Roth IRA of a resident generally is FAPI (absent a Treaty exemption)
1.6 The taxation in Canada of a Roth IRA that is a trust is fact specific. Generally, the CRA would expect that a Roth IRA trust for an individual resident in Canada would satisfy the conditions in paragraph (h) of the definition exempt foreign trust in subsection 94(1) to be exempted from the application of the non-resident trust rules in section 94. In such a case, and assuming that the individual is the sole beneficiary, the individual will be required to include in income the trust’s foreign accrual property income pursuant to sections 94.2 and 95.
Subsection 94.2(2) - Deemed corporation
An exempt foreign trust (the "Trust") is deemed by s. 94.2(2) to be a non-resident corporation controlled by (and therefore a CFA of) a beneficiary resident in Canada, which is a financial institution under s. 142.2(1). Would the Trust, as a financial institution, be subject to the specified debt obligation and mark-to-market rules in ss. 142.2 to 142.6 in calculating its foreign accrual property income ("FAPI")? CRA stated:
[T]he Trust would be a CFA of that financial institution pursuant to subsection 95(1) and the Trust's FAPI would be determined as though it were resident in Canada and in accordance with the provisions of the Act pursuant to paragraph 95(2)(f). As a result, because a corporation that is controlled by a financial institution would be a financial institution under subparagraph (a)(iii) of the definition of "financial institution" in subsection 142.2(1), the Trust would be a financial institution and would, for purposes of computing its FAPI under section 95, be subject to the specified debt obligation and mark-to-market rules in sections 142.2 to 142.6.
See summary under s. 95(2)(f.14).
|Locations of other summaries||Wordcount|
|Tax Topics - Income Tax Act - Section 220 - Subsection 220(2.1)||potential relief from penalties where insufficient data for computing FAPI||191|
|Tax Topics - Income Tax Act - Section 233.5||potential relief from penalties where insufficient data for computing FAPI||195|
|Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f.14)||no stated accommodation for using proxy method where data unavailable||289|
Michael N. Kandev, Matias Milet, "Foreign Trusts", 2017 Annual CTF Conference draft paper
Whether s. 104(13) inclusion test is satisfied in case of foreign trust (p. 21)
[S]ubsection 94.2(3) provides for a deduction in computing the trust’s FAPI allocable to the affected beneficiary equal to that portion of FAPI that is included in the income of the beneficiary under subsection 104(13).
The relief from double taxation mechanism in subsection 94.2(3) is not without its technical challenges. First, a deduction from the trust’s income under paragraph 104(6)(b) is permitted only on “the amount that the trust claims”. A non-resident trust that is subject to subsection 94.2 (3) is one that is exempt from being deemed resident in Canada under section 94. Accordingly, it could be expected that such a trust will not file a Canadian tax return and will not be expressly claiming any deductions under the Act. If the trust does not claim a deduction for distributed income in a Canadian tax return, it is not clear based solely on a textual reading of the relevant provisions that there would be a paragraph 104(6)(b) deduction that can ground a subsection 104(13) income inclusion for the beneficiaries who received distributions. That uncertainty in turn would affect the availability of the double taxation relief in subsection 94.2(3), which reduces FAPI allocable to the affected beneficiary by the amount of the FAPI of the trust included in the beneficiary’s income under subsection 104(13). However, the concern can be diminished by a reading of the provision that takes purposive and contextual elements into account. Although not authoritative, the heading for subsection 94.2(3) is “Relief from double taxation”, and the Technical Notes to the provision state that “new subsection 94.2(3) ensures that amounts payable by the trust are not included in income twice”. Moreover, subsection 94.2(3) is flexibly worded, as it provides for a deduction from FAPI to be included in income under subsection 91(1) an amount equal to the FAPI amounts as “would reasonably be considered to have been ... included under subsection 104(13)”, and, arguably, it would be reasonable to consider that some of the trust’s distributed income would have been so included had the trust filed a Canadian tax return, in which case it is also reasonable to consider that the trust would have claimed a deduction under subsection 104(6) for such income. This is a plausible reading of the words of the statute and becomes even more so in light of the above-mentioned context and purpose.
It can thus be seen that a commercial trust with “fixed interests” may be able to escape deemed residence status under section 94, but where a Canadian resident or its controlled foreign affiliate is a beneficiary of such a trust, amounts may be required to be included in income in Canada in connection with such trust under section 94.1 or section 94.2.
|Locations of other summaries||Wordcount|
|Tax Topics - Income Tax Act - Section 94 - Subsection 94(2) - Paragraph 94(2)(k.1)||288|
|Tax Topics - Income Tax Act - Section 94.1 - Subsection 94.1(1) - Paragraph 94.1(1)(b)||292|