 External T.I. 2014-0517511E5 - Withholding tax and deemed resident trust

Part XIII withholding on capital or taxable dividend then distributed by trust to resident beneficiaries can be recovered

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.. .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a) - Subparagraph 94(3)(a)(viii) recovering Part XIII tax on a capital dividend 112

25 July 2014 Internal T.I. 2013-0513641I7 - Deemed resident trust under subsection 94(3)

required Part XIII withholding treated like Part I instalment

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.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(7.01) meaning of "maximum amount...deductible" 162
Tax Topics - Income Tax Act - Section 120 - Subsection 120(1) addition for s. 94 deemed trust 146

Subsection 94(5)

Articles

Robert E. Ward, "Twenty-One Years Is Not Enough: Avoiding Canada's 21-Year Rule with Trusts for U.S. Beneficiaries", Tax Management International Journal, 2017, p. 710

Use in U.S. of generation-skipping dynasty trusts (p. 711)

U.S. citizens and non-citizens who are domiciled in the United States ("U.S. persons") who make a generation-skipping transfer have a $5 million generation-skipping transfer tax exemption (indexed to $5.49 million for transfers occurring in 2017) to shelter such transfers from the generation-skipping transfer tax. By reliance on the GST exemption, U.S. persons can establish "dynasty trusts" which enable assets to be permanently removed from the U.S. gift, estate, and generation-skipping transfer tax systems…

[R]esidents of Canada (whether U.S. citizens or not may wish to utilize dynasty trusts in planning for U.S persons who will receive inter vivos or testamentary transfers of wealth….

Canadian resident can establish a dynasty trust for exclusively non-resdient beneficiaries holding non-Cdn-realty assets (p. 712)

Non-resident trusts settled by Canadian residents will not be subject to the 21-year rule unless the trust holds property subject to taxation by Canada under the provisions of the Tax Treaty. Although the Canadian resident settlor may be taxable on the transfer of assets to the trust as a disposition, no realization or recognition event will occur unless there is unrealized income or gain in the property with which the trust is settled. Because of the basis adjustment to the decedent's assets as a result of the decedent's death, little or no gain should be recognized on funding the trust with those assets (whether owned directly or indirectly through an alter ego or joint partner trust). The trust will not be deemed resident in Canada if the persons exercising control and management of the trust assets are not resident in Canada and if trust beneficiaries are limited to U.S. persons and the Canadian resident settlor is no longer alive. Consequently, a dynasty trust settled by a Canadian resident who is deceased will be subject to Canadian income taxation in general and the 21-year rule in particular only if the trust holds taxable Canadian property. If the trust is regarded as U.S. resident under the provisions of the Tax Treaty, Article XIII limits the taxable Canadian property subject to income taxation and the 21-year rule to real property situated in Canada owned directly or indirectly by the trust. Consequently residents of Canada are able to settle dynasty trusts for the benefit of U.S. family members that will be exempt from Canadian income taxation, including taxation of unrealized gain under the 21-year rule, for most assets in which trust corpus is invested.

Subsection 94(8.2)

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Taxation of Beneficiaries Resident in Canada", Chapter 4 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

Effect of ss. 94(8.1) and (8.2)

By deeming the relevant transfers and loans not to be arm's-length transfers (as otherwise defined in subsection 94(1)), they will be considered to be contributions made to the trust by the Canadian resident. To the extent that the Canadian resident is a resident contributor to the trust for the purposes of section 94, the trust is deemed to be resident in Canada pursuant to paragraph 94(3)(a), subject j:o the application of an exemption contained in section 94.

Subsection 94(10) - Contributor — resident in Canada within 60 months after contribution

Administrative Policy

29 May 2018 STEP Roundtable Q.14

a 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 (who are not successor beneficiaries as defined in s. 94(1)) and its contributor had made a contribution to the trust less than 60 months before becoming resident. Is the trust deemed to be resident for the five taxation years before the taxation year in which the individual became resident in Canada? If so, would CRA expect T3 income tax returns and foreign reporting forms, such as the T1 135 and the T1 134, to be filed for these previous years and would interest and late-filing penalties be applied to any tax owing by the non-resident trust for these prior years?

CRA indicated that all the advanced propositions were correct, and illustrated them in its first example respecting "Mr. X" as the contributor. The most relevant provision is s. 94(10), which has a lookback effect. Where s. 94(10) applies, one of the outcomes is that the trust is subject to Canadian tax for each of the taxation years.

The trust will also be subject to interest and penalties for each year for which a return was not filed, and it will be required to complete foreign reporting forms, T1135 and T1134, if applicable, for each of those years. Interest and penalties will also apply to the reporting for the relevant taxation years. S. 152(4)(b)(vii) allows for assessment or reassessment of tax, interest or penalties within an additional three years beyond the normal reassessment period to give effect to the application of s. 94.

CRA then provided two further examples respecting Mr. Z and Mr. Y as the contributors to illustrate the following propositions:

  • where the contributor was not a non-resident for 60 months prior to making the contribution (i.e., in the 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 s. 94(3) commencing in the taxation year during which the contributor made the contribution to the non-resident trust (i.e., 2013)
  • it is unnecessary for the contributor to have never been a resident of Canada before making the contribution to a non-resident trust for s. 94(10) to apply (e.g., Mr. Y became a non-resident in 2008, made the contribution in 2013 and became resident again in 2018).
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a) effective date of deemed residency where NR contributor immigrates 401

18 June 2015 STEP Roundtable Q. 7b, 2015-0572141C6 - 2015 STEP– Q7-Deemed Res Trust-subsection 94(10)

retroactive application of s. 94(3)(a) to immigration trust to beginning of year

///?p=37586#Q7b">19 June 2015 STEP Roundtable, oral Q.7(b)

Assume in January 2005, Mr. X became a non-resident of Canada, in July 2010, he made a contribution to a non-resident trust (the "Trust"), on March 2015, he became a resident of Canada and the Trust has Canadian resident beneficiaries who are not successor beneficiaries (as per s. 94(1)). Will the Trust be deemed to have become a resident trust with retroactive effect to 2010? Would it thereby be responsible for filing tax returns for up to five previous taxation years, furnishing T1134 and T1135s respecting its holdings, and paying income tax on any income of the trust, computed in accordance with Canadian rules, subject to foreign tax credit relief?

CRA noted that as X was non-resident for more than 60 months before the contribution - but returned to Canada within 60 months after the contribution - then s. 94(10) applies to all the post-contribution years, stating:

For the 2015 taxation year of Trust, Mr. X would be considered to have made the contribution to Trust at a time other than a non-resident time since Mr. X was a non-resident for more than 60 months before the contribution time but became resident in Canada within 60 months after the contribution time. As a result, Mr. X would be a connected contributor. Consequently, Trust would have resident beneficiaries, as defined in subsection 94(1). Therefore, Trust would be deemed to be resident in Canada for the 2015 taxation year. …

[S]ubsection 94(10) will deem Mr. X to have made the contribution to Trust at a time other than a non-resident time for each taxation year commencing with the taxation year during which Mr. X made the contribution to the Trust. Therefore, Trust will be deemed to be a trust resident in Canada for each taxation year commencing in 2010. This would result in Trust being deemed resident in Canada pursuant to subsection 94(3) for a total of six taxation years (2010 - 2015 inclusive).

…Trust will be required [by s. 94(3)(a)(vi)] to complete foreign reporting forms (T1135 and T1134), if applicable, for each taxation year commencing in 2010..[and will] be subject to Canadian tax by virtue of paragraph 94(3)(a) for each taxation year commencing in 2010.

Suppose instead that Mr. Z, a previous long term resident of Canada, became a non-resident in January 2007, in July 2010 made a contribution to a non-resident trust (the "Trust2") and in March 2015, became a resident of Canada – and that Trust2 has Canadian resident beneficiaries who are not successor beneficiaries. CRA stated:

[A]t the end of the 2010 taxation year, Trust2 would have a resident beneficiary…as there are beneficiaries of the trust that are resident in Canada and Mr. Z would be considered to be a connected contributor… because at the time the contribution was made, Mr. Z would not have been a non-resident of Canada for a period of 60 months before the contribution was made. Consequently, the contribution would not be considered to have been made at a non-resident time of Mr. Z. As a result, Trust2 would be deemed to be resident in Canada from 2010 onward without any retroactive application.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paragraph 94(3)(a) retroactive application of s. 94(3)(a) to immigration trust to beginning of year 122

Subsection 94(16)

Administrative Policy

13 June 2017 STEP Roundtable Q. 4, 2017-0695141C6 - U.S. grantor trust

election of US-citizen/Cdn-resident beneficiary of grantor trust so as to generate FTC

Mr. C, who is a Canadian resident and U.S. citizen, settled a revocable living trust for him and his family which, as a “grantor trust”, is disregarded for Code purposes, so that for Code purposes all trust income is that of Mr. C. However as Mr. C is a “resident contributor” to the trust, the trust is subject by virtue of s. 94(3) to Canadian income taxation on its worldwide income. Since the Code taxes are not payable by the trust, it cannot cannot claim a foreign tax credit or an s. 20(12) deduction. Could this mismatch be remedied by him electing under s. 94(16) so that the trust’s income will be attributed to him?

As Mr. C is the only contributor, he would report under s. 94(16)(a) 100% of the income earned by the trust. S. 94(16)(c) would deem such income to have a U.S. source for purposes of s. 126 and paras. (c) and (d). Thus, Mr. C can claim the foreign tax credit under s. 126(1), in respect of the foreign income that the trust designates under s. 94(16)(c). As para. (c) does not apply for purposes other than those specified, pursuant to s. 94(16)(b) Mr. C’s income under s. 94(16)(a) remains sourced to Canada for the purposes of s. 20(11), so that he canot cannot claim a deduction under s. 20(11). Finally, Mr. C may claim a deduction under s. 20(12) in respect of the US income tax he paid in respect of the income attributed to him under s. 94(16)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 126 - Subsection 126(1) dual-resident individual who is subject to direct U.S. tax on income from a s. 94(3) trust can generate a FTC if the trust income is annually distributed or he elects under s. 94(16) 493
Tax Topics - Income Tax Act - 101-110 - Section 108 - Subsection 108(5) - Paragraph 108(5)(a) income from factually U.S.-resident but s. 94(3) trust was U.S.-sourced 112