Income Tax Act Commentaries

Commentary: Section 94 — Non-Resident Trust Rules

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Overview

Section 94 deals with the taxation of non-resident trusts (NRTs).

In general, if a Canadian resident contributes property to a NRT (other than an “exempt foreign trust”), the NRT is deemed to be resident in Canada for a number of purposes, and the contributor (excepting electing contributors in respect of the NRT), the NRT and certain Canadian resident beneficiaries of the NRT may all become jointly and severally, or solidarily, liable to pay Canadian tax on the income of the trust.

More specifically, new section 94 divides the NRT into two notional portions.

  • The “resident portion” of the trust generally includes all property of the trust in respect of which there has been a contribution by a current or former resident of Canada, and certain other non-contributed amounts.
  • The “non-resident portion” of the trust generally includes all other property of the trust. The NRT generally is not taxed on income derived from its non-resident portion, unless the income is from certain Canadian sources.

In computing its income under the Act, the NRT will have the ordinary deductions available, under subsections 104(6) and (12), for certain amounts in respect of beneficiaries. After claiming any such deductions, the NRT will then have available a deduction in respect of amounts included in the income of an “electing contributor” in respect of the trust.

New section 94 is intended to apply to NRTs where the amount to be distributed to a beneficiary of the trust depends upon a discretionary power, but may also apply to a trust in which all interests are “fixed interests” if the trust is not an “exempt foreign trust” as defined in subsection 94(1) (which can include cases where the trust elects not to be an exempt foreign trust). The new rules are not intended to impact upon legitimate commercial trusts. In respect of these NRTs, existing paragraph 94(1)(d) is carried forward, with some modifications, as new section 94.2 of the Act. For more information, see the commentary on new section 94.2.

The English-language expression “jointly and severally” no longer exists in the civil law of the province of Quebec and has been replaced in that civil law with the expression “solidarily”. In the English-language version of section 94, the expression “solidarily” is added to the expression “jointly and severally”, which latter expression is maintained for common-law purposes. The French-language version of new section 94 uses only the expression “solidairement” as this expression is appropriate for both the civil and common-law. These changes ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces.

For more detail on filing obligations regarding returns of income, contact the Canada Revenue Agency (CRA).

The following table briefly summarizes section 94 and related rules.

Section 94 and Related Rules
IssueSummaryReferences
1. Which trusts are subject to the new NRT rules?A. In general, a trust (other than an exempt foreign trust) will be subject to tax for a taxation year as a trust resident in Canada if a contribution was made to the trust by a person (other than a recent immigrant to Canada or an exempt person) that is resident in Canada at a specified time (generally, the end of the year).s. 94(3) “exempt person” – s. 94(1) “exempt foreign trust” – s. 94(1) “contribution” – s. 94(1) and (2) “resident contributor” – s. 94(1) “specified time” – s. 94(1)
1. Which trusts are subject to the new NRT rules?B. In addition, a trust (other than an exempt foreign trust) will generally be subject to Canadian tax for a taxation year if there is a resident beneficiary under the trust. More specifically, if: a contribution was made by a person when the person was resident in Canada (or generally within a 60-month period before the person became resident in Canada or within a 60-month period after the person ceased to be resident in Canada), where the contributing person is an individual (other than a trust), at the specified time the individual had been resident in Canada for more than 60 months, and at the specified time there is a person (other than a successor beneficiary) that is resident in Canada and is a beneficiary under the trust.s. 94(3) and (10) “beneficiary” – s. 94(1) “contribution” – s. 94(1) and (2) “connected contributor” – s. 94(1) “non-resident time” – s. 94(1) “resident beneficiary” – s. 94(1) “specified time” – s. 94(1) “successor beneficiary” – s. 94(1)
2. Who is responsible for the tax payable by a NRT?The trust is required to pay its Canadian taxes. If it fails to do so, each contributor (other than an electing contributor) referred to in 1(A) and/or each beneficiary referred to in 1(B) is jointly and severally or solidarily liable with the trust for the tax. However, the amount recoverable from a person that is only a beneficiary is limited to the beneficiary’s recovery limit. Relief is also available in some cases for a contributor whose contribution to the trust is insignificant relative to other contributions made to the trust.Jointly and severally, or solidarily, liable: paragraphs s. 94(3)(d) and (e) Limit to amount recoverable – s. 94(7) Recovery limit – s. 94(8) Determination of fair market value – s. 94(9) Definitions – s. 94(1)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust’s tax liabilities be calculated?A. Canadian rules generally apply to the trust as if the trust were resident in Canada throughout the year for the purpose of computing the trust’s income.s. 94(3)(a) and 94(4)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust’s tax liabilities be calculated?B. Explicit rule treats the trust as becoming resident in Canada, with resulting adjustment to cost amount of property.s. 94(3)(c)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust’s tax liabilities be calculated?C. The trust’s income will be reduced by amounts attributed to electing contributors in respect of the trust.“electing contributor” – s. 94(1) s. 94(16) and (17)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust’s tax liabilities be calculated?D. If the trust elects to have its non-resident portion deemed to be the property of a non-resident portion trust, its income for Canadian tax purposes will be computed without regard to its income from the non-resident portion.“electing trust” – s. 94(1) “non-resident portion” – s. 94(1) “resident portion” – s. 94(1) s. 94(3)(f) “non-resident portion trust” – s. 94(3)(f)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust’s tax liabilities be calculated?E. Part XII.2 does not apply to the trust. Explicit exemption from Part XIII tax on amounts distributed to the trust, although payer must still withhold and trust is granted a credit for such amounts withheld. Part XIII tax will generally apply to amounts (other than exempt amounts) paid or credited by the trust to non-resident beneficiaries.s. 94(3)(a)(viii) and (ix), (3)(g) and (4)(c) and 215 and 216(4.1) “exempt amount” – s. 94(1)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust’s tax liabilities be calculated?F. Flow-through of income to resident and non-resident beneficiaries permitted, subject to special rules in the event that Canadian-source income is distributed to non-residents.s. 94(3)(a)(ix) and 104(7.01) – special rules
4. What is the treatment of an investment in a commercial NRT?Where the trust is a paragraph (h) exempt foreign trust, a Canadian investor with a 10% or more interest in the trust (together with persons not dealing at arm’s length with the investor), or who has contributed restricted property to the trust, will be subject to a modified foreign accrual property income (FAPI) regime under section 94.2. Other investors may be subject to the offshore investment property regime in section 94.1 of the Act. Remittances out of a trust’s current year income remain taxable in the investor’s hands under subsection 104(13), with relief from double taxation provided.“exempt foreign trust” – s. 94(1) “fixed interest” – s. 94(1) “mutual fund” – s. 94(1) s. 94(15)(a)(ii) and (c) s. 94.1 and 94.2

Definitions

ITA 94(1)

New subsection 94(1) of the Act defines a number of expressions that apply for the purpose of section 94.

“arm’s length transfer”

A loan or transfer of property by a person or partnership in respect of a trust will generally not be considered a “contribution” to the trust where the loan or transfer is an “arm’s length transfer”. In these circumstances, that loan or transfer generally will not cause the transferor to be considered to be a “contributor” to the trust. Accordingly, subsection 94(3) does not apply to a non-resident trust as a consequence only of an “arm’s length transfer” in respect of the trust unless a deemed contribution or deemed contributor rule applies. For more information on the definitions “contribution” and “contributor” in subsection 94(1), see the commentary on those definitions.

The definition “arm’s length transfer” also is relevant in applying some of the rules in subsection 94(2).

If property transferred or loaned is “restricted property”, the transfer or loan will not be an arm’s length transfer. For more information on the definition “restricted property”, see the commentary on that definition and subsection 94(14).

A transfer or loan will be an arm’s length transfer only if it is reasonable to conclude that none of the reasons (determined by reference to all the circumstances including the terms of a trust, an intention, the laws of a country or the existence of an agreement, a memorandum, a letter of wishes or any other arrangement) 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. Thus, for example, if any person receives a beneficial interest in a non-resident trust as a result of a particular transfer or loan of property or if it is reasonable to conclude that one of the reasons for the transfer was to facilitate the acquisition of such an interest, the transfer will not be an arm’s length transfer.

Under subparagraphs (b)(i) and (ii) of the definition, an arm’s length transfer includes, in general terms, an arm’s length return on an investment (conferred by the entity in which the investment is made) and certain payments made by a corporation on a reduction of the paid-up capital in respect of shares of a class of the corporation’s capital stock.

Under subparagraph (b)(iii) of the definition, an arm’s length transfer includes a transfer in exchange for which the recipient transfers or loans property to the transferor, or becomes obligated to so transfer or loan such property, and for which it is reasonable to conclude

  • having regard only to the transfer and the exchange that the transferor would have been willing to make the transfer if the transferor dealt at arm’s length with the recipient, and
  • that the terms and conditions, and circumstances, under which the transfer was made would have been acceptable to the transferor if the transferor dealt at arm’s length with the recipient.

An arm’s length transfer described in subparagraph (b)(iii) will include most purchases and sales made to and by persons dealing at arm’s length with one another. It may also include a repayment of a loan provided that the amounts of any interest and principal repaid were amounts that the transferor would have been willing to pay if the transferor dealt at arm’s length with the trust.

Under subparagraph (b)(iv) of the definition, an arm’s length transfer includes a transfer that is made in satisfaction of an obligation that arose because of a transfer to which subparagraph (b)(iii) applied, if

  • the transferor would have been willing to make the transfer if the transferor dealt at arm’s length with the recipient, and
  • the terms and conditions, and circumstances, under which the transfer was made would have been acceptable to the transferor if the transferor dealt at arm’s length with the recipient.

Under subparagraph (b)(v) of the definition, an arm’s length transfer includes a transfer that is a payment of an amount owing by the transferor under a written agreement the terms and conditions of which, when entered into, were terms and conditions that, having regard only to the amount owing and the agreement, would have been acceptable to the transferor if the transferor dealt at arm’s length with the recipient.

Under subparagraph (b)(vi) of the definition, an arm’s length transfer includes a transfer that is a payment made before 2002 to a trust, to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, in repayment of or otherwise in respect of a particular loan made by the trust, corporation or partnership, as the case may be, to the transferor. The conditions that must be met in order to qualify as an arm’s length transfer described in subparagraph (b)(vi) of the definition are similar to the circumstances prescribed by former section 5909 of the Income Tax Regulations (the “Regulations”).

Finally, under subparagraph (b)(vii) of the definition, an arm’s length transfer includes a transfer that is a payment made after 2001 to a trust, to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, in repayment of or otherwise in respect of a particular loan made by the trust, corporation or partnership, as the case may be, to the transferor in circumstances where either

  • the payment is made before 2011, and the parties would have been willing to enter into the particular loan if they dealt at arm’s length with each other, or
  • the payment is made before 2005 in accordance with fixed repayment terms agreed to before June 23, 2000.

The definition “arm’s length transfer” generally applies to trust taxation years that end after 2006. However, where a trust elects, by notifying the Minister of National Revenue in writing on or before its filing-due date for its taxation year that includes the day on which the amending legislation introducing section 94 is assented to, the definition “arm’s length transfer” will be read without reference to a loan or transfer of property that is made in a taxation year that begins before 2003 and is identified in the election. This electing provision recognizes that the definition “arm’s length transfer” in the new rules does not have an equivalent under existing subsection 94(1) of the Act. In particular, a non-resident trust considered resident under the existing law by reason of existing subsection 94(1) might not, in the absence of such an election, continue to be deemed resident under new subsection 94(3), which would result in the change in residency rules in subsection 128.1(4) applying. The election, which is found in the coming-into-force provision of the amending legislation, effectively permits a trust to elect to continue to be deemed resident.

“beneficiary”

Under paragraph (a) of the definition “beneficiary” in subsection 94(1), a beneficiary under a trust includes a person or partnership beneficially interested in the trust. For greater certainty, where a partnership is a beneficiary under a trust, each of its partners is also a beneficiary under the trust by reason of paragraph 248(25)(c) of the Act.

Under paragraph (b) of the definition “beneficiary”, a beneficiary under a trust also includes a person that would be beneficially interested in the trust if the reference in subparagraph 248(25)(b)(ii) of the Act to

(A) “any arrangement in respect of the particular trust” were read as a reference to “any arrangement (including the terms or conditions of a share, or any arrangement in respect of a share, of the capital stock of a corporation that is beneficially interested in the particular trust) in respect of the particular trust”, and

(B) “the particular person or partnership might” were read as a reference to “the particular person or partnership becomes (or could become on the exercise of any discretion by any person or partnership), directly or indirectly, entitled to any amount derived, directly or indirectly, from the income or capital of the particular trust or might”.

As a result, the shareholders of a corporate beneficiary would typically be considered beneficiaries of a trust for the purposes of sections 94 and 94.2 of the Act.

For the purposes of the Act, the expression “beneficially interested” has the meaning assigned by subsection 248(25) of the Act.

“closely held corporation”

The definition “closely held corporation” is relevant to the definition “restricted property” and subsection 233.2(2) of the Act. For more information on the definition “restricted property” in subsection 94(1) and subsection 233.2(2) of the Act, see the commentary on those provisions. Paragraph 94(15)(a) is an anti-avoidance provision that applies in determining whether a corporation is a closely held corporation at any time. For more detail, see the commentary on that provision.

A closely held corporation, at any time, means a corporation, other than a corporation in respect of which

  • there is at least one class of shares of its capital stock that includes shares prescribed for the purpose of paragraph 110(1)(d) of the Act;
  • it is reasonable to conclude that at that time, in respect of each class of shares of the corporation’s capital stock that are shares prescribed for the purpose of paragraph 110(1)(d), shares of the class are held by at least 150 shareholders each of whom holds shares, of the class, that have a total fair market value of at least $500 – i.e., in general terms, the shares must be widely-held; and
  • it is reasonable to conclude that at that time, in no case does a particular shareholder (or the particular shareholder together with any other shareholders with whom the particular shareholder does not deal at arm’s length) hold shares of the capital stock of the corporation
    • that would give the particular shareholder (or the particular shareholder together with those other shareholders with whom the particular shareholder does not deal at arm’s length) 10% or more of the votes that could be cast under any circumstance at an annual meeting of shareholders of the corporation if the meeting were held at that time, or
    • that have a fair market value of 10% or more of the fair market value of all of the issued and outstanding shares of the corporation.

“connected contributor”

The definition “connected contributor” is relevant in determining whether a beneficiary is, at a particular time, a “resident beneficiary” (as defined in new subsection 94(1)) under a non-resident trust. Under new paragraph 94(3)(d) of the Act, such a resident beneficiary can, to an extent, be liable for the trust’s income tax. For more information, see the commentary on subsections 94(3) and (7) to (10), subparagraph 152(4)(b)(vi) and subsections 160(2.1) and (3).

A connected contributor at a particular time is any person, including a person that has ceased to exist, that is a “contributor” (as defined in new subsection 94(1)) to the trust at that time, other than

  • an individual who was resident in Canada for a period of, or periods the total of which is, not more than 60 months (but not including a trust or an individual who before that time was never non-resident), or
  • a person all of whose contributions to the trust made at or before that time occurred at a “non-resident time” (as defined in new subsection 94(1)) of the person.

For more information on the definitions “contributor”, “resident beneficiary” and “non-resident time” in subsection 94(1), see the commentary on those definitions.

In the context of the definition “connected contributor”, reference should also be made to paragraphs 94(2)(a), (c), (d) and (f) to (m) (which generally extend the circumstances in which a transfer is considered to occur for the purposes of section 94), paragraphs 94(2)(n) to (q), subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94 and may apply to deem a person or partnership to be a connected contributor to a trust), and paragraphs 94(2) (r) to (v) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94). Reference should also be made to subsection 94(10), which applies where a contributor becomes resident in Canada within 60 months after making a contribution to a trust.

“contribution”

Where a “contribution” is made at or before a particular time to a non-resident trust by a person or partnership, that person – or in the case of a partnership, a person that is a member of that partnership – will generally be considered to be a “contributor” at the particular time and, in certain cases (excluding, for example, electing contributors), will be jointly and severally or solidarily liable under subsection 94(3) for the trust’s income taxes. For more detail on the expression “solidarily ”, please refer to the introductory commentary above on new section 94. For more information on subsection 94(3), see the commentary on that subsection.

Under paragraph (a) of the definition, a “contribution” to a trust by a particular person or partnership means a loan or transfer of property (in this commentary referred to as a “transfer”) by the person or partnership to the trust (other than an “arm’s length transfer”, as defined in new subsection 94(1)).

Under paragraphs (b) and (c) of the definition “contribution”, a contribution is also considered to have been made by a particular person or partnership where

  • the particular person or partnership makes a particular transfer (other than an “arm’s length transfer”) as part of a series of transactions or events that includes another transfer (other than an arm’s length transfer), to the trust, by another person or partnership; or
  • the particular person or partnership becomes obligated to make a particular transfer (other than a transfer that would, if it were made, be an “arm’s length transfer”) as part of a series of transactions or events that includes another transfer (other than an arm’s length transfer), to the trust, by another person or partnership.

In these circumstances, the other transfer is considered to be a contribution to the trust by the particular person or partnership only to the extent that the other transfer can reasonably be considered to have been made in respect of the particular transfer or the particular person or partnership’s obligation to make the particular transfer, as the case may be. In either case, a contribution is considered to be made at the time of the other transfer.

There are a number of rules that have the effect of expanding the application of the definition “contribution”. See the commentary on paragraphs 94(2)(a) to (m) (which generally extend the circumstances in which a transfer is considered to occur for the purposes of section 94), and paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94). See also the commentary on paragraphs 94(2)(r) to (v), which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94.

The definition “contribution” applies to all loans and transfers, irrespective of when made.

“contributor”

A “contributor” to a trust at any time means 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” (within the meaning assigned by subsections 94(1) and (2)) to the trust. The definition “contributor” is significant primarily for the purposes of the definitions “resident contributor”, “resident portion” and “connected contributor” in subsection 94(1) and subsection 94(16). For more information, see the commentary on those definitions and on the definition “exempt person”.

Reference should be made in this context to paragraphs 94(2)(a) to (m) (which generally extend the circumstances in which a transfer is considered to occur for the purposes of section 94), paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2) (r) to (v) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

Note that although a partnership is not considered to be a contributor in respect of contributions made by the partnership to a trust, persons that are members of the partnership are considered to have also made those contributions to the trust and, therefore, are contributors to the trust in respect of those contributions.

“electing contributor”

The definition “electing contributor” is relevant in applying the rules for attributing, under subsections 94(16) and (17) of the Act, trust income to a resident contributor. An electing contributor to a trust means a resident contributor to the trust who has elected to be attributed the electing contributor’s share of the trust’s income. For this purpose, the trust’s income is determined after taking into account allocations to beneficiaries (i.e., after deducting amounts under subsections 104(6) and (12) of the Act) and without reference to any income earned by the associated non-resident portion trust (if the trust has elected to have its non-resident portion treated as a separate trust). For more information on “non-resident portion trust”, see the commentary on paragraph 94(3)(f) and for more information on the definitions “resident contributor” and “resident portion” in subsection 94(1), see the commentary on those definitions.

In order for an election to be valid, it must be made to have subsection 94(16) apply to the contributor for the taxation year in which the election is made and for all subsequent taxation years, and it must be filed with the Minister of National Revenue on or before the contributor’s filing-due date for that first taxation year. A valid election must also include the trust’s account number assigned by the Minister of National Revenue (i.e., the number found in box 14 of the T3 information slip and also identified as the “Trust account number” on the first page of the trust’s T3 return of income), and evidence that the contributor notified the trust, no later than 30 days after the end of the trust’s taxation year that ends in the first year for which the election is to have effect, that the election would be made.

For more detail on the effect of making an election to be an electing contributor, see the commentary on subsections 94(7), 94(16) and 94(17).

“electing trust”

The definition “electing trust” is relevant in determining whether property held in the non-resident portion of a deemed resident trust is considered to be held in a separate trust. In order for an election by a trust to be an electing trust to be valid, it must be filed with the Minister of National Revenue on or before the trust’s filing-due date for its first taxation year in which it holds property that is at a time in the year part of its non-resident portion and throughout which it is deemed by subsection 94(3) to be resident in Canada. Once made, the election is valid for that taxation year and for all subsequent taxation years. For more detail on the effect of making an election to be an electing trust, see the commentary on paragraph 94(3)(f) and on the definitions “resident portion” and “non-resident portion” in subsection 94(1).

“exempt amount”

The expression “exempt amount” is relevant in determining whether Part XIII tax applies to a non-resident person in respect of an amount paid or credited after 2003 by a trust to which subsection 94(3) applies. In general terms, Part XIII tax will not apply to such amounts if they are exempt amounts.

Three kinds of amounts may qualify as an exempt amount in respect of a particular taxation year of a trust. The first is any amount paid or credited (within the meaning assigned by Part XIII) by the trust before 2004.

The second is an amount that is paid or credited by the trust and referred to in paragraph 104(7.01)(b) in respect of the trust for the particular taxation year. For more detail on paragraph 104(7.01)(b), see the commentary on that provision.

The third type of exempt amount arises only in respect of trusts created before October 30, 2003 and to which no contributions have been made on or after July 18, 2005. In respect of such trusts, an exempt amount also means an amount (other than an amount included in computing an exempt amount in respect of any other taxation year of the trust) that is described in subparagraph 212(1)(c)(i) and paid in the particular taxation year (or within 60 days after the end of the particular taxation year) by the trust directly to a qualifying beneficiary under the trust. In this regard, a qualifying beneficiary means a beneficiary (determined without reference to subsection 248(25)) who is a natural person none of whose interests as a beneficiary under the trust was ever acquired for consideration (determined by reference to subsection 108(7)).

For more detail on subsection 108(7), see the commentary on that provision.

“exempt foreign trust”

An “exempt foreign trust” includes a number of different types of non-resident trusts that are exempt from deemed Canadian residence under new subsection 94(3) of the Act. The expression refers to the following types of non-resident trusts:

(a) a non-resident trust the current income (determined with reference to amended subsection 108(3)) or capital from which can be provided only to one or more physically or mentally infirm dependent individuals, provided that each such individual is at all times that they are a beneficiary under the trust during the trust’s current taxation year, non-resident, and that any property settled on the trust could reasonably be considered, at the time it was settled, to be necessary for the maintenance of those individuals;

(b) a non-resident trust created as a consequence of the breakdown of a marriage or common-law partnership of two individuals, the current income (determined with reference to amended subsection 108(3)) or capital from which can be provided only for the maintenance of non-resident beneficiaries of the trust who, during that marriage or common-law partnership, were either

  • children of both of the individuals, if the beneficiaries are under 21 years of age (or under 31 years of age and enrolled in a specified educational institution); or
  • one of those individuals.

Under this exemption, each contribution to the trust must have been to provide for the maintenance of those children or a former spouse or common-law partner of the relationship. In the case of contributions to provide for the maintenance of a former spouse or common-law partner of the relationship, those contributions must be an amount paid that would be a “support amount” (as defined in subsection 56.1(4) of the Act) if the amount had been paid directly to the former spouse or common-law partner;

(c) a non-resident trust that is an agency of the United Nations, certain non-resident trusts that own or administer a prescribed university the student body of which ordinarily includes students from Canada, a non-resident trust to which her Majesty in right of Canada has made a gift in the trust’s current taxation year or at any time in the preceding calendar year, or a non-resident trust established pursuant to the International Convention on the Establishment of an International Fund for Compensation for Oil Pollution Damage, 1992, or any protocol to that Convention ratified by the Government of Canada;

(d) certain non-resident trusts established exclusively for charitable purposes (as those purposes are defined under the laws of Canada);

(e) a non-resident trust that is governed by an employee profit sharing plan (as defined in subsection 248(1)), by a retirement compensation arrangement (as defined in subsection 248(1)), or, by a foreign retirement arrangement (as defined in subsection 248(1));

(f) certain foreign trusts established to provide benefits in respect of services provided by employees or former employees, if at all times that the trust exists, it is operated exclusively for the purposes of providing benefits in respect of those employees or former employees, and throughout its current taxation year the trust

  • is governed by an employee benefit plan (including a foreign pension plan) or described in paragraph (a.1) of the definition “trust” in subsection 108(1) of the Act (commonly referred to as health and welfare trusts),
  • is maintained for the benefit of natural persons, the majority of whom are non-resident, and
  • provides only benefits in respect of qualifying services, as defined in subsection 94(1) (or, as provided in the coming-into-force provision, only in respect of taxation years that end before 2009, benefits in respect of particular services rendered before November 9, 2006 to an employer by an employee if the employee had a right before November 9, 2006 to receive the benefits in respect of the particular services pursuant to a written agreement entered into before November 9, 2006, and (where the employee was resident in Canada on November 9, 2006), a copy of which was filed with a prescribed form with the Minister of National Revenue by or on behalf of the employer no later than April 30 of the first calendar year that begins after November 9, 2006;

(g) a non-resident trust (other than a prescribed trust or a trust described in paragraph (a.1) of the definition “trust” in subsection 108(1)) that at all times since it was created has been operated exclusively for the specific purposes described below, is resident in a particular country other than Canada and has been exempt – because it is operated for these specific purposes – from paying income tax to the government of that country. There is no intent to prescribe any trust at this time from the potential application of this provision. The specific purposes are administering or providing superannuation or pension benefits, where those benefits are primarily in respect of services rendered in that particular country by natural persons who were non-resident at the time the services were rendered – as a result, certain trusteed foreign pension plans or similar arrangements are intended to qualify as an exempt foreign trust under this provision;

(h) a non-resident trust (other than a trust that files an election with the Minister of National Revenue not to be an exempt foreign trust for the taxation year in which the election is made and for each subsequent taxation year) whose only beneficiaries with rights to receive directly from the trust any of the income or capital of the trust are beneficiaries that hold fixed interests (as defined in subsection 94(1) of the Act) in the trust and one of the following applies:

  • there are at least 150 direct beneficiaries under the trust each of whom holds fixed interests in the trust worth at least $500,
  • all fixed interests in the trust are listed on a designated stock exchange and were traded on a designated stock exchange on at least 10 days in the 30 immediately preceding days,
  • each outstanding fixed interest in the trust was either
    • issued by the trust for at least 90 per cent of the interest’s proportionate share of the net asset value of the trust’s property at the time the interest was issued, or
    • acquired for fair market value at the time the interest was acquired, or
  • the trust is governed by a Roth IRA within the meaning of section 408A of the United States Internal Revenue Code or a plan or arrangement created after September 21, 2007 that the Minister agrees is substantially similar to a Roth IRA, and that is substantially subject to the Code(in this context, the reference to the Minister means the Minister of National Revenue, acting as competent authority under the authority of the Convention between Canada and the United States of America with respect to Taxes on Income and on Capital); or

(i) a non-resident trust that is a prescribed trust.

Paragraph (h) of the definition “exempt foreign trust” is intended to apply to non-resident investment trusts that are truly commercial. Under section 94.2, if a resident beneficiary holds, together with persons not dealing at arm’s length with the resident beneficiary, 10% or more of the fixed interests in a trust described by paragraph (h) of the definition exempt foreign trust, the resident beneficiary is required to include in income a participating percentage of the trust’s FAPI (determined as if the trust were a corporation). If section 94.2 does not apply in respect of an interest in the trust, section 94.1 may instead apply to require the beneficiary to include an amount in income. For more information on sections 94.1 and 94.2 of the Act, see the commentary on those provisions. For more information on related anti-avoidance rules, see the commentary on subsection 94(15).

“exempt person”

The definition “exempt person” is relevant to the definitions “contributor” and “resident beneficiary” under subsection 94(1) of the Act. Generally, an exempt person means a person exempt by subsection 149(1) of the Act from paying tax on that person’s taxable income, Her Majesty in right of Canada or a province, certain federal or provincial pension or workers compensation administrators, and intermediaries wholly owned by such entities. For greater certainty, an exempt person includes a trust or a corporation resident in Canada and that is described in paragraphs 4802(1)(c) to (d) of the Income Tax Regulations, including a trust or corporation that is identified in an order or regulation that is made under the authority of an Act of Parliament or the legislature of a province. Exempt persons are neither contributors to a trust nor resident beneficiaries under a trust for the purposes of sections 94 and 94.2.

The definition “exempt person” also includes mutual fund trusts and mutual fund corporations that meet the definition “mutual fund” in subsection 94(1). Although it is generally expected that neither a mutual fund trust nor a mutual fund corporation would be making a contribution to a non-resident trust otherwise than in the context of making an investment in an “exempt foreign trust” as defined by paragraph (h) of that definition in subsection 94(1), a mutual fund is not to be considered a contributor to a non-resident trust for the purpose of section 94. The purpose of providing a mutual fund with an exemption from contributor status is to relieve the significant compliance burden that might otherwise arise in determining whether each of its investments in a non-resident trust is made in a non-resident trust that meets the conditions required to be an exempt foreign trust. A mutual fund will, however, be subject to section 94.1 or section 94.2 if the conditions in those provisions are met with respect to the mutual fund’s interest in a particular non-resident trust. For more information, see the commentary on the definition “mutual fund” in subsection 94(1).

“exempt service”

The definition “exempt service” is relevant to paragraph 94(2)(f), which deems the provision of certain services (other than exempt services) to be a transfer of property.

An exempt service means a service rendered at any time by a person or partnership (the “service provider”) to, for or on behalf of, another person or partnership (a “recipient”) if either

  • the recipient is at that time a trust and the service relates to the administration of the trust, or
  • the following conditions apply in respect of the service; namely

(i) the service is rendered in the service provider’s capacity at that time as an employee or agent of the recipient,

(ii) in exchange for the service, the recipient transfers or loans property or becomes obligated to transfer or loan property, and

(iii) it is reasonable to conclude

(A) having regard only to the service and the exchange, that the service provider would have been willing to carry out the service if the service provider had dealt at arm’s length with the recipient, and

(B) that the terms, conditions, and circumstances under which the service was provided, would have been acceptable to the service provider if the service provider had dealt at arm’s length with the recipient.

An exempt service that relates to the administration of the trust is not limited to services provided by a trustee of the trust, and may include legal, accounting and similar services provided in connection with the administration of the trust. However, where legal, accounting or similar services are provided in connection with a service provided by the trust, such services would not relate to the administration of the trust.

“fixed interest”

The expression “fixed interest” is relevant in applying paragraphs 94(2)(q) and (r), paragraph (h) of the definition “exempt foreign trust” in subsection 94(1), paragraph 94(14)(b), the anti-avoidance provisions in subsection 94(15), and section 94.2 of the Act. These provisions are intended to apply only to commercial trusts.

A fixed interest at any time of a person or partnership in a trust means an interest of the person or partnership as a beneficiary under the trust (determined without reference to subsection 248(25) of the Act) if none of the income or capital of the trust to be distributed in respect of any interest in the trust depends on the exercise, or the failure to exercise, by any person or partnership of any discretionary power. For this purpose, a discretionary power excludes a power that

  • conforms to normal commercial practices in respect of a trust,
  • is consistent with terms that would be acceptable to the beneficiaries under the trust if the beneficiaries were dealing with each other at arm’s length, and
  • the exercise of, or failure to exercise, the power does not materially affect the value of an interest as a beneficiary under the trust relative to the value of other such interests under the trust.

This exclusion recognizes that in the context of a commercial trust, a discretion with respect to the timing of distributions does not change the rights to income and capital in respect of any of the interests in the trust. This is so even if a beneficiary (the “seller”) were to sell their interest to another beneficiary (the “purchaser”), such that an amount that would have been payable to the seller is instead paid to purchaser (the seller would presumably have been compensated for this in determining the proceeds of disposition of the interest). However, if the discretion with respect to the timing of distributions is such that the trustee may choose which beneficiary would be entitled to a particular distribution (i.e., where payments made before a specific date would be payable to one beneficiary and payments made after that date would be payable to another beneficiary), the beneficial interests in the trust would not be fixed interests. For greater certainty, beneficial interests in a trust the terms of which provide a person or partnership with a power to appoint new beneficiaries or to vary the beneficial interests in the trust would not be fixed interests.

“joint contributor”

The definition “joint contributor” is relevant in applying the rules for attributing, under subsections 94(16) and (17) of the Act, trust income to a resident contributor where, in respect of a given contribution to the trust, there is more than one contributor. In this circumstance, a joint contributor refers to each person that made (including a person that is deemed to have made) the contribution to the trust.

For more information on contributions, see the commentary on the extended meanings of transfers, loans and contributions in subsection 94(2), and the commentary on the definition “contribution” in subsection 94(1).

“mutual fund”

The definition “mutual fund” means a mutual fund corporation or a mutual fund trust, as those terms are defined in the Act, but does not include such a trust or corporation if certain statements or representations have been made by it or by a promoter or other representative of the mutual fund trust or mutual fund corporation in respect of the acquisition or offering of an interest in that trust or corporation. In particular, a mutual fund trust or mutual fund corporation will not qualify as a mutual fund, and thus will not qualify as an exempt person, if statements or representations are made to the effect that the tax payable on the income, profit or gains earned in respect of one or more of its properties that is either an interest in a non-resident trust, or an interest that derives its value from such an interest, will be less than, or is expected to be less than, the tax that would have been payable if the income, profits or gains from that property had been earned directly by a person who acquired an interest in the trust or corporation.

The definition “mutual fund” is relevant in determining whether a mutual fund trust or mutual fund corporation is considered to be a contributor to a non-resident trust. For more detailed information on the effect of this determination, see the commentary on the definitions “exempt person” and “contributor”.

“non-resident portion”

The non-resident portion of a trust is defined by reference to the resident portion of a trust. Essentially, the non-resident portion of a trust constitutes all property held by the trust that is not part of the resident portion of the trust. Under paragraph 94(3)(f) of the Act, a trust may elect to treat its non-resident portion as a separate trust that is not deemed to be resident in Canada.

Specifically, if a trust elects in writing for its first taxation year in which it is deemed resident in Canada by reason of subsection 94(3) to have its non-resident portion be treated as a separate trust (referred to as the non-resident portion trust), the trust is treated as if it were two trusts, one that is deemed resident in Canada and one that is not resident in Canada for that taxation year and each subsequent taxation year.

For more information on the definition “resident portion” in subsection 94(1) of the Act, see the commentary on that definition. For more information on the meaning of “non-resident portion trust” and consequences of transfers between the resident portion and non-resident portion, see the commentary on paragraph 94(3)(f) and the definition “electing trust” in subsection 94(1) of the Act.

“non-resident time”

The definition “non-resident time” is relevant in determining whether a contributor to a trust is a “connected contributor” and whether the extended transfer (“look-through”) rule in paragraph 94(2)(l) applies in determining whether a person or partnership has made a contribution to a trust.

The “non-resident time” of a person in respect of a contribution to a trust and a particular time means a time (referred to in this commentary as the “contribution time”) at which the person made a contribution to a trust, that is before the particular time and at which the person was non-resident (or not in existence). However, such a time will qualify as a non-resident time only if the person was non-resident (or not in existence) throughout a specified period.

(i) General rule

In general (subject to the specific exceptions discussed below), the specified period is the period that begins 60 months before the contribution time and ends at the earlier of 60 months after the contribution time and the particular time.

The measurement of the specified period by reference to any particular time is meant to ensure that the contributing person and the trust may treat the contribution time as a non-resident time for the purposes of applying subsection 94(3) at a specified time (as defined in subsection 94(1)) in respect of the trust for a taxation year of the trust (generally, the end of that taxation year) if at the end of that particular year the contributor still has not become resident in Canada within the 60-month period after the contribution time.

However, subsection 94(10) ensures that such a contributor will, for the purposes of the definition “connected contributor”, be considered to have made the contribution at a time other than a non-resident time if the contributor becomes resident in Canada within the 60-month period after the contribution time. In such a case, at each such specified time in respect of the trust for a taxation year of the trust (generally, the end of each of those taxation years) following the contribution, there would be a connected contributor to the trust and, if there were a resident beneficiary under the trust, subsection 94(3) would also apply in respect of those years.

Amended subparagraph 152(4)(b)(vi) of the Act ensures that a reassessment of a taxpayer arising out of the application of subsection 94(10) may be undertaken by the CRA within 3 years after the end of the taxpayer’s normal reassessment period for the taxpayer’s relevant taxation year.

(ii) Contributions made before June 23, 2000

As indicated in the coming-into-force provision for new section 94 of the Act, where the contribution time occurs before June 23, 2000, the specified period is the period that begins 18 months before the end of the trust’s taxation year that includes the contribution time and ends at the earlier of 60 months after the contribution time and the particular time. In effect, 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 at least 18 consecutive months before the contribution was made, and remained non-resident for at least another 60 consecutive months after the contribution.

(iii) Contributions made on and as a consequence of death

For contributions made by an individual who was resident in Canada immediately before their death to a trust or estate that arose on and as a consequence of the individual’s death, the specified period will start 18 months before the individual’s death and will end 60 months after the contribution time. As a result of the application of paragraph 94(2)(j), the contribution will be deemed to have been made immediately before death with the result that it will not have been made at a non-resident time. Contributions made by an individual who was not resident in Canada immediately before their death to a trust or estate that arose on and as a consequence of their death will generally be considered to have been made at a non-resident time provided that the individual was not resident in Canada at any time in the 18-month period that began before their death since the individual will not be in existence during the portion of the specified period that follows their death.

(iv) Notional contributions made after a person’s death

A contribution made to a trust that arose on, and as a consequence of, an individual’s death will be considered to have been made at a non-resident time provided that the individual was not resident in Canada at any time during the 18 months before their death. If any of paragraphs 94(2)(a), (c), (k) to (l) or (n) applies to deem an individual to have made a contribution at a time when some other person has made a contribution to the trust, and the individual is not in existence at the time that the contribution is made, the individual’s deemed contribution will be considered to have been made at a non-resident time provided that the individual was not resident in Canada at any time during the 18 months before their death.

Example 1

Marie has never been resident in Canada. Upon her death in 2011, her property was transferred to a trust that is non-resident in Canada for the benefit of her adult children, one of whom is currently resident in Canada. No other property is contributed to the trust.

Results

1. Since Marie was not resident in Canada for the 18 months before her death and not in existence for the 60 months following her death, the contribution is considered to have been made at a non-resident time.

2. Although one of the beneficiaries is resident in Canada, that beneficiary is not a resident beneficiary for the purposes of these rules, and the trust is not deemed to be resident in Canada. If, at some time in the future, the trust is resettled or the property is otherwise transferred to a new trust, Marie will be deemed to be a contributor to the new trust by reason of new paragraph 94(2)(n). However, since Marie will either have been non-resident or not in existence for the 60 months before and after that transfer to the new trust, Marie’s deemed contribution will be made at a non-resident time. Paragraphs 94(12) to (13) would have no application to the new trust because none of the conditions in subsection 94(11) will be met with respect to the trust created on Mary’s death (since Mary was the only contributor to the original trust). Consequently, the new trust will not be deemed resident even if one or more of the beneficiaries are resident in Canada at that time.

For more information on subsections 94(10) to (13) and amended subparagraph 152(4)(b)(vi), see the commentary on those provisions.

“promoter”

The definition “promoter” is relevant in applying paragraph 94(2)(s) and in applying the new definition “mutual fund” in subsection 94(1).

Paragraph 94(2)(s) provides that a transfer to a trust will not be considered to be a contribution where certain conditions (described in that paragraph) are met. For the purpose of paragraph 94(2)(s), a promoter means a person or partnership that establishes, organizes or substantially reorganizes the undertakings of the trust.

The definition “mutual fund” is relevant to the definition “exempt person” in subsection 94(1) and to section 94.2. For the purpose of the definition “mutual fund”, a promoter means a person or partnership that establishes, organizes or substantially reorganizes the undertakings of the trust, as well as a person or partnership who in the course of a business sells or issues, or promotes the sale, issuance or acquisition of an interest in a mutual fund corporation or mutual fund trust, acts as an agent or advisor in respect of the sale or issuance, or the promotion of the sale, issuance or acquisition of, an interest in a mutual fund corporation or mutual fund trust, or accepts, whether as a principal or agent, consideration in respect of an interest in a mutual fund corporation or mutual fund trust. For more information on paragraph 94(2)(s) and the definition “mutual fund”, see the commentary on that paragraph and that definition.

“qualifying services”

The definition “qualifying services” is relevant in applying paragraph (f) of the definition “exempt foreign trust” in subsection 94(1).

In general terms, “qualifying services” are

  • services rendered by an employee of an employer while the employee was non resident,
  • services rendered to an employer other than services that were rendered primarily in Canada, services rendered in connection with a business carried on by an employer in Canada, or a combination of these services,
  • services rendered in a particular calendar month by an employee of the employer which employee
    • was resident in Canada no more than 60 months during the 72 month period that ends at the end of the particular month, and
    • became a member of, or a beneficiary under the plan or trust under which benefits in respect of the services may be provided (or a similar plan or trust for which the plan or the trust was substituted) before the end of the calendar month following the month in which the employee became resident in Canada, or
  • any combination of services that are qualifying services described above.

For more detail on certain transitional rules for qualifying services, see the commentary on paragraph (f) of the definition “exempt foreign trust” in subsection 94(1).

“resident beneficiary”

Under subsection 94(3), a particular trust (other than an exempt foreign trust) is treated as resident in Canada for a particular taxation year of the trust if there is a resident beneficiary under the particular trust at a “specified time” (generally, the end of the particular year). Under paragraph 94(3)(d), each resident beneficiary is jointly and severally or solidarily liable with the particular trust for the particular trust’s income tax liabilities under the Act for the particular year. For further information with respect to the expression “solidarily ”, please refer to the introductory commentary on new section 94. See also the commentary on subsection 94(3).

A resident beneficiary at a particular time under a trust is a person (other than a person that is at that time an “exempt person” or a “successor beneficiary” in respect of the trust) that, at that time, is a beneficiary under the trust, if, at that time,

  • the person is resident in Canada; and
  • there is a “connected contributor” to the trust.

The expressions “connected contributor”, “exempt person”, “specified time” and “successor beneficiary” are defined in subsection 94(1). For further information, see the commentary on those definitions.

“resident contributor”

Under subsection 94(3), a trust (other than an exempt foreign trust) is treated as resident in Canada for a particular taxation year of the trust if there is a “resident contributor” to the trust at a “specified time” in respect of the trust for the particular taxation year (generally, the end of the particular year). Under paragraph 94(3)(d), a “resident contributor” to a trust, other than an electing contributor to the trust, can be jointly and severally or solidarily liable with the trust for the trust’s income tax liabilities under the Act for the particular year. For further information with respect to the expression “solidarily”, please refer to the introductory commentary above on new section 94.

A “resident contributor” to a trust at any time means a person that is, at that time, resident in Canada and a “contributor” (as defined in new subsection 94(1)) to the trust. However, an exemption from treatment as a resident contributor is provided for a contributor who is:

  • an individual who has been resident in Canada for a period of, or periods the total of which is, not more than 60 months (but not including an individual who before that time was never non-resident); and
  • an individual, if the trust is an inter vivos trust that was created before 1960 by a person who was non-resident when the trust was created and the individual made no contribution after 1959 to the trust.

In the context of this definition, reference should also be made to paragraphs 94(2)(a), (b) and (d) to (m) (which extend the circumstances in which a transfer is considered to occur for the purposes of section 94), paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(c) and (r) to (v) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

“resident portion”

The expression “resident portion” is relevant to determining which property of an electing trust is considered in computing the Canadian income tax liability of a trust that is deemed by subsection 94(3) of the Act to be resident in Canada for a taxation year. If a trust that is deemed by subsection 94(3) to be resident in Canada is not an electing trust (i.e., it does not elect to have the property held in its non-resident portion treated as a separate trust), the rules under subsection paragraph 94(3) of the Act will apply to it without regard to paragraph 94(3)(f), such that the expression “resident portion” will not be relevant to determining which property of the trust is considered in computing its Canadian income tax liability.

In general, where a trust is an electing trust, contributions of property to the trust will form part of the resident portion of the trust to the extent that they were made by current or former residents of Canada. More specifically, paragraph (a) of the definition provides that all property held by the trust in respect of which a contribution has been made by a “resident contributor” or, if there is a current resident beneficiary under the trust, by a “connected contributor”, will be a part of the resident portion of the trust. Therefore, if a contribution of property is made jointly by a resident contributor and a non-resident contributor (whether in fact, or by reason of a deeming provision), the property will form part of the resident portion. However, for clarification, property that is held by a contributor in common or in partnership and that is contributed to the trust will form part of the resident portion of the trust only to the extent that the contributor so held the property. This contemplates that a particular property held in common or in partnership immediately before it was contributed to the trust be notionally divided, such that part of the property will form part of the resident portion and part of the property will form part of the non-resident portion of the trust according to the extent to which contributions were made by resident contributors and (if there are current resident beneficiaries under the trust) connected contributors to the trust, and by persons who are not connected or resident contributors to the trust in respect of the property.

If a non-resident makes a contribution within 60 months of becoming resident in Canada, then the contribution will form part of the resident portion as of the date of the contribution by operation of subsection 94(10). For more information on the effect of subsection 94(10) on electing contributors, see the commentary on subsection 94(16).

Paragraph (a) of the definition also provides a set of application rules for determining which property held by the trust forms part of the resident portion under paragraph (a) where the relevant contribution is as a result of a notional transfer under any of paragraphs 94(2)(a), (c), (d) or (f) of the Act. Subparagraph (a)(ii) of the definition has the effect of allocating such property to the resident portion of the trust if it is not already a part of that portion.

In particular, clause (a)(ii)(A) of the definition concerns contributions that result from a deemed transfer to the trust under paragraph 94(2)(a). Clause (a)(ii)(A) of the definition provides that, in the case of an increase in the fair market value of a property held by the trust because of the application of clause 94(2)(a)(ii)(A) of the Act, that property will form part of the resident portion of the trust. Clause (a)(ii)(A) also provides that, in the case of a decrease in a liability or potential liability of the trust because of the application of clause 94(2)(a)(ii)(B) of the Act, the trust must select a property, that would not otherwise be included in the resident portion of the trust and that has a fair market value at least equal to the absolute value of the decrease in the liability or potential liability of the trust, that will be allocated to the resident portion of the trust. Failing such a selection by the trust, the Minister of National Revenue may select an appropriate property. If the absolute value of the decrease in the trust’s liability or potential liability is greater than the fair market value of all property held in the non-resident portion, all of the property in the non-resident portion would be transferred to the resident portion.

Clause (a)(ii)(B) of the definition concerns contributions that result from a deemed transfer to the trust under paragraph 94(2)(c). In the case of such a contribution, clause (a)(ii)(B) provides that property described by subparagraph 94(2)(c)(ii), i.e., property held by the trust, is to be allocated to the resident portion of the trust.

Clause (a)(ii)(C) of the definition concerns contributions that result from a deemed transfer to the trust under paragraph 94(2)(d). If a particular person or partnership that is not the trust provides an undertaking of any kind, including a guarantee, covenant or agreement, to ensure the repayment of a loan or indebtedness incurred by the trust and that is treated as a contribution to the trust such that paragraph (a) of the definition applies, clause (a)(ii)(C) of the definition provides that property acquired by the trust as a result of such an undertaking will form part of the resident portion of the trust. Note that where all or part of such financial assistance is not a contribution to the trust described by paragraph (a) of the definition “resident portion”, that financial assistance may still be relevant in determining whether property is part of the trust’s resident portion under paragraph (b) of the definition. However, paragraph (b) and clause (a)(ii)(C) of the definition do not operate to allocate more than 100 per cent of a particular property held by the trust to its resident portion.

Clause (a)(ii)(D) of the definition concerns contributions that result from a deemed transfer to the trust under paragraph 94(2)(f). If paragraph 94(2)(f) deems a transfer of property to have been made to a trust as a result of services provided by a person resident in Canada and that person is deemed to have made a contribution as a result of that deemed transfer, clause (a)(ii)(D) of this definition provides that the trust must select a property, that would not otherwise be included in the resident portion of the trust and that has a fair market value at least equal to the fair market value of the services deemed to have been contributed to the trust, that will be allocated to the resident portion of the trust. Failing such a selection by the trust, the Minister of National Revenue may select an appropriate property. If the fair market value of the services provided is greater than the fair market value of all property held in the non-resident portion, all of the property in the non-resident portion would be transferred to the resident portion.

Paragraph (b) of the definition provides a rule to determine the circumstances under which property acquired by a trust (or any property substituted for that property) as a consequence of a loan or other indebtedness that is not a contribution to the trust is to be included in the resident portion. If the loan or other indebtedness is considered to be a contribution to the trust, the rule in paragraph (a) will apply to determine what portion, if any, of the property acquired by way of indebtedness is included in the resident portion.

If property is acquired partly by means of a loan or other indebtedness that is not a contribution to the trust, and partly by some other means, this rule applies only to the part of the property that was acquired by way of a loan or indebtedness that is not a contribution to the trust. For example, if the trust acquires property for $100,000 and finances the acquisition with a $40,000 loan, this rule will apply to determine what part of the four-tenths of this property is to be included in the resident portion. The other paragraphs in this definition will determine what portion, if any, of the six-tenths of the property is to be included in the resident portion.

The part of any property acquired by way of indebtedness that is not a contribution to the trust is included in the resident portion if any of the following conditions are met:

  • the indebtedness is secured on any property that forms part of the trust’s resident portion (other than the property acquired by way of the indebtedness);
  • it is reasonable to conclude, at the time the indebtedness is incurred, that the trust will be required to use any part of the property of its resident portion to repay the loan or indebtedness (other any portion of the property that is acquired by way of this particular indebtedness); or
  • a person resident in Canada or a partnership of which a person resident in Canada is a member has become obligated, either absolutely or contingently, to effect any undertaking including a guarantee, covenant or agreement to ensure the repayment, in whole or in part, of the indebtedness, or has provided any other financial assistance in respect of the indebtedness.

The first condition includes the property acquired if it is secured by resident portion property (ignoring the property itself to avoid circularity).

The second condition complements the first and will be met if it reasonable to conclude, at the time the indebtedness is incurred, that the trust is not able to repay the indebtedness, including any interest payable on that indebtedness, based solely on the property acquired by way of this particular indebtedness and any assets held in its non-resident portion (taking into account any liability or obligation outstanding in respect of those assets. For this purpose, the property acquired by way of the particular indebtedness does not include any property that will be substituted for it, or any income generated by such property.

If the third condition is met and clause (a)(ii)(C) does not require the property acquired by way of the loan to be included in the resident portion, paragraph (b) of the definition requires that trust select property to be included in the resident portion equal to the property acquired by way of loan. However, paragraph (b) and clause (a)(ii)(C) of the definition do not operate to allocate more than 100 per cent of a particular property held by the trust to its resident portion.

Paragraph (c) of the definition includes in the resident portion of the trust, property that is not described by any of paragraphs (a), (b) and (d) of the definition to the extent that it is derived, directly or indirectly in any manner whatever, from property described in those paragraphs. Under paragraph (c), such property would include, but not be limited to, income accumulating in the trust and income earned on such accumulating income, capital gains (i.e., the tax-free portion of a capital gain), and insurance proceeds in respect of which the insurance premiums were funded in whole in part by property from the resident portion of the trust.

Paragraph (d) of the definition provides that the resident portion of the trust will also include property to the extent that it is substituted for property described in paragraphs (a) to (c) of the definition. In this context, paragraph (d) is informed by subsection 248(5) of the Act such that property substituted for substituted property within the meaning of paragraph 248(5)(a) will also form part of the resident portion of the trust. If a trust acquires property in substitution for a particular property, a part of which is held in its resident portion and the other part is held in its non-resident portion, the substituted property would be apportioned between the trust’s resident portion and non-resident portion in the same ratio as the apportionment of the particular property immediately before it was disposed of by the trust.

For more information on the definitions “connected contributor”, “electing trust”, “resident contributor” and “non-resident portion” in subsection 94(1), see the commentary on those definitions.

Example 1

1. In 2004, Mary, who has never been resident in Canada, settled a trust that is factually resident in Country X. The trust is for the benefit of Donna (who has always been resident in Canada and is Mary’s daughter) and Donna’s family (all of whom have always been resident in Canada). The settled amount consisted of a contribution of $395,000 to the trust. The $395,000 is held in a foreign bank account. From 2004 to 2007, the trust earns $5,000 in interest on the foreign bank account balance and this interest remains in the bank account.

2. On January 1, 2008, Donna contributed $10,000 cash to the trust. The $10,000 was deposited into the trust’s foreign bank account. For 2008, the trust earns $500 in interest on the foreign bank account balance and this interest remains in the bank account.

3. On January 1, 2009, the trust withdrew $50,000 from the bank account to acquire a guaranteed investment certificate issued by a non-resident financial institution. The GIC provides a 6% annual return (simple interest). The $3,000 earned annually on the GIC is accrued and will be payable on the redemption of the GIC. On January 1, 2009, the trust also withdrew $60,000 from the bank account and used the funds to acquire all of the shares in a corporation, Corporation A. As of January 1, 2009, the remaining $300,500 of trust property remains in the trust’s bank account. For 2009, the trust earns $500 in interest on the foreign bank account balance and this interest remains in the bank account.

4. On May 15, 2010, Donna makes a gift of $150,000 in cash to Corporation A. Because of that gift, the fair market value of the trust’s shares in Corporation A increases at the time of the gift. For 2010, the trust earns $500 in interest on the foreign bank account balance and this interest remains in the bank account.

5. On May 30, 2011, the trust borrows $200,000 from a non-resident commercial lender. No security is required in respect of that loan. The loan is not a contribution to the trust. The trust uses $100,000 of the loan proceeds to open a business that will operate from a non-resident location. Donna will use her expertise to run the business, but will accept no compensation for her services. The fair market value of her services to the business is $30,000. The trust uses the other $100,000 of loan proceeds to acquire shares in another corporation, Corporation C. For 2011, the trust earns $500 in interest on the foreign bank account balance and this interest remains in the bank account.

6. On July 15, 2011, the trust disposes of all of its shares of Corporation A for $250,000 in proceeds and invests the proceeds in shares of another corporation, Corporation B.

7. Although the trust is factually resident in Country X, it is not required to pay any income tax to Country X.

8. Donna validly elects to be an electing contributor and the trust validly elects to have its non-resident portion treated as a separate trust for all relevant taxation years.

9. Assume that: (1) at all times all funds are held and all amounts are expressed in Canadian dollars, (2) none of the non-resident portion property gives rise to taxable income earned in Canada, (3) the only attribution rule, under Canadian income tax provisions, that may apply in respect of the trust is that under subsection 94(16), and (4) the trust makes no distributions or payments to its beneficiaries at any time.

Results

2004-2007

1. There is neither a resident contributor or connected contributor to the trust at any time in its 2004 to 2008 taxation years and, therefore, is not deemed to be resident in Canada under subsection 94(3) of the Act for any of those taxation years.

2008

2. Donna is a resident contributor and connected contributor to, and a resident beneficiary under, the trust at the end of its 2008 year. The remaining beneficiaries are also resident beneficiaries under the trust. Therefore, the trust is deemed to be resident in Canada under subsection 94(3) for its 2008 taxation year. Since the trust is deemed resident for its 2008 taxation year (and not for its immediately preceding year), paragraph 94(3)(c) of the Act deems the trust to have disposed of each property for proceeds equal to their fair market value immediately before the end of its 2007 taxation year and reacquired the property for the same amount (since none of the property is property described in subparagraph 128.1(1)(b)(i) to (iv)). In this case, the fair market value of the property of the trust (i.e., represented by the balance on deposit in its foreign bank account) is the same as that property’s original cost and there is no adjustment to the cost base of the trust’s property at that time.

3. At the beginning of 2008, the property held in the trust’s non-resident portion is comprised of the $400,000 of cash held on deposit in the foreign bank account (referred to in the remaining analysis as “Property A”). Donna’s 2008 contributed property of $10,000 (referred to in the remaining analysis as “Property B”), which is also on deposit in the foreign bank account, is included in the trust’s resident portion as of January 1, 2008.

4. Because the trust has elected in its return of income for its 2008 taxation year to treat the property held in its non-resident portion as being held in a separate trust, its 2008 income from its non-resident portion property is ignored for Canadian tax purposes. The trust’s $500 interest for 2008 on deposit in its bank account represents property derived from both Property A and Property B, and is included in the trust’s resident portion to the extent that it is derived from Property B or if it is property that is substituted for such property. Assume that in this case, the trust determines that of that $500 property, $12 represents property (referred to in the remaining analysis as “Property B-1”) derived from Property B . The remaining $488 of interest forms part of the trust’s non-resident portion (referred to in the remaining analysis as “Property A-1”). Thus, the trust’s income for Canadian tax purposes for 2008 is $12 (ignoring Donna’s status as an electing contributor).

5. At the end of 2008, the trust’s resident portion consists of Properties B and B-1.

2009

6. Donna remains a resident contributor to the trust at the end of its 2009 year. Therefore, the trust is deemed to be resident in Canada under subsection 94(3) for its 2009 taxation year.

7. For 2009, no contributions were made to the trust. The trust must, however, determine which of the properties that it acquired in 2009 was substituted for one or more of Properties A, A-1, B and B-1. In this case, the trustee determines that the GIC (referred to in the remaining analysis as “Property A-2”) and the shares of Corporation A (referred to in the remaining analysis as “Property A-3”) were properties substituted for part of Property A. The trust’s $500 interest for 2009 on deposit in its bank account represents property derived from Properties A, A-1, B and B-1, and is included in the trust’s resident portion to the extent that it is derived from Property B or B-1, or if it is property that is substituted for such property. Assume that in this case, the trust determines that of that $500 property, $17 represents property (included in the remaining analysis with Property B-1) derived from Property B. The remaining $483 of interest forms part of the trust’s non-resident portion (included in the remaining analysis with Property A-1). Thus, the trust’s income for Canadian tax purposes for 2009 is $17 (ignoring Donna’s status as an electing contributor).

8. At the end of 2009, the trust’s resident portion consists of Properties B and B-1.

2010

9. Donna remains a resident contributor to the trust at the end of its 2010 year. Therefore, the trust is deemed to be resident in Canada under subsection 94(3) for its 2010 taxation year.

10. Donna’s gift to Corporation A results in a deemed transfer by Donna of property to the trust under paragraph 94(2)(a) of the Act.  The transfer is a contribution by Donna to the trust.  As a result, under paragraph (a) of the definition “resident portion”, Property A-3 becomes part of the trust’s resident portion.  Under paragraph 94(3)(f) of the Act this change in status of the property is treated as a transfer from the non-resident portion trust to the trust (i.e., the electing trust that is deemed resident in Canada under subsection 94(3) of the Act).  Because the two trusts are deemed not to deal with each other at arm’s length, and because the transfer is a disposition to which section 107.4 of the Act cannot apply (i.e., because the condition in paragraph 107.4(1)(c) is not met by operation of subsection 94(4) of the Act), the non-resident portion trust’s proceeds of disposition of the property transferred are equal to the fair market value of the property at the time of the deemed disposition, and the trust (i.e., the electing trust that is deemed resident in Canada under subsection 94(3) of the Act) is deemed to acquire the property at a cost equal to that fair market value.

11. The trust’s $500 interest for 2010 on deposit in its bank account represents property derived from Properties A, A-1, B and B-1 and is included in the trust’s resident portion to the extent that it is derived from Property B or B-1, or if it is property that is substituted for such property. Assume that in this case, the trust determines that of that $500 property, $17 represents property (included in the remaining analysis with Property B-1) derived from Property B. The remaining $483 forms part of the trust’s non-resident portion (included in the remaining analysis with Property A-1). Thus, the trust’s income for Canadian tax purposes for 2010 is $17 (ignoring Donna’s status as an electing contributor).

12. At the end of 2010, the trust’s resident portion consists of Properties A-3, B and B-1.

2011

13. Donna remains a resident contributor to the trust at the end of its 2011 year. Therefore, the trust is deemed to be resident in Canada under subsection 94(3) for its 2011 taxation year.

14. Property (referred to in the remaining analysis as “Property C”) acquired from the $200,000 in loan proceeds is not property contributed to the trust, but can still form part of the trust’s resident portion if, under paragraph (b) of the definition “resident portion”, one of the three conditions listed in that paragraph is met. In this example, none of those conditions is met. In particular, since the loan is unsecured and no person has provided a guarantee, covenant, or agreement to ensure repayment of the loan, the $200,000 will only form part of the resident portion of the trust if it is reasonable to conclude, at the time the funds are borrowed, that the $200,000 and the assets in the non-resident portion of the trust would not be sufficient to repay the indebtedness, including any interest payable on the indebtedness. For this purpose, any income that is expected to be earned on property that will be acquired in substitution for the borrowed funds is not taken into account. Since the non-resident portion of the trust’s assets at that time is $343,488 (Property A (funds held on deposit) and Property A-2 (the GIC)), Property C is included in the non-resident portion. Since the business assets and the shares of Corporation C (referred to in the remaining analysis as “Property C-1” and “Property C-2” respectively) are not acquired in substitution for resident portion property or by way of a Canadian contribution to the trust, Properties C-1 and C-2 form part of the trust’s non-resident portion.

15. Donna’s provision of $30,000 in uncompensated services to the trust is treated as a deemed transfer by Donna to the trust under paragraph 94(2)(f).  This transfer will be a contribution by Donna to the trust.  Under clause (a)(ii)(D) of the definition “resident portion”, the trust must, therefore, select a property with a fair market value that is at least equal to $30,000 to include in the trust’s resident portion. The trustee selects $30,000 of the non-resident portion of the funds held on deposit in the foreign bank. Under paragraph 94(3)(f) of the Act, this change in status of the property is treated as a transfer from the non-resident portion trust to the trust (i.e., to the electing trust that is deemed resident in Canada under subsection 94(3) of the Act).  Although this is a disposition, the non-resident portion trust’s proceeds and cost base of the property are the same.  (The $30,000 now included in the resident portion will be included in the remaining analysis with Property B.)

16. The trust’s $500 interest for 2011 on deposit in its bank account represents property derived from its resident and non-resident portion property. It is included in the trust’s resident portion to the extent that it is derived from resident portion property, or if it is property that is substituted for such property. Assume that in this case, the trust determines that of that $500 property, $67 represents property (included in the remaining analysis with Property B-1) derived from Property B. The remaining $433 forms part of the trust’s non-resident portion (included in the remaining analysis with Property A-1).

17. As the shares of Corporation A (Property A-3) are currently held in the resident portion, the shares of Corporation B (referred to in the remaining analysis as “Property B-2”), which are acquired with the proceeds of disposition from the disposition of the shares of Corporation A, are also held in the resident portion. Also, for Canadian income tax purposes (ignoring Donna’s status as an electing contributor) the taxable portion of the gain realized by the trust on the disposition of the Corporation A shares will be recognized, as well as the trust’s remaining $67 of interest income, in computing the trust’s income.

18. At the end of 2011, the trust’s resident portion consists of Properties B, B-1 and B-2, as summarized in the following chart:

Resident and Non-resident Portion (end of 2011)
Resident portionNon-resident portion
Foreign Bank Account (Property B and B-1)Foreign Bank Account (Property A and A-1)
Shares of Corporation B (Property B-2)Guaranteed Investment Certificate (Property A-2)
 Shares of Corporation C (Property C-2)
Business Assets (Property C-1)

“restricted property”

The expression “restricted property” is relevant in applying a number of provisions in respect of non-resident trusts, including the definitions “arm’s length transfer” and “exempt foreign trust” in subsection 94(1) of the Act. The definition “restricted property” is intended to serve as an anti-avoidance provision.

Specifically, restricted property of a person or partnership means property held by the person or partnership that is

  • under paragraph (a) of the definition, a share (or a right to acquire a share) of the capital stock of a closely held corporation if the share (or right), or a property for which the share (or right) was substituted, was at any time acquired as part of a transaction or series of transactions under which either
    • a specified share of the capital stock of a closely held corporation was acquired by any person or partnership in exchange for, as consideration for, or upon conversion of any property at a cost less than the fair market value of the specified share at the time of its acquisition,
    • or a share (other than a specified share) of the capital stock of a closely held corporation that was not a specified share becomes a specified share;
  • under paragraph (b) of the definition, an indebtedness or other obligation (or a right to acquire an indebtedness or other obligation) of a closely held corporation if
    • the indebtedness, obligation or right, or a property substituted for it, was acquired as part of a transaction or series of transactions under which either
      • a specified share of the capital stock of a closely held corporation was acquired by any person or partnership in exchange for, as consideration for, or upon conversion of any property at a cost less than the fair market value of the specified share at the time of its acquisition, or
      • a share (other than a specified share) of a closely held corporation that was not a specified share becomes a specified share, and
  • the amount of any payment under the indebtedness, obligation or right (whether immediate or future, absolute or contingent or conditional on or subject to the exercise of any discretion by any person or partnership) is, directly or indirectly, determined primarily by reference to one or more of
    • the fair market value of, production from or use of any of the property of the closely held corporation,
    • gains or profits from the disposition of any of the closely held corporation’s property,
    • income, profits, revenue or cash flow of the closely held corporation, or
    • any criterion similar to those listed immediately above; and
  • under paragraph (c) of the definition, any property that was acquired by the person or partnership as part of a series of transactions described in paragraph (a) or (b) of the definition, and the fair market value of which is derived in whole or in part, directly or indirectly, from a particular share, indebtedness or right described in paragraph (a) or (b) of the definition.

Subsection 94(14) may apply in some circumstances to suspend a property’s characterization as restricted property. For more details, see the commentary on that provision.

“specified party”

Subsection 94(8) of the Act provides a rule for calculating a person’s recovery limit for the purpose of determining under subsection 94(7) of the Act the extent of the person’s limitation on liability arising under a provision referred to in paragraph 94(3)(d). A “specified party” in respect of a particular person at any time means:

  • under paragraph (a) of the definition, a spouse or common-law partner of the particular person;
  • under paragraph (b) of the definition, a corporation that is a “controlled foreign affiliate” of the particular person or their spouse or common-law partner, or a corporation that would be a controlled foreign affiliate of a partnership, of which the particular person is a majority interest partner, if the partnership were a person resident in Canada at that time;
  • under paragraph (c) of the definition, a person, or partnership of which the particular person is a majority interest partner, for which it is reasonable to conclude that a benefit referred to in subparagraph 94(8)(a)(iv) of the Act (i.e., a benefit received or enjoyed under a trust) was conferred either
    • in contemplation of the person becoming after that time a corporation described by paragraph (b) of the definition, or
    • to avoid or minimize a liability that arose, or that would otherwise have arisen, under Part I of the Act with respect to the particular person; or
  • under paragraph (d) of the definition, a corporation in which the particular person, or a partnership of which the particular person is a majority interest partner, is a shareholder, if the corporation is or was a beneficiary under a trust, and the particular person or partnership is a beneficiary under the trust solely because of the application of paragraph (b) of the definition “beneficiary” in subsection 94(1) to the particular person or the partnership in respect of the corporation.

“specified share”

A specified share means a share of the capital stock of a corporation other than a share that is prescribed for the purpose of paragraph 110(1)(d) of the Act. This expression is relevant to the definition “restricted property” in subsection 94(1). For more information, see the commentary on the definition “restricted property”.

“specified time”

A specified time, in respect of a trust for a taxation year of the trust, means

  • if the trust exists at the end of the taxation year, the time that is the end of that taxation year; and
  • if the trust ceases to exist after October 30, 2003, the time in that taxation year that is immediately before the time at which the trust ceases to exist.

This definition is relevant in determining whether paragraph 94(3)(a) applies to deem the trust to be resident in Canada, for the taxation year, for a number of purposes. It also applies in respect of subsections 94(7), (10) and (15) to (17). For more detail, see the commentary on those provisions.

“successor beneficiary”

The expression “successor beneficiary” is used in the definition “resident beneficiary” in subsection 94(1). A resident beneficiary under a trust does not include a successor beneficiary.

A successor beneficiary under a trust at a particular time means a person that is a beneficiary under the trust solely because of a right of the person to receive any of the trust’s income or capital, if under that right the person may so receive that income or capital only on or after the death after that time of a specified individual. For this purpose a specified individual is an individual who is, at that time, alive and is a contributor to the trust, or is related to (including an aunt, uncle, niece or nephew of) a contributor to the trust or who would be so related if every individual who was alive before that time were alive at that time.

For more information on the definition “resident beneficiary” in subsection 94(1) of the Act, see the commentary on that definition.

“transaction”

A definition “transaction” is provided for the purpose of applying section 94. The definition clarifies that a reference to a transaction in that section includes an arrangement or event.

“trust”

A definition “trust” is provided for the purpose of applying section 94. The definition clarifies that a reference to a trust in that section includes an estate.

Rules of Application

ITA 94(2)

Subsection 94(2) of the Act sets out a number of rules for use in applying section 94. These rules are primarily relevant for the purposes of determining whether a transaction constitutes a “contribution” of property to a trust. These rules are also relevant for the purposes of subsections 94(7) to (10) and (15) to (17) and the reporting penalty provisions in subsections 162(10.1) and 163(2.4) and section 233.2.

Paragraphs 94(2)(a) to (m) include rules that deem certain loans or transfers, the granting of options and the provision of services to be transfers of property to a person or partnership. A deemed transfer will be considered to be a contribution to a trust if the transfer falls within the criteria of the definition “contribution” in subsection 94(1) or the deemed contribution rules. In this regard, it should be noted that a transfer or loan, unless it is deemed to be a contribution under a provision of section 94, will not be considered a contribution if it is an “arm’s length transfer” (as defined in subsection 94(1)). In addition, paragraphs 94(2)(r) to (v) may apply to deem certain transfers not to be contributions.

The rules in subsection 94(2) generally apply to taxation years of trusts that end after 2006, but in some cases relief is provided with regard to transactions or events that occurred before June 23, 2000 or before October 11, 2002. In addition, the application of some rules is modified for transactions that occurred before August 27, 2010 or Announcement Date. The rules in subsection 94(2) will also apply to taxation years of trusts that end after 2000 and before 2007 if the trust elects (under the coming-into-force provision for new section 94 of the Act) to have new section 94 of the Act apply to each of those years.

Deemed Transfers

Paragraph 94(2)(a) of the Act generally applies to indirect loans or transfers of property to a trust through transfers to other entities. Paragraph (a) deems a transfer of property (other than an “arm’s length transfer”, as defined in new subsection 94(1)) to be a direct transfer to a trust if the property is transferred from one person or partnership to another and, as a result of the transfer, the fair market value of the property of the trust increases or the liabilities of the trust decrease.

Where paragraph (a) applies, paragraph 94(2)(b) deems the fair market value of property deemed transferred under paragraph (a) to be the total of all amounts each of which is the absolute value of an increase in the fair market value of the trust property or a decrease in the liabilities of the trust because of the transfer. In the event that the deemed transfer is a contribution to a trust, paragraph 94(2)(p), described in greater detailed below, would deem the amount of the contribution to be that fair market value. In addition, if the time of the deemed transfer of property under paragraph (a) is after August 27, 2010 and the property that the person or partnership actually transferred or loaned is restricted property of the person or partnership, paragraph 94(2)(b) deems the property that is deemed to be transferred under paragraph (a) to be restricted property transferred to the trust. As a result, if the deemed transfer is deemed to be a contribution of restricted property to a trust that is made after August 27, 2010, the amount of the contribution will be determined by the rules set out in subsection 94(9).

Paragraph 94(2)(c) of the Act also applies to indirect loans or transfers of property to a trust. Paragraph (c) deems a transfer or loan of property from a person or partnership to another person or partnership (referred to as the “intermediary”) to be a direct transfer to a trust where the trust holds property the fair market value of which is derived from property held by the intermediary if the following three conditions apply:

  • either the property transferred is restricted property, or the loan is not an arm’s length transfer as defined in new subsection 94(1);
  • the property held by the trust is not property described by paragraph 94(14)(b); and
  • it is reasonable to conclude that one of the reasons for the transfer or loan is to avoid or minimize a liability under Part I of the Act.

Where paragraph (c) applies, paragraph 94(2)(c.1) deems the fair market value of property deemed transferred under paragraph 94(2)(c) to be the fair market value of the property referred to in subparagraph (2)(c)(i). Example 3 below illustrates the operation of paragraphs (c) and (c.1). In addition, if the deemed transfer of property under paragraph (c) occurs after Announcement Date and the property that the person or partnership actually transferred or loaned to the intermediary is restricted property of the person or partnership, paragraph 94(2)(c.1) deems the property that is transferred under paragraph (c) to be restricted property transferred to the trust. As a result, if the deemed transfer is deemed to be a contribution of restricted property to a trust that is made after August 27, 2010, the amount of the contribution will be determined by the rules set out in subsection 94(9).

Paragraph 94(2)(d) of the Act applies when a particular person or partnership becomes obligated (e.g., by way of providing a guarantee) to effect any undertaking given to ensure repayment, wholly or partially, of a loan or other indebtedness incurred by another person or partnership, or when the particular person or partnership has provided any other financial assistance to another person or partnership. If these conditions are satisfied, the particular person or partnership is deemed to have transferred property at that time to the other person or partnership. Any property transferred (i.e., consideration paid such as a guarantee fee) to the particular person or partnership from the other person or partnership in exchange for the undertaking or other financial assistance is deemed to have been so transferred in exchange for the property deemed to be transferred to the other person or partnership.

Under paragraph 94(2)(e) of the Act, the fair market value of property deemed under subparagraph 94(2)(d)(i) to have been transferred is deemed to be equal to the amount of the loan or indebtedness incurred by the other person or partnership to which the property relates. For example, where a particular person provides a guarantee in respect of a $1,000 indebtedness entered into by another person, the particular person is deemed to have transferred, at the time the guarantee is made, to the other person property with a fair market value of $1,000. In the event that the deemed transfer is a contribution to a trust, paragraph 94(2)(p), described in greater detailed below, would deem the amount of the contribution to be $1,000.

Paragraph 94(2)(f) applies where any service (other than an exempt service, as defined in subsection 94(1)) is rendered after June 22, 2000 by a person or partnership to, for or on behalf of another person or partnership. In these circumstances, the person or partnership rendering the service is deemed to have transferred property to the other person or partnership. Any property given to the particular person or partnership by the other person or partnership in exchange for the service is deemed to have been transferred to the particular person or partnership in exchange for the property deemed by subparagraph (f)(i) to have been transferred. For more information on the definition “exempt service”, see the commentary on that definition. Under paragraph 94(2)(h), the fair market value of the property deemed under subparagraph 94(2)(f)(i) to have been transferred is deemed to be equal to the fair market value of the services rendered. In the event that the deemed transfer is a contribution to a trust, paragraph 94(2)(p), described in greater detailed below, would deem the amount of the contribution to be that fair market value.

For greater certainty, paragraph 94(2)(g) provides that a corporation is considered to transfer shares that it issues. Similar rules, also contained in paragraph 94(2)(g), apply to interests in a trust acquired otherwise than from a beneficiary under the trust and interests in a partnership acquired otherwise than from a member of the partnership, as well as to debt issued to a person or partnership by another person or partnership and a right (granted after June 22, 2000 by the person or partnership from which the right was acquired) to acquire or to be loaned property.

Paragraph 94(2)(i) deems a person or partnership to have become obligated at a particular time to transfer property to another person or partnership where the person or partnership becomes obligated to do an act (e.g., the rendering of a service) that would constitute the transfer of a property to another person or partnership if the act were to occur.

Paragraph 94(2)(j) applies, for the purpose of applying at any time the definition “non-resident time” in subsection 94(1), if a trust acquires property of an individual as a consequence of the death of the individual and the individual was resident in Canada immediately before the individual’s death. In these circumstances, paragraph 94(2)(j) deems the individual to have transferred the property to the trust immediately before the individual’s death.

Paragraph 94(2)(k) applies where a particular person or partnership loans or transfers property to another person or partnership at the direction of or with the acquiescence of a third person or partnership (the “specified person”). In these circumstances, if it is reasonable to conclude that one of the reasons for the transfer is to avoid or minimize a liability of any person or partnership under Part I of the Act that arose, or that would otherwise have arisen, because of the application of section 94, the transfer is deemed to be a transfer made jointly by the particular person or partnership and the specified person.

Paragraph 94(2)(k.1) applies where a particular person or partnership loans or transfers property to another person or partnership, at any time after November 8, 2006 and at the direction of or with the acquiescence of a third person or partnership (the “specified person”). In these circumstances, if it is reasonable to conclude that one of the reasons for the loan or transfer is to provide benefits in respect of services rendered by a person as an employee of the specified entity, the transfer is deemed to be a transfer made jointly by the particular person or partnership and the specified person.

Paragraph 94(2)(l) applies where a corporation loans or transfers property to a person or partnership at the direction of or with the acquiescence of another person or partnership (the “specified person”). In these circumstances, the transfer is deemed to be a transfer made jointly by the corporation and the specified person if

  • the transfer or loan is made at a time that is not, or would not be, if the transfer or loan were a contribution of the specified person, a “non-resident time” (as defined in subsection 94(1)) of the specified person, or if the specified person is a partnership, a non-resident time of one or more members of the partnership, and
  • either
  • the corporation is at the time of the transfer or loan a controlled foreign affiliate of the specified person (or would be a controlled foreign affiliate of the specified person if the specified person were resident in Canada), or
  • it is reasonable to conclude that the transfer or loan was made in contemplation of the corporation becoming after the time of the transfer or loan a controlled foreign affiliate of the specified person (or a controlled foreign affiliate of the specified person if the specified person were resident in Canada).

The expression “controlled foreign affiliate” is defined in subsection 248(1) of the Act as having the meaning given in subsection 95(1).

The examples below illustrate the operation of a number of the provisions in subsection 94(2) and the definition “contribution” in subsection 94(1).

Example 1

Donald is a long-term resident of Canada. In 2011, Donald pays higher than fair market value consideration for a property acquired from a corporation. A non-resident trust holds shares in the corporation. The fair market value of those shares increases because of the transaction.

Results

1. Under paragraph 94(2)(a), Donald is considered to have transferred property to the trust in these circumstances. The exception for arm’s length transfers does not apply.

2. As a consequence, Donald is considered to have made a contribution to the trust, which results in Donald being a contributor and a resident contributor to the trust.

Example 2

Lucie, a long-term resident of Canada, transfers property to Canco on condition that Canco direct Canco’s wholly-owned foreign subsidiary (Foreignco-1) to transfer properties to another corporation (Foreignco-2) for consideration that is less than fair market value. Shares of the capital stock of Foreignco-2 are held by a non-resident trust. The fair market value of the Foreignco-2 shares increases as a result of the increase in the fair market value of the property owned by Foreignco-2.

Results

1. The transfers to Canco and to Foreignco-2 are part of the same series of transactions.

2. Because of paragraph 94(2)(a), the transfer to Foreignco-2 is considered to be a transfer by Foreignco-1 to the trust. Because of paragraph 94(2)(l), the transfer by Foreignco-1 to the trust is considered to be jointly made by Foreignco-1 and Canco. This would also be the result under paragraph 94(2)(k), if it was intended to avoid or minimize a liability under Part I. The exception for arm’s length transfers does not apply. Canco is, therefore, a contributor to the trust.

3. Canco is also considered to have made a contribution to the non-resident trust because of paragraph (a) of the definition “contribution” in subsection 94(1). Lucie is considered to have made a contribution to the trust under paragraph (b) of that definition. Both Lucie and Canco are therefore contributors and resident contributors to the trust.

4. Foreignco-1 is also a “contributor” to the trust, but is not a “resident contributor” as long as it does not become resident in Canada.

Example 3

The application of paragraphs 94(2)(c) and (c.1) is illustrated by the following three separate examples in which a transfer or loan is made to a corporation and a non-resident trust holds shares in that corporation.

(A) Marc is a long term resident of Canada. As part of a plan to minimize income tax owing in respect of an eventual sale of restricted property that he owns, Marc contributes the restricted property to a non-resident corporation, taking back preferred shares with a value equal to the property transferred to the corporation. At the time of Marc’s contribution, Trust A, a non-resident trust, has no legal or economic ownership of the corporation. However, immediately following that contribution, the non-resident corporation issues common shares to Trust A such that Trust A owns all but one of the common shares of the corporation (the remaining share being held by a director of the corporation) and Marc owns all the preferred shares of the corporation. There are three non-resident beneficiaries under Trust A but the trustee has the power, under the terms of the trust, to add other persons as beneficiaries provided that they are not resident in Canada at the time that they are added to the trust. Marc plans to retire outside of Canada and expects that the trustee will add him as a beneficiary at that time, although the trustee is under no obligation to do so.

(B) A non-resident trust (Trust B) holds shares of Canco that represent 5% of the fair market value of the outstanding shares of Canco. Canco has only one class of shares and the shares are widely-held and publicly traded such that Trust B’s shares meet the conditions set out in paragraph 94(14)(b). Canco makes an interest-free loan to its wholly-owned foreign subsidiary. The acquisition of shares by Trust B and the loan are not part of a series of transactions.

(C) A non-resident trust (Trust C) holds shares of Canco that represent 15% of the fair market value of the outstanding shares of Canco. Canco has two wholly-owned foreign subsidiaries. In the course of its operations, one of these foreign subsidiaries makes an interest-free loan to the other controlled foreign affiliate of Canco, with the implicit concurrence of Canco.

Results

Based on the further factual assumptions below, Marc is deemed to have made a contribution to Trust A, but Canco is not deemed to have made a contribution to either Trust B or Trust C.

(A) In the first example, Marc has made a transfer of property to the corporation that is not an arm’s length transfer. Paragraph 94(2)(a) nonetheless does not apply to the transaction because Trust A does not have an interest in the corporation at the time of Marc’s contribution to the corporation. Paragraph 94(2)(c) does, however, apply to Marc’s transfer. The shares of the corporation that are held by Trust A are not shares described by paragraph 94(14)(b). Absent the application of paragraph 94(2)(c) and assuming that Marc is not otherwise a contributor to Trust A, the income that would otherwise have been subject to income tax under Part I of the Act in Marc’s hands had he not made the transfer to the corporation will not be subject to tax in Canada if the income is earned by Trust A. As a result, it is reasonable to conclude that one of the purposes of the transfer is to avoid tax under Part I of the Act and paragraph 94(2)(c) would apply to deem Marc to have made a transfer to Trust A. That deemed transfer is a contribution to Trust A and is not an arm’s length transfer because the property that is deemed to be transferred is restricted property.

(B) In the second example, the loan from Canco to its controlled foreign affiliate (CFA 1) is not an arm’s length transfer. Nonetheless, paragraph 94(2)(a) would not apply to the loan from Canco to CFA 1 on the assumption that the aggregate fair market value of Trust B’s property does not change as a result of that loan. In addition, paragraph 94(2)(c) would not apply because the shares of Canco held by Trust B are shares described by paragraph 94(14)(b) such that the second criterion listed in 94(2)(c) is not met. As a result, the loan does not result in the application of paragraph 94(2)(c) in respect of Trust B.

(C) In the third example, the loan from one subsidiary of Canco to the other is not an arm’s length transfer. As in the second example, paragraph 94(2)(a) would not apply to the loan from CFA 1 to CFA 2 on the assumption that the aggregate fair market value of Trust C’s property does not change as a result of that loan. Depending on the circumstances, Canco may be deemed by paragraph 94(2)(l) to have made the loan jointly with its subsidiary to its other subsidiary. Assuming that paragraph 94(2)(l) does apply such that Canco is deemed to have made the loan jointly with its subsidiary, the first two criteria of paragraph 94(2)(c) are met (since the shares of Canco held by Trust C are not shares described by paragraph 94(14)(b)), and it must be determined whether it is reasonable to conclude that one of the reasons the transfer or loan is made is to avoid or minimize a liability under Part I of the Act. Assuming that neither subsidiary is subject to tax under Part I and that the total amount of tax payable by Canco in respect of its subsidiaries under the foreign property accrual rules is not significantly different than it would have been in the absence of the loan, one would not expect it to be reasonable to conclude that one of the reasons for the transfer between the two subsidiaries is to reduce tax payable under Part I. As a result, the loan would not result in the application of paragraph 94(2)(c) in respect of Trust C.

Deemed Contributions

Paragraph 94(2)(n) applies where a particular trust makes a contribution to another trust. If this is the case, the contribution is deemed to have been made jointly by the particular trust and each other person or partnership that is a contributor to the particular trust.

Paragraph 94(2)(o) applies where a partnership makes a contribution to a trust. Where this is the case, the contribution is deemed to have been made jointly by the contributing partnership and by each person or partnership that is a member of the contributing partnership at the time of the contribution. For transfers made before August 27, 2010 by a partnership, a limited partner is not treated by paragraph 94(2)(o) as having made the transfer; however, if before that date a partnership has contributed to a trust, a limited partner of the partnership may also be considered to have made a contribution to the trust in respect of a transfer or loan made by the limited partner or another entity if any of the other rules in subsection 94(2) so provides.

Paragraph 94(2)(p) provides, subject to paragraphs 94(2)(q) and subsection 94(9), that the amount of a contribution to a trust at the time it was made is deemed to be the fair market value at that time of the property that was the subject of the contribution. This rule is useful for the purposes of subsections 94(7) and (8) and (15) to (17), as well as the reporting penalty provisions in amended subsections 162(10.1) and 163(2.4). The rule is relevant because a contribution is defined by reference to a loan or transfer, rather than by reference to the property that was the subject of the loan or transfer.

Paragraphs 94(2)(q) and (r) apply to dealings in a “fixed interest” (as defined in subsection 94(1)) in a trust and in a right, issued by the trust, to acquire such an interest. The rules for fixed interests apply in respect of commercial trusts. For more detail, see the commentary on the definition “fixed interest” and on paragraph (h) of the definition “exempt foreign trust” in subsection 94(1) of the Act. Paragraph 94(2)(q) deems a person or partnership, that at any time acquires a fixed interest in a trust (or a right, issued by the trust, to acquire such an interest) from another person or partnership (other than the trust), to have made a contribution to the trust at that time. The amount of the contribution is deemed to be the fair market value at that time of the fixed interest.

Transfers Deemed not to be Contributions

Paragraph 94(2)(r) generally applies where a particular person or partnership has made a contribution (e.g., because of paragraph 94(2)(q)) to a trust because of acquiring a fixed interest in the trust or a right to acquire such an interest, or has acquired a fixed interest in a trust as a consequence of making a contribution to the trust, and at a later time the interest or right, as the case may be, is transferred, for arm’s length consideration, to another person or partnership (i.e., upon a sale of the interest or right, or if the other person or partnership is the trust that issued the interest or right, upon a redemption of the interest or right). In these circumstances, the particular person or partnership is deemed, for the purpose of applying section 94 at any time after the later time, not to have made the contribution described above in respect of the fixed interest, or right, that is the subject of the sale. However, nothing in this provision would cause any other contribution to the trust by the particular person to cease to be a contribution to the trust.

Paragraph 94(2)(s), in very general terms, provides that a transfer of property to a trust by a particular person or partnership that is a manager or promoter of the trust, in exchange for an interest as a beneficiary under the trust, will not be considered a contribution of the particular person or partnership to the trust while the beneficial interest is acquired and held by the particular person or partnership because of a requirement imposed under securities laws. Paragraph 94(2)(s) will be relevant in the relatively rare circumstance (i.e., because of an election by the trust under paragraph (h) of the definition “exempt foreign trust” not to have that paragraph apply to it) that a commercial trust cannot rely on the exemption for exempt foreign trusts in order to avoid the application of subsection 94(3). Paragraph 94(2)(s) will apply in determining under that subsection whether the trust has a resident contributor or connected contributor (i.e., and hence, a resident beneficiary).

More specifically, under paragraph 94(2)(s), a transfer to a trust by a particular person or partnership is deemed not to be, at a particular time, a contribution to the trust if

  • the particular person or partnership has transferred, at or before the particular time and in the ordinary course of business of the particular person or partnership, property to the trust,
  • the transfer is not an arm’s length transfer, but would be an arm’s length transfer if the definition “arm’s length transfer” in subsection 94(1) were read without reference to paragraph (a), and subparagraphs (b)(i), (ii) and (iv) to (vii) of that definition,
  • it is reasonable to conclude that the particular person or partnership was the only person or partnership that acquired, in respect of the transfer, an interest as a beneficiary under the trust,
  • the particular person or partnership was required, under the securities law of a country or of a political subdivision of the country in respect of the issuance of beneficial interests by the trust, to acquire the interest because of the particular person or partnership’s status at the time of the transfer as a manager or promoter (as defined in subsection 94(1)) of the trust,
  • at the particular time, the trust is not an exempt foreign trust, but would be at that time an exempt foreign trust if it had not made an election under paragraph (h) of the definition “exempt foreign trust”, and
  • the particular time is before the earliest of
    • the first time at which the trust becomes an exempt foreign trust,
    • the first time at which the particular person or partnership ceases to be a manager or promoter of the trust, and
    • the time that is 24 months after the first time at which the total fair market value of consideration received by the trust in exchange for beneficial interests (other than the particular person or partnership’s interest referred to in subparagraph 94(2)(s)(iii)) in the trust is greater than $500,000.

Paragraph 94(2)(t) generally expunges a contribution of shares or indebtedness of a Canadian corporation from the corporation to a trust if the corporation issued (in circumstances described in subparagraph 94(2)(g)(i) or (iv)) the shares or the debt to the trust and the trust later sells the shares or indebtedness in circumstances in which the parties to the sale deal with each other on an arm’s length basis.

However, 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 or the other person or partnership: such transfers will continue to be treated as transfers under section 94. In addition, the application of paragraph 94(2)(t) will not expunge the status as a contribution to the trust of a transfer made by a person or partnership and involving the corporation (e.g., a person or partnership that transferred property to the corporation, and hence the trust, because of the application of paragraph 94(2)(m)).

More specifically, under paragraph 94(2)(t) a transfer, by a Canadian corporation of particular property (i.e., a share or debt), that is at a particular time a contribution by the Canadian corporation to a trust, is deemed not to be, after the particular time, a contribution by the Canadian corporation to the trust if

  • the trust acquired the particular property before the particular time from the Canadian corporation in circumstances described in subparagraph 94(2)(g)(i) or (iv);
  • as a result of a transfer (i.e., a sale of, or a redemption by the Canadian corporation of, the issued shares or debt) at the particular time by any person or partnership (referred to in the paragraph as the “seller”) to another person or partnership (referred to in the paragraph as the “buyer”) the trust ceases to hold all of its property that is shares of the capital stock of, or debt issued by, the Canadian corporation and the trust ceases to hold property that is property the fair market value of which is derived in whole or in part, directly or indirectly, from shares of the capital stock of, or debt issued by, the Canadian corporation;
  • the buyer deals at arm’s length immediately before the particular time with the Canadian corporation, the trust and the seller;
  • in exchange for the sale, the buyer transfers or becomes obligated to transfer property (which property is referred to in the paragraph as the “consideration”), to the seller; and
  • it is reasonable to conclude
    • having regard only to the sale and the consideration that the seller would have been willing to make the sale if the seller dealt at arm’s length with the buyer,
    • that the terms and conditions made or imposed in respect of the exchange are terms and conditions that would have been acceptable to the seller if the seller dealt at arm’s length with the buyer, and
    • that the value of the consideration is not, at or after the particular time, determined in whole or in part, directly or indirectly, by reference to shares of the capital stock of, or debt issued by, the Canadian corporation.

Paragraph 94(2)(u) applies to a transfer, before October 11, 2002, to a personal trust by an individual (other than a trust) of particular property. Where the conditions in subparagraphs 94(2)(u)(i) and (ii) are met, the transfer of the particular property is deemed not to be a contribution of the particular property by the individual to the trust. Paragraph 94(2)(u) is intended to provide relief to individuals that have transferred a relatively small amount of property to a trust (e.g., the initial settlement of a coin on the trust) where the individual can reasonably be considered not to have been involved with the use of the trust as part of what is commonly referred to as an estate freeze (i.e., see the condition in clause 94(2)(u)(ii)(A) that the trust never have acquired from the individual restricted property).

Paragraph 94(2)(v) of the Act provides an exception, from what would otherwise be a contribution to a trust, for a specified financial institution, as defined in subsection 248(1) of the Act, that makes a loan to the trust. It provides that if the loan is made on arm’s length terms and in the ordinary course of business of the specified financial institution, the loan will be deemed not to be a contribution to the trust.

Liabilities of Non-resident Trusts and Others

ITA 94(3)

Subsection 94(3) of the Act applies to a non-resident trust (other than an “exempt foreign trust”, as defined in subsection 94(1)) for a taxation year where, at a “specified time” in respect of the trust for the taxation year (generally, the end of the taxation year), there is a “resident contributor” to the trust or a “resident beneficiary” under the trust. All of these defined expressions are explained in detail in the commentary on subsection 94(1).

Where subsection 94(3) applies to a non-resident trust for a taxation year, the trust is deemed to be resident in Canada throughout the year for the purposes specified in paragraph 94(3)(a). Except to the extent otherwise provided by subsection 94(4), a trust is deemed to be resident in Canada for a taxation year under subsection 94(3):

  • for the purposes of applying section 2, in computing the trust’s income for the year and computing the trust’s liability for tax under Part I – with the result that the trust is subject to tax under that Part on its worldwide income for the year (including, for example, its income determined as a result of deemed dispositions under subsections 104(4) to (5.2) or 128.1(4) and, for example, in determining whether a foreign affiliate of the trust is its controlled foreign affiliate and whether it has FAPI) that is not distributed to beneficiaries of the trust or attributed to resident contributors of the trust;
  • for the purposes of paragraph 94(3)(c), to avoid circularity, and subsection 111(9), with the result that in determining the trust’s losses for the taxation year, subsection 111(9) will not apply in computing its taxable income for the year;
  • for the purpose of applying clause 53(2)(h)(i.1)(B) – with the result that the adjusted cost base to a beneficiary of the beneficiary’s interest in a trust to which this clause applies is computed in the same way as for interests in trusts resident in Canada;
  • for the purpose of applying the amended definition “non-resident entity” in subsection 94.1(2) – with the result that a beneficiary’s interest in the trust is not treated as an interest of a beneficiary in an offshore investment fund property for the purpose of section 94.1;
  • for the purposes of applying subsections 104(13.1) to (28), and 107(2.1) and (2.002) and section 115 – with the result that the tax treatment of beneficiaries under the trust generally accords with the tax treatment available to beneficiaries under trusts that are resident in Canada;
  • for the purposes of determining the obligation of the trust to file a return under sections 233.3 and 233.4 – with the result that the trust is required to file information returns under sections 233.3 (information return on foreign property holdings the total cost of which exceeds $100,000) and 233.4 (information return on foreign affiliates);
  • for the purpose of determining the liability of the trust for tax under Part XIII – with the result that the trust is exempt from Part XIII tax on amounts paid or credited to it (for more detail, see the commentaries on subsections 94(4) and 104(7.01));
  • for the purpose of applying Part XIII in respect of an amount (other than an exempt amount) paid or credited by the trust to any person;
  • for the purpose of determining after July 18, 2005 whether a foreign affiliate of a taxpayer (other than the trust) is a controlled foreign affiliate of the taxpayer; and
  • for the purpose of determining the rights and obligations of the trust under sections 150 to 180 – with the result that various administrative provisions in the Act apply in the same way as to other trusts resident in Canada. These provisions include those with regard to the filing of returns, assessments, tax payments, arrears interest, refund interest, instalment interest, penalties, refunds and appeals.

Under paragraph 1 of the resident article in Canada’s income tax treaties, a reference in such a treaty to a “resident of a Contracting State” means any person who, under the law of that State, is liable to taxation in that State by reason of the person’s domicile, residence, place of management or any other criterion of a similar nature. A person, in this context, would generally include a trust because of the usual definition “person” in Canada’s income tax treaties. Because a trust to which subsection 94(3) applies is resident in Canada, and is liable to tax in Canada because of being resident in Canada, it will be considered a resident of Canada under paragraph 1 of the resident article in Canada’s income tax treaties, whether it is also considered to be resident, under the applicable treaty, in another country or not. An amendment to the Income Tax Conventions Interpretation Act, described elsewhere in this commentary, ensures that this result applies consistently across Canada’s tax treaties.

Where subsection 94(3) applies to deem a trust to be resident in Canada for a particular taxation year of the trust, paragraph 94(3)(b) provides a number of rules for determining the recognition by Canada of foreign taxes paid by the trust. These rules are also applicable in determining the amount of foreign source income and foreign taxes that can be allocated to a beneficiary under subsections 104(22) to (22.3), and to an electing contributor under subsection 94(16). In particular, paragraph 94(3)(b) provides in respect of the trust for the particular taxation year that:

  • no deduction under subsection 20(11) of the Act is permitted; however, a deduction continues to be available to the trust under subsection 20(12) of the Act in respect of non-business income tax paid by the trust in respect of an item of income included in computing the trust’s income for the year;
  • for the purposes of subsection 20(12) and section 126 of the Act, the non-business income tax of the trust for the particular taxation year is determined without reference to paragraph (b) of the definition “non-business-income tax”, with the result that its resulting non-business income tax is fully creditable against the trust’s Canadian tax otherwise payable for the particular taxation year, or alternatively, fully deductible under subsection 20(12) in computing the trust’s income from a source on which the tax was paid; and
  • for purposes of subsection 20(12) and section 126 of the Act, the trust’s income, and foreign taxes paid by it, for the particular taxation year are “pooled” to the country, if any, other than Canada in which the trust is resident for the particular taxation year. The effect of this rule will also extend to subsections 94(16) and 104(22) to (22.3), which allow the trust to designate a portion of its foreign tax credit in favour of its electing contributors and beneficiaries, respectively.

Paragraph 94(3)(c) provides that a non-resident trust that becomes subject to subsection 94(3) for a particular taxation year, after not being subject to either subsection 94(3) or existing paragraph 94(1)(c) for the preceding year, is deemed, immediately before the end of the preceding taxation year, to have disposed of each property (other than property described in any of subparagraphs 128.1(1)(b)(i) to (iv)) held by the trust at that time for proceeds of disposition equal to its fair market value at that time. The trust is also deemed to have acquired, at the beginning of the particular taxation year, each of those properties so disposed of at a cost equal to its proceeds of disposition. Note, in this regard, that, because of paragraph 94(4)(d), subsection 128.1(1) will not apply in the preceding taxation year only because of the application of paragraph 94(3)(a).

Paragraph 94(3)(c) is intended to ensure – in a manner similar to that for taxpayers that migrate to Canada – that certain gains or losses that accrued on certain property of the trust while the trust was non-resident are not subject to taxation in Canada.

Paragraph 94(3)(c) also complements the rule in subsection 94(6), which applies where a non-resident trust ceases to be an “exempt foreign trust” (as defined in subsection 94(1)). In this case, subsection 94(6) establishes the beginning of a new taxation year. If subsection 94(3) applies for that new year, paragraph 94(3)(c) would be applicable with regard to the properties held by the trust at the beginning of that year.

For more information on the allocation of foreign source income and foreign taxes to an electing contributor, see the commentary under paragraphs 94(16)(c) to (e). For a summary of the tax consequences resulting from a change in the trust’s status for tax purposes, see the commentary under subsection 128.1(1.1).

Example 1

A trust is created in 2011. The trust is not at any time an exempt foreign trust. At the end of its 2011 taxation year, the trust is non-resident and there are no resident contributors to the trust and no resident beneficiaries under the trust.

On February 1, 2012, John makes a contribution to the trust. John is at all times before 2014 resident in Canada. At the end of the trust’s 2012 taxation year, John is a resident contributor to the trust, and the trust is non-resident (ignoring the application of section 94 of the Act).

On July 1, 2013 the sole trustee of the trust moves to Canada, becomes resident in Canada at that time and remains resident in Canada throughout the remainder of the year. Immediately before the trustee became resident in Canada, the trustee was non-resident and John remained a resident contributor to the trust.

On July 1, 2014, John ceases to be resident in Canada. There are no other resident contributors to the trust and there are no resident beneficiaries under the trust (taking into account the fact that John is the trust’s only connected contributor). The trustee remains resident in Canada.

For the purpose of this example, assume that all of the trust’s property is included in its resident portion. For more information on the effect of this provision with respect to a non-resident portion trust, see the commentary on subparagraph 94(3)(f)(x).

Results

Trust’s 2011 Taxation Year

1. Subsection 94(3) does not apply to deem the trust to be resident in Canada in computing its income for its 2011 taxation year.

Trust’s 2012 Taxation Year

2. Paragraph 94(3)(a) applies to deem the trust to be resident in Canada throughout its 2012 taxation year for a number of purposes, including the computation of its income. Because the trust was non-resident throughout its 2011 taxation year, paragraph 94(3)(c) also applies to deem the trust to have disposed of its property (other than certain properties described in subparagraphs 128.1(1)(b)(i) to (iv)) for fair market value proceeds immediately before the end of its last 2011 taxation year and to have reacquired those properties at a cost equal to that fair market value at the beginning of the 2012 taxation year. Because of paragraph 94(4)(d), the application of the deemed residency rule in paragraph 94(3)(a) will not cause the trust to become resident in Canada for purposes of subsection 128.1(1).

Trust’s 2013 Taxation Year

3. Paragraph 128.1(1)(a) applies to deem the trust to have a new taxation year at the time the trustee becomes resident in Canada on July 1, 2013. This is because paragraph 94(4)(d) ensures that the application of paragraph 94(3)(a) to the trust is disregarded in determining whether the trust becomes resident in Canada for the purposes of subsection 128.1(1). However, subsection 128(1.1) prevents the application of paragraphs 128.1(1)(b) and (c) in these circumstances. Accordingly, although the trust has a deemed year end immediately before the trustee becomes resident in Canada, it is not subject to a deemed disposition of its property on “becoming” resident in Canada.

4. With respect to its resulting first 2013 taxation year, the trust is deemed by paragraph 94(3)(a) to be resident in Canada throughout that “stub” year. Paragraph 94(3)(c) does not apply to deem the trust to have disposed of any of its property immediately before the end of its 2012 taxation year because the trust is not considered to be non-resident for its 2012 taxation year for this purpose, because of the operation of subparagraph 94(3)(a)(v).

5. Because the trust is resident in Canada at the end of its second 2013 taxation year, subsection 94(3) does not apply to the trust for that year.

6. Subsection 94(5) does not apply to the trust in 2014 because the trust is resident in Canada in its last 2013 taxation year, by operation of ordinary principles, and not by operation of subsection 94(3), with the result that the condition in paragraph 94(5)(a) is not met.

Paragraph 94(3)(d) imposes liabilities for a taxation year on persons who are “resident contributors” or “resident beneficiaries”. Where subsection 94(3) applies to a trust for a taxation year, each of these persons, other than “electing contributors” for the particular taxation year, is jointly and severally, or solidarily, liable with the trust in respect of the trust’s obligations under sections 150 to 180. Typically, the most significant obligation in this context is the obligation to pay tax instalments pursuant to section 156. However, the extent of the liability imposed by paragraph 94(3)(d) is limited by subsection 94(7). For more information, see the commentary on subsections 94(7) to (9). However, nothing in this paragraph or paragraph 94(3)(e), as described below, limits the liabilities of the trust or of another resident contributor or resident beneficiary under the Act.

The expression “solidarily liable” is added to ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces.

Paragraph 94(3)(e) imposes liabilities for a taxation year on each person that is a beneficiary under the trust and was a person from whom an amount would be recoverable at the end of 2006 under subsection 94(2) (i.e., “old” section 94, as it read in its application to taxation years that end before 2007) in respect of the trust if the person had received before 2007 amounts described under paragraphs 94(2)(a) or (b) in respect of the trust (as those paragraphs read in their application to taxation years that end before 2007). Where subsection 94(3) applies to the trust for a taxation year, each of these persons is, to the extent of the person’s recovery limit for the year, jointly and severally, or solidarily, liable with the trust in respect of the trust’s obligations under sections 150 to 180. Note that where a trust has elected under the coming-into-force provisions of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007, paragraph 94(3)(e) does not apply to it (i.e., because “old” section 94 would never have applied to it); however, paragraph 94(3)(e) does apply to a trust that was created before 2000 and that elected under the coming-into-force provisions of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007.

Note that subsection 94(3) generally does not result in the creation of any obligations for a trust to withhold tax under Part XIII or to pay any tax under Part XII.2 in respect of distributions of income earned by the trust from Canadian sources to non-resident beneficiaries. Instead, the rules in subsection 104(7.01) are designed so that there will be a reasonable level of Part I tax in respect of Canadian-source income received by the trust in the event the trust also distributes that income to non-resident beneficiaries in their capacity as beneficiaries. For more information, see the commentary on subsection 104(7.01).

In addition, in the event that the trust pays or credits an amount to a non-resident and that amount is not referred to in paragraph 104(7.01)(b) in respect of the trust for the taxation year, the non-resident will continue to be liable for any Part XIII tax on the amount, except to the extent that the amount is described in paragraph (b) of the definition “exempt amount” in subsection 94(1), or paid or credited before 2004.

Paragraph 94(3)(f) provides additional rules that generally have the effect, on an elective basis, of excluding from the taxable base of the trust for Canadian tax purposes any income relating to property that has been contributed to the trust otherwise than by a resident contributor to the trust or, if there is a current resident beneficiary under the trust, a connected contributor to the trust (i.e., property that is part of the non-resident portion of the trust). In effect, this is accomplished by deeming there to be a second trust in addition to the electing trust. The additional trust is deemed to hold the property that forms the trust’s non-resident portion. This has the effect of removing from the taxable base of the trust any income derived from that property.

Specifically, subparagraph 94(3)(f)(i) provides that if a particular trust files an appropriate election in writing with the Minister of National Revenue to be treated as an “electing trust” (as defined under new subsection 94(1) of the Act), an additional inter vivos trust (referred to as the “non-resident portion trust”) is, for the purposes of the Act other than subsection 104(2), deemed to be created at the first time in a taxation year in which the particular trust exists and is an electing trust. The resulting non-resident portion trust is deemed to continue in existence until the earliest time that the electing trust

  • ceases to be resident in Canada because of subsection (5) or (5.1);
  • ceases to exist; or
  • becomes factually resident in Canada.

Subparagraph (f)(ii) assigns to the non-resident portion trust all property of the electing trust that is part of its non-resident portion, and deems such property not to be, except for the purposes of paragraph 94(3)(f) and the definition “electing trust”, property of the electing trust. This has the effect of carving out of the electing trust’s taxable base for Canadian income tax purposes any income and losses with respect to property held in its non-resident portion. Distributions of income out of a non-resident portion trust to non-resident beneficiaries are not subject to withholding tax under Part XIII unless subsection 212(13.2) applies to the distribution.

Subparagraphs (f)(iii) and (iv) provide that the terms and conditions of, and the rights and obligations of beneficiaries under, the electing trust are deemed to also apply in respect of the non-resident portion trust. In particular, the trustees of the electing trust are deemed to be the trustees of the non-resident portion trust, and the beneficiaries under the electing trust are deemed to be the beneficiaries under the non-resident portion trust. In addition, the non-resident portion trust is deemed to have no resident contributor or connected contributor to it.

Subparagraph (f)(v) deems the non-resident portion trust in respect of its property to be an individual. This does not affect the liability of the trustees of the non-resident portion trust for their own income tax.

Subparagraphs (f)(vi) and (vii) are complementary rules that apply where property that was a part of one portion of the electing trust becomes property that is a part of the other portion of the electing trust. In such circumstances, these subparagraphs deem the property to have been transferred from one portion of the electing trust to the other portion, as the case may be.

Subparagraph (f)(viii) deems the electing trust and the non-resident portion trust to be affiliated with each other and to not deal with each other at arm’s length. Among other things, this has the effect of, ensuring that subsection 69(1) of the Act will apply to the deemed transfers arising under subparagraphs (f)(vi) and (vii).

Subparagraph (f)(ix) provides that the electing trust has jointly, severally and solidarily with the non-resident portion trust, the same rights and obligations as the non-resident portion trust under Divisions I and J of the Act in respect of any taxation year. Furthermore, this subparagraph provides that the electing trust is subject to Part XV of the Act in respect of those rights and obligations. These provisions would be relevant when the non-resident portion trust’s property gives rise to Canadian source income (i.e., under subsection 2(3) and section 115 of the Act) requiring the non-resident portion trust to file a return of income under Part I of the Act.

Subparagraph (f)(x) provides a set of rules that apply if the non-resident portion trust ceases to exist pursuant to the application of subparagraph (f)(i) as described above. For example, the non-resident portion trust will cease to exist if the electing trust ceases to be deemed resident in Canada by reason of subsection 94(3). Immediately before the time that is immediately before the time that it ceases to exist, the non-resident portion trust is deemed to have disposed of

  • its property described by any of subparagraphs 128.1(1)(b)(i) to (iv) for proceeds of disposition equal to its cost amount of the property at the time of the property’s deemed disposition; and
  • each other property for proceeds of disposition equal to the fair market value of the property at the time of the property’s deemed disposition.

In addition, the electing trust is, at the time that is immediately before the time that it ceases to exist, deemed to have reacquired each property described immediately above at a cost equal to the proceeds described immediately above.

Lastly, all persons or partnerships that are beneficiaries under the non-resident portion trust at the time that is immediately before the time that it ceases to exist are deemed to have disposed of their interests in the non-resident portion trust for proceeds equal to the cost amount of the interests at the time of the interests’ deemed disposition. These beneficiaries are also deemed, at the time of the disposition of the interests, to cease to be beneficiaries under the non-resident portion trust.

The electing trust and the non-resident portion trust will each be required to file a return of income for a given taxation year with the Canada Revenue Agency, and will be assigned separate Trust Account Numbers (TANs). Accordingly, if the non-resident portion trust earns income that would be included under any of paragraphs 115(1)(a) to (c) in computing its taxable income earned in Canada for a year, it will be required to report that income separately from the electing trust.

If a trust chooses to not make the election under paragraph 94(3)(f), the rules in subsection 94(3) of the Act will apply without regard to that paragraph. As a result, if a trust does not wish to avail itself of the limited taxation regime under paragraph 94(3)(f) in respect of its non-resident portion property, then it simply need not elect.

For more information on the definition “electing trust” in subsection 94(1) of the Act, see the commentary on that definition.

Paragraph 94(3)(g) of the Act applies when a person withholds and remits Part XIII tax in respect of an amount paid or credited to a trust that is deemed resident in Canada under subsection 94(3). In these circumstances, the amount remitted is deemed to have been paid on account of the trust’s Part I tax for the year to the extent that the amount paid or credited to the trust has been included in its income under that Part for the year.

Excluded Provisions

ITA 94(4)

Subsection 94(4) of the Act provides that the rules in paragraph 94(3)(a) treating non-resident trusts as resident in Canada do not apply for the purposes of:

  • the definitions “arm’s length transfer” and “exempt foreign trust” in subsection 94(1) – thus ensuring that there is no circularity in applying those definitions due to fact that those definitions impose a requirement that a trust be non-resident;
  • subsections 70(6) and 73(1) and paragraph 107.4(1)(c) (other than, for transfers to trusts that occurred before February 28, 2004, subparagraph 107.4(1)(c)(i)), and paragraph (f) of the definition “disposition” in subsection 248(1) – thus ensuring that rules allowing in some cases for a rollover of property on transfers to a Canadian resident trust generally do not apply to transfers to a trust otherwise deemed to be resident in Canada by subsection 94(3));
  • determining whether subsection 107(5) applies to a distribution on or after July 18, 2005 of property to the trust;
  • determining whether an amount can be attributed, under subsection 75(2), to the trust;
  • determining whether the exception, under paragraph 94(14)(a), to property that is restricted property is available in respect of property held by a non-resident trust;
  • paragraph (a) of the definition “mutual fund trust” in subsection 132(6) – making it clear that a trust deemed to be resident in Canada by subsection 94(3) will not be treated as a mutual fund trust for any purpose;
  • determining, for taxation years that begin after July 18, 2005, whether a partnership is a “Canadian partnership” (as defined in subsection 102(1) of the Act); and
  • determining whether, in applying subsection 128.1(1), the trust becomes resident in Canada at a particular time and determining whether, in applying subsection 128.1(4), the trust ceases to be resident in Canada at a particular time – thus ensuring that the deeming of a trust to be resident under paragraph 94(3)(a) does not apply to affect a determination of whether a trust has changed residence at any time (e.g., upon a change of trustees or upon a change of residence of trustees).

Note that paragraphs 94(4)(d) and (e) are generally suspended, for a brief transitional period, in their application to a trust that is subject without interruption to “old” and “new” sections 94. That transitional period starts immediately before the end of the trust’s last taxation year that ends before 2007 and for which it was deemed resident by “old” section 94 and ends immediately after the beginning of the trust’s first taxation year that ends after 2006 (i.e., its first taxation year in respect of which “new” section 94 applies). This is intended to ensure that section 128.1 does not apply to a trust solely because of the transition between the old and new NRT regimes. The suspension of paragraphs 94(4)(d) and (e) does not apply, however, where in the transitional period a change in the trustees of the trust occurred (e.g., the number of trustees changed, the residency of any of the trustees changed, or any of the trustees was replaced). For a summary of the tax consequences resulting from a change in the trust’s status for tax purposes, see the commentary on subsection 128.1(1.1).

Furthermore, except as otherwise permitted under subsection 216(4.1) of the Act, paragraphs 94(3)(a) and 94(4)(c) do not relieve a payer of Canadian-source income from the obligation to withhold amounts under section 215 in connection with amounts paid to a trust deemed to be resident in Canada by subsection 94(3). This is so even though such a trust is not itself liable for Part XIII tax on amounts paid or credited to it, because of the application of subparagraph 94(3)(a)(viii). However, any Part XIII taxes withheld in respect of amounts that are paid or credited to the trust and included in its income will, under paragraph 94(3)(g), be treated as having been paid on account of the trust’s liability for tax under Part I of the Act.

Deemed Cessation of Residence

ITA 94(5)

Subsection 94(5) of the Act deems a trust to have ceased to be resident in Canada at the earliest time in a specified period at which there is neither a “resident contributor” to the trust nor a “resident beneficiary” under the trust. For this purpose, the specified period is the period that would (if the Act were read without reference to subsection 128.1(4)) be a taxation year of the trust

  • that immediately follows a taxation year of the trust throughout which it was resident in Canada by reason of the application of subsection 94(3), and
  • at the end of which the trust is non-resident and not an exempt foreign trust.

For more information on the expressions “resident contributor”, “resident beneficiary” and “exempt foreign trust”, as defined in subsection 94(1), see the commentary on those provisions.

If subsection 94(5) applies to a trust, subsection 128.1(4) will also apply so that the trust’s taxation year is deemed to have ended immediately before the earliest time in the specified period described above. At that deemed taxation year-end, the criteria in subsection 94(3) are satisfied. Accordingly, the trust will be deemed to be resident in Canada for that year.

Subsection 94(5.2) is a related rule that provides relief with respect to the trust’s filing-due date for that year and extends the period of time in which the income of the trust for that year (determined without reference to subsections 104(6) and (12)) is considered payable to a beneficiary in that year for the purposes of subsections 104(6) and (13). Under paragraph 94(3)(d), each “resident beneficiary” or “resident contributor” at the time of that deemed taxation year end, other than “electing contributors” for the particular taxation year, is jointly and severally, or solidarily, liable with the trust for the trust’s income tax liabilities under the Act for that year. For more detail on the expression “solidarily”, please refer to the introductory commentary above on new section 94.

For a summary of the tax consequences resulting from a change in the trust’s status for tax purposes, see the commentary on subsection 128.1(1.1).

Deemed Cessation of Residence

ITA 94(5.1)

Subsection 94(5.1) of the Act deems a trust to cease to be resident in Canada at the earliest time in a taxation year in which it becomes an exempt foreign trust. For this purpose, the taxation year is the trust’s taxation year (determined without reference to subsection 128.1(4))

  • that immediately follows a taxation year of the trust throughout which it was resident in Canada by reason of the application of subsection 94(3); and
  • at a specified time in which the trust is an exempt foreign trust and there is either a resident contributor to the trust or a resident beneficiary under the trust.

Where subsection 94(5.1) of the Act applies, the cessation of residence in Canada of a trust results in the application of subsections 128.1(4). Under that subsection, a taxation year of the trust is deemed to have ended immediately before the earliest time in the specified period described above. At that deemed taxation year-end, the criteria in subsection 94(3) are satisfied. Accordingly, the trust will be subject to tax under Part I on its world-wide income for that year because it is considered under subsection 94(3) to be resident in Canada throughout that year.

Subsection 94(5.2) is a related rule that provides relief with respect to the trust’s filing-due date for that year and extends the period of time in which the income of the trust for that year (determined without reference to subsections 104(6) and (12)) is considered to be payable to a beneficiary in that year for the purposes of subsections 104(6) and (13).

Administrative Relief

ITA 94(5.2)

Subsection 94(5.2) of the Act provides administrative relief for a trust that is deemed to have ceased to be resident in Canada either by reason of subsection 94(5) or (5.1).

Firstly, the return of income for the taxation year that ends immediately before the trust ceases to have a resident beneficiary or resident contributor (or before it becomes an exempt foreign trust) is considered to have been filed on a timely basis if it is filed with the Minister of National Revenue within 90 days from the end of the trust’s taxation year that is deemed by subparagraph 128.1(4)(a)(i) to begin at the particular time. As a result, the trust’s filing-due date for its return of income for the “stub year” is extended to coincide with the filing-due date for its other taxation year that ends in the same calendar year.

In addition, for the purpose of computing its income for the “stub year”, subsection 94(5.2) extends the period of time in which the income of the trust for that year (determined without reference to subsections 104(6) and (12)) is considered to be payable to a beneficiary in that year for the purposes of subsections 104(6) and (13).

This subsection does not apply to a taxation year that ends before Announcement Date if the trust elects, by notifying the Minister of National Revenue in writing on or before its filing-due date for its taxation year that includes the day on which this Act is assented to, to have subsections 94(5) to 94(6) apply in the manner described above in the commentary for subsection 94(5.1).

Becoming or Ceasing to be an Exempt Foreign Trust

ITA 94(6)

Subsection 94(6) of the Act generally provides that, if a trust ceases to be an “exempt foreign trust” (as defined in subsection 94(1)) at any time and at that time there is either a resident beneficiary under or a resident contributor to the trust at that time, the trust’s taxation year is deemed to have ended immediately before that time, a new taxation year is deemed to have begun at that time, and the trust is deemed not to have established a fiscal period before that time. However, subsection 94(6) does not apply where a trust ceases to be an exempt foreign trust because it becomes resident in Canada.

If subsection 94(6) applies because a trust ceases to be an exempt foreign trust, subsection 94(3) may apply to deem the trust to be resident in Canada for the new taxation year of the trust if the criteria set out in that subsection are satisfied at a “specified time” in respect of the trust for the new taxation year (generally, the end of the taxation year). For more detail, see the commentary on subsection 94(3).

Elective Transition: subsections 94(5) to (6)

An election is available to have subsections 94(5) and (6) apply as provided under the earlier proposed amendments (the “outstanding proposals”) tabled during the second session of the 39th Parliament, which were not enacted before Parliament dissolved in September 2008. If a trust elects, by notifying the Minister of National Revenue in writing on or before its filing-due date for its taxation year that includes the day on which this Act is assented to, subsection 94(5) provides the rules for determining how subsection 128.1(4) will apply when the trust ceases to have a “resident contributor” to the trust or a “resident beneficiary” under the trust in a taxation year that ends before Announcement Date. Specifically, the trust will be deemed to have ceased to be resident in Canada at the earliest time in a specified period at which there is neither a “resident contributor” to the trust nor a “resident beneficiary” under the trust. For this purpose, the specified period is the period that would (if the Act were read without reference to subsection 128.1(4)) be a taxation year of the trust

  • that immediately follows a taxation year of the trust throughout which it was resident in Canada by reason of the application of subsection 94(3);
  • at the beginning of which there was either a resident contributor to, or a resident beneficiary under, the trust; and
  • at the end of which the trust is non-resident and not an exempt foreign trust.

As a result of the cessation of the trust’s residence, subsection 128.1(4) will apply.

In addition, if a trust makes this election, subsection 94(6) of the Act provides the rules for determining the trust’s taxation year if it either becomes, or ceases to be, an exempt foreign trust in a taxation year that ends before Announcement Date. Specifically, subsection 94(6) of the Act provides that, if a trust becomes or ceases to be an “exempt foreign trust” (as defined in subsection 94(1)) at any time, the trust’s taxation year is deemed to have ended immediately before that time, a new “stub” taxation year is deemed to have begun at that time, and the trust is deemed not to have established a fiscal period before that time. However, subsection 94(6) does not apply where a trust ceases to be an exempt foreign trust because it becomes resident in Canada.

In addition, a trust that makes this election will not be entitled to the administrative relief provided by subsection 94(5.2).

For more information on the expressions “resident contributor”, “resident beneficiary” and “exempt foreign trust”, as defined in subsection 94(1), see the commentary on those provisions.

Limit to Amount Recoverable

ITA 94(7) and (8)

Subsection 94(7) of the Act allows for a limitation of the amount that may be recovered from a person that would otherwise be jointly and severally, or solidarily, liable for the entire amount of a trust’s tax obligations under the Act. Subsection 94(7) applies to a person (other than one deemed, by subsection 94(12) or (13), to be a contributor or a resident contributor to the trust) in respect of a particular taxation year of the trust where three conditions are satisfied.

The first condition is satisfied in respect of a particular taxation year of the trust if

  • under subparagraph 94(7)(a)(i), the person is jointly and severally, or solidarily, liable with the trust only because the person was a “resident beneficiary” (as defined in subsection 94(1)) under the trust at a specified time in respect of the trust for the particular year, or
  • under subparagraph 94(7)(a)(ii), at a specified time in respect of the trust for the particular year, the total amount (determined with reference to paragraphs 94(2)(b), (e), (h), (p) and (q) and subsection 94(9)) of contributions made to the trust by the person (or by another person or partnership not dealing at arm’s length with the person) is not more than the greater of $10,000 and 10% of the total amount of all contributions made to the trust before that time.

The second condition, under paragraph 94(7)(b), requires that the person have filed on a timely basis all information returns required to be filed by the person in respect of the trust under section 233.2 (or on any later day that is acceptable to the Minister of National Revenue). However, the second condition need not be satisfied if the first condition is satisfied because the total determined under subparagraph 94(7)(a)(ii) (in respect of the person and all persons or partnerships not dealing at arm’s length with it) is $10,000 or less.

The third condition, under paragraph 94(7)(c), is satisfied in respect of a person and a particular taxation year of the trust where it is reasonable to conclude that each transaction or event that occurred before the end of the particular year at the direction of, or with the acquiescence of, the person satisfied the following conditions:

  • none of the purposes of the transaction or event was to enable the person to avoid or minimize any liability under a provision referred to in paragraph 94(3)(d) in respect of the trust, and
  • the transaction or event was not part of a series of transactions or events any of the purposes of which was to enable the person to avoid or minimize any liability under a provision referred to in paragraph 94(3)(d) in respect of the trust.

There are a number of transactions or events, or series of transactions or events, that may result in a failure to satisfy the third condition (e.g., an artificial dilution of a person’s relative contribution to the trust (i.e., below the 10% level); or corporate distributions that have the effect of avoiding or minimizing the impact of the three-year rule described in subsection 94(9)).

Reference should be made in this context to the definition “contribution” in subsection 94(1), as well as to related rules in subsection 94(2).

Where subsection 94(7) applies to a person in respect of a taxation year of a trust, the amount recoverable at any time from the person in respect of the year is limited to the person’s “recovery limit”, determined under subsection 94(8), in respect of the trust and the year.

Under subsection 94(8), the amount of the recovery limit that applies to a particular person at any particular time is calculated as follows:

  • ADD amounts received or receivable after 2000 and before the particular time by the particular person on the disposition of all or part of the particular person’s interest as a beneficiary under the trust, or by another person or partnership that was, at the time the amount became receivable, a specified party (as defined in subsection 94(1)) in respect of the particular person on the disposition of all or part of the specified party’s interest as a beneficiary under the trust;
  • ADD an amount (other than an amount described in the paragraph above) made payable by the trust after 2000 and before the particular time to the particular person because of the interest of the particular person as a beneficiary under the trust, or to another person or partnership (that was, at the time the amount became payable, a specified party in respect of the particular person) because of the interest of the specified party as a beneficiary under the trust;
  • ADD the amount of any loan received after August 27, 2010 by the particular person, or by another person or partnership (that was, when the amount was received, a specified party in respect of the particular person) to the extent that the amount has not been repaid;
  • ADD the fair market value of benefits received or enjoyed (other than amount described in the paragraphs above), after 2000 and before the particular time, under the trust by the particular person (or by a person or partnership that was, at the time the benefit was received or enjoyed, a specified party in respect of the particular person);
  • ADD the maximum amount that would be recoverable from the particular person at the end of the trust’s 2006 taxation year under “old” subsection 94(2) (i.e., as it read in its application to taxation years that end before 2007) if the trust had had tax payable under Part I of the Act at the end of that taxation year in excess of the total of the amounts described in respect of the particular person under “old” paragraphs 94(2)(a) and (b) (i.e., as they read in their application to taxation years that end before 2007), except to the extent that the amount so recoverable is in respect of an amount that is included in the particular person’s recovery limit because of subparagraph 94(8)(a)(i) or (ii) (note that where a trust created after 2000 and before 2007 has elected under the coming-into-force of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007, the amount described by this paragraph would not apply in respect of it because “old” section 94 would never have applied to it);
  • ADD, to the extent that it exceeds the total of the first five amounts, the total amount (determined with reference to paragraphs 94(2)(b), (e), (h), (p) and (q) and subsection 94(9)) of contributions made to the trust by the particular person;
  • SUBTRACT previous recoveries by the CRA under subsection 94(3) or under “old” section 94 (i.e., as it read in its application to taxation years that end before 2007);
  • SUBTRACT previous recoveries by the CRA under subsection 94(3) or under “old” section 94 (i.e., as it read in its application to taxation years that end before 2007) from a specified party in respect of the particular person in respect of the trust and the year or a preceding taxation year of the trust; and
  • SUBTRACT the amount, if any, by which the particular person’s tax payable under Part I of the Act for any taxation year in which an amount described in any of subparagraphs 94(8)(a)(i) to (iv) was paid, became payable, was received, became receivable or was enjoyed by the particular person exceeds the amount that would have been the particular person’s tax payable under Part I of the Act for that taxation year if no such amount were paid, became payable, were received, became receivable or were enjoyed by the particular person in that taxation year.

For more information on subsections 94(11) to (13), or the expression “specified party” as defined in subsection 94(1), see the commentary on those provisions.

Determination of Contribution Amount

ITA 94(9)

Subsection 94(9) affects the calculation of the amount of a “contribution” (as defined in subsection 94(1)) to a trust of “restricted property” (as defined in subsection 94(1)). This special rule will be relevant in determining whether the “recovery limit” limitation applies to a contributor to the trust, and in determining the amount of that recovery limit. The rule is also relevant to determining certain amounts in respect of trust contributions under sections 162 and 164 of the Act, as well as amounts in respect of an electing contributor for purposes of the attribution regime in subsections 94(16) and (17).

The amount of a contribution to a trust because of a transfer to the trust of restricted property is deemed by subsection 94(9) to be the greater of:

  • the amount, otherwise determined, at that time of the contribution; and
  • the amount that is the greatest fair market value of the restricted property (or of substituted property, determined by reference to subsection 248(5) of the Act)) in the period that begins immediately after that time and ends at the end of the third calendar year after that time.

For more information on the expression “restricted property” as defined in subsection 94(1), see the commentary on that definition.

Subsection 94(9) allows for a reasonable opportunity for recovery of tax by the CRA in the context of a transaction or series of transactions involving the transfer of restricted property. Consider, for example, an estate freeze under which common shares in the capital stock of a corporation are transferred directly or indirectly to a non-resident trust. Because of the difficulties associated with valuing the common shares at the time of the transfer, it is appropriate to provide for a valuation as described above.

In conjunction with subsection 94(9), subparagraph 152(4)(b)(vii) of the Act is added to ensure, among other things, that a reassessment of a taxpayer arising out of the application of subsection 94(9) can be undertaken by the CRA within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer’s relevant taxation year.

Where Contributor Becomes Resident in Canada within 60 Months after Making a Contribution

ITA 94(10)

Subsection 94(10) of the Act applies to determine whether there is a “connected contributor” (as defined in subsection 94(1)) to a trust for the purposes of section 94, including in applying the definition “resident beneficiary” (as defined in subsection 94(1)). Under paragraph 94(3)(d) of the Act, a resident beneficiary can, to an extent, be liable for the trust’s income tax under Part I of the Act. For more information, see the commentary on those definitions and subsections 94(3) and (7) to (9).

A “contribution” (as defined in subsection 94(1)) to a trust by a contributor is considered to have been made at a time other than a “non-resident time” (as defined in subsection 94(1)) if the contributor becomes resident in Canada at any time within the period (referred to in this commentary as the “60-month post period”) 60 months after the time of the contribution. However, to facilitate the administration of the definition “non-resident time”, paragraph (b) of the definition “connected contributor” and subsection 94(3), the definition “non-resident time” is drafted so that such a contributor and the trust may, subject to subsection 94(10), treat the time of the contribution as a non-resident time for the purposes of applying the definition “connected contributor” and subsection 94(3) at a “specified time” (as defined in subsection 94(1)) in respect of the trust for any particular trust taxation year if at the specified time the contributor still has not become resident in Canada within the 60-month post period.

Subsection 94(10) deems (for the purpose of applying section 94 at each specified time, in respect of a trust for a taxation year of the trust, that is before the particular time at which the contributor becomes resident in Canada within the 60-month post period) the contribution to have been made at a time other than a non-resident time of the contributor if:

  • in applying the definition “non-resident time” as of each of those specified times, the particular contribution was made at a non-resident time of the contributor; and
  • in applying the definition “non-resident time” at the particular time, the contribution is made at a time other than a non-resident time of the contributor.

Where subsection 94(10) applies, the contributor will be considered to be a “connected contributor” to the trust and, if, as a result, there was a “resident beneficiary” at a specified time, the trust will be deemed resident for that prior taxation year. In cases where the trust was not already deemed by subsection 94(3) to be resident in Canada for the prior year (i.e., because for the prior year there were no resident contributors to the trust and no resident beneficiaries under the trust), the trust would be treated as resident in Canada for that year and the resident beneficiary would, because of subsection 94(3), generally be jointly and severally, or solidarily, liable for Part I tax on the trust’s income for the prior year. In this regard, please refer to the commentary on paragraphs 94(3)(c) and (d). For more details on the expression “solidarily”, please refer to the introductory commentary above on section 94. For more information on the definition “electing contributor”, see the commentary on that definition.

Subparagraph 152(4)(b)(vii) of the Act is added to ensure, among other things, that a reassessment of a taxpayer arising out of the application of subsection 94(10) can be undertaken by the CRA within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer’s relevant taxation year.

Deemed Contributor or Resident Contributor

ITA 94(11) to (13)

Subsections 94(11) to (13) provide a set of related anti-avoidance rules that apply where it is reasonable to conclude that one of the reasons for a loan or transfer of property from a trust (the “original trust”), that is deemed under paragraph 94(3)(a) to be resident in Canada (or was deemed resident because of “old” subsection 94(1) as it read in its application to taxation years that end before 2007 or would have been so deemed under either of those provisions if they had applied without regard to the period of time in which a contributor to the trust was resident in Canada), to another trust (the “transferee trust”) is to avoid or minimize the liability, of any person under Part I of the Act, that arose, or that would otherwise have arisen, because of the application of section 94 (or because of subsection 94(1) as it read in its application to taxation years that end before 2007). Note that if a deemed Canadian resident trust, that was created after 2000 and before 2007 and that has elected under the coming-into-force of new section 94 to have new section 94 apply to it for all of its taxation years that end before 2007, has made a transfer described by paragraph 94(11)(a), the trust will be an “original trust” by operation of subparagraph 94(11)(b)(i).

Where a loan or transfer described by subsection 94(11) is made at a particular time, the original trust is deemed, under subsection 94(12), to be a resident contributor to the transferee trust for the purpose of applying section 94 in respect of the transferee trust.

Where such a loan or transfer is made at a particular time, a person that is at that time a contributor to the original trust is deemed, under subsection 94(13), to be a contributor to the transferee trust and (if at that time the person is also a connected contributor to the original trust) a connected contributor to the transferee trust. For more information on the definitions “contributor” and “connected contributor” in subsection 94(1), see the commentary on those definitions.

Subsection 94(7) of the Act, generally provides that the liability of a “resident contributor” is limited by that contributor’s recovery limit, as determined by reference to subsections 94(7) to (9). However, subsection 94(7) does not apply to a person that is deemed, by subsection 94(12) or (13), to be a contributor or a resident contributor to the trust. For more information on the definition “resident contributor” or subsections 94(3) and (7) to (9), see the commentary on those provisions.

Restricted Property – Exceptions

ITA 94(14)

Subsection 94(14) of the Act provides two separate rules that can operate to suspend, in limited circumstances, a particular property’s status as restricted property of a particular person or partnership.

Paragraph 94(14)(a) provides that a particular property that is at any time held, loaned or transferred by the particular person or partnership will not be treated as restricted property held, loaned or transferred at that time by the person or partnership if

  • the particular property (or property for which the particular property is, or is to be, substituted property (including by reference to subsection 248(5) of the Act)) was not, and will not be, at any time acquired, held, loaned or transferred by the person or partnership (or any person or partnership with whom the person or partnership does not at any time deal at arm’s length) in whole or in part for the purpose of permitting any change in the value of the property of a corporation (that is, at any time, a closely held corporation) to accrue directly or indirectly in any manner whatever to the value of property held by a non-resident trust (n.b., because of subsection 94(4) a non-resident trust includes here a trust that is deemed to be resident in Canada for other purposes under subsection 94(3));
  • the Minister of National Revenue is satisfied that this is the case with respect to the property (and property, if any, for which it is to be substituted); and
  • the particular property is identified in prescribed form with prescribed information.

In the case of a person, the prescribed form in which the particular property is identified must be filed by the person’s filing-due date for the person’s taxation year that includes that time. In the case of a partnership, the prescribed form must be filed on or before the day on which a return is required by section 229 of the Regulations to be filed in respect of the partnership (or would be required to be filed if that section applied to the partnership). In either case, the prescribed form may be filed on or before another date acceptable to the Minister of National Revenue. That other date will generally be a date later than the person or partnership’s relevant filing-due date, but in circumstances in which the person or partnership has no filing-due date, the other date is intended to provide the Minister of National Revenue with the ability to choose a filing deadline for the prescribed form.

Paragraph 94(14)(b) provides that property is not restricted property of a particular person or partnership that is held, loaned or transferred, as the case may be, at that time by the particular person or partnership if at that time:

  • the particular property is a share of the capital stock of a corporation, a fixed interest in a trust, or an interest as a limited partner in a partnership;
  • there are at least 150 persons each of whom holds at that time property that at that time is identical to the particular property, and has a total fair market value of at least $500;
  • the total of all amounts each of which is the fair market value, at that time, of the particular property (or of identical property that is held, at that time, by the particular person or partnership or a person or partnership with whom the particular person or partnership does not deal at arm’s length) does not exceed 10% of the total fair market value, at that time, of the particular property and of identical property held by any person or partnership;
  • property that is identical to the particular property can normally be acquired by and sold by members of the public in the open market; and
  • the particular property, or identical property, is listed on a designated stock exchange

For more details on the definitions “restricted property” and “closely held corporation”, see the commentary on those provisions.

Anti-avoidance

ITA 94(15)

Subsection 94(15) of the Act is an anti-avoidance provision.

Determining Whether There are 150 Persons

Paragraph 94(15)(a) of the Act is relevant to the application of the definition “closely held corporation” in subsection 94(1), paragraph (h) of the definition “exempt foreign trust” in subsection 94(1), and paragraph 94(14)(b). These provisions, respectively, provide for different results based, in part, on the condition that there be at a particular time at least 150 shareholders of the capital stock of a corporation, at least 150 beneficiaries under a trust, or at least 150 persons that hold property (identical to a particular property) issued by a trust, corporation or limited partnership.

Paragraph 94(15)(a) provides that, if it can reasonably be considered that one of the main reasons that a person or partnership is at any time a shareholder of a corporation, holds a capital interest in a trust, or holds a property is to cause the applicable condition above to be met in respect of the corporation, the trust or – in the case of paragraph 94(14)(b) – the particular property (or an identical property), the condition is deemed not to have been met with respect to the corporation, the trust or the particular or identical property.

Where paragraph 94(15)(a) applies in respect of a particular time and in respect of the corporation or trust, in the case of the corporation, it would be treated at that time as a closely held corporation and in the case of the trust, it would not be treated at that time as an exempt foreign trust. In the case of paragraph 94(14)(b), the particular property and the identical property would no longer qualify under paragraph 94(14)(b) for an exemption from treatment as restricted property.

Exempt Foreign Trusts – paragraph (f)

Paragraph 94(15)(b) applies if at any time a resident contributor has contributed restricted property – or contributes property for which restricted property is later substituted (including by reference to subsection 248(5) of the Act) – to a trust. Where this is the case, for each taxation year of the trust for which it is at or after the contribution and at a specified time in that taxation year (generally meaning the end of the taxation year) an exempt foreign trust because of paragraph (f) of the definition “exempt foreign trust” in subsection 94(1), any of the trust’s income from, or taxable capital gains from the disposition of, the restricted property is not to be included in computing the trust’s income. Instead, those amounts are to be included in computing the income of the resident contributor for its taxation year in which the relevant trust taxation year ends.

Exempt Foreign Trusts – paragraph (h)

Paragraph 94(15)(c) is intended to apply to trusts that initially qualify for the commercial trust exemption under paragraph (h) of the definition “exempt foreign trust”, but that compromise an essential indicator of commerciality as a result of the interest of a beneficiary under the trust ceasing to be fixed. The anti-avoidance rule seeks to ensure that the trust is taxed as though it were not an exempt foreign trust during the entire period in which there are Canadian investors in the trust and the trust qualified as an exempt foreign trust under paragraph (h) of that definition.

Paragraph 94(15)(c) applies in respect of a trust for a particular taxation year of the trust if at the end of its immediately preceding taxation year, it was an exempt foreign trust because of paragraph (h) of the definition “exempt foreign trust” in subsection 94(1), and in the particular taxation year the beneficial interest of a trust investor ceases to be a fixed interest (as defined in subsection 94(1)) in the trust (n.b., in these circumstances, the beneficial interests of all of the trust’s investors would be expected to also cease to be fixed interests in the trust because the definition “fixed interest” requires that none of the rights to income or capital in respect of any interest under the trust depend upon a discretionary power). In addition, in order for this provision to apply, there must be either a resident contributor to, or resident beneficiary under, the trust immediately before the time that the beneficial interest under that trust ceases to be a fixed interest.

Where this is the case, the trust is subject to a deemed year-end under subsection 94(6) and the trust is deemed to not be an exempt foreign trust for the resulting “stub” taxation year (referred to in this paragraph and this commentary as the “assessment year”). The trust is required to include a specified amount in computing its income for the assessment year. The specified amount is intended to be a proxy for the trust’s accumulated income since it first acquired a resident beneficiary or resident contributor (the post-fixed interest computation or “PFIC” amount). More specifically, the PFIC amount is the increase, if any, in the net fair market value of the trust from the initial time at which there are Canadian investors in the trust (or a resident contributor who is not a beneficiary of the trust) and the trust qualifies as an exempt foreign trust under paragraph (h) of that definition to the end of the assessment year, minus the total amount of contributions made to the trust in that period (“the interest gross-up period”).

In addition to this income inclusion for the trust in the assessment year, for each taxation year of the trust included in its interest gross-up period, the trust is made liable for unpaid instalment interest, computed as though the trust had unpaid Canadian taxes for the year (using the federal rate that applies for inter vivos trusts that have income not earned in a province, currently 42.92%) in respect of the specified amount. The resulting excess is in addition to any other excess otherwise determined in respect of the trust under subsection 161(1) of the Act.

The example below helps to illustrate the operation of subsection 94(15).

Example

There are 150 beneficiaries under a trust (the “Trust”) that is an exempt foreign trust by reason of paragraph (h) of the definition “exempt foreign trust” in subsection 94(1) for each of its 2007 to 2015 taxation years. Three of these beneficiaries are resident in Canada and acquired their interests in the Trust on June 15, 2005 in exchange for consideration equal to the fair market value of their respective interests. All of these resident beneficiaries remain investors in the trust as of June 15, 2016. On June 15, 2016, the terms of the trust are amended such that the interests in the trust are no longer fixed interests.

Results

1. Subsection 94(6) creates a deemed year-end (the assessment year) in the trust at the time immediately before the time that the interests cease to be fixed interests.

2. Although the conditions for exempt foreign trust status are still met at the end of the assessment year, the trust is deemed not to be an exempt foreign trust in the year.

3. For the assessment year, the Trust is deemed resident in Canada and is required to include in its income for Canadian tax purposes the amount of any of its income that has accumulated since June 15, 2005, the date on which it first acquired a resident beneficiary or resident contributor.

4. With respect to the interest payable on the Trust’s tax payable for its taxation year that ends on June 15, 2016, interest will be computed on the basis that 1/12 of the tax payable on the Trust’s accumulated income was payable in each of the Trust’s 2005 to 2016 taxation years.

Attribution to Electing Contributors

ITA 94(16)

Subsection 94(16) of the Act provides rules for attributing the income of a trust that is deemed to be resident in Canada under subsection 94(3) to its electing contributors. The provision applies on an electing contributor-by-electing contributor basis. Losses of a trust cannot be attributed to an electing contributor. However, the amount of trust income to be attributed to an electing contributor is reduced by the amount of the trust’s losses of other years deducted by the trust in computing its taxable income. For more information on the definition “electing contributor” in subsection 94(1), see the commentary on that definition.

Paragraph 94(16)(a) of the Act provides for an income inclusion for an electing contributor in respect of a trust. This income inclusion is computed by subtracting from the trust’s income for the taxation year the amounts deducted by the trust under section 111 of the Act as losses for the year (thus ensuring that electing contributors benefit from their proportionate share of trust losses), and multiplying the result by the proportion that the electing contributor’s share of contributions made to the trust is of the total amount that would be contributions to the trust by resident contributors or connected contributors if those contributors were electing contributors in respect of the trust. This proportion is itself computed to account for joint contributors (as defined under subsection 94(1)). If there are joint contributors in respect of the trust and a contribution, the electing contributor’s share of that contribution will be divided equally among the number of joint contributors in respect of that contribution. Paragraph 94(16)(a) therefore has the effect of attributing to electing contributors their proportionate share of the income of the trust.

Paragraph 94(16)(a) provides that the income of the trust that is available to be attributed to electing contributors is its income computed after taking into account deductions available to the trust for amounts allocated to trust beneficiaries, but before taking into account amounts deducted by the trust under paragraph 94(16)(f). After applying the attribution rules to any electing contributors in respect of the trust, the remaining income, if any, in the trust – ignoring income retained for purposes of applying losses in computing the trust’s taxable income – would be subject to Part I tax. It is expected that this would mainly be income derived from contributions by former residents of Canada.

Paragraph 94(16)(b) characterizes the income attributed to electing contributors of a trust. It operates, subject to the rules in paragraph 94(16)(c), to deem amounts included in the income of electing contributors under paragraph 94(16)(a) to be income from property from a source in Canada.

Paragraphs 94(16)(c) to (e) provide rules that permit a trust to designate, for electing contributors in respect of the trust, an amount of the trust’s foreign income and foreign taxes. Where the designation of an amount of foreign income is made, the amount designated is deemed, for the purposes of paragraphs 94(16)(c) and (d) and section 126, to be the electing contributor’s income for the year from that source. These rules operate in a manner similar to rules in subsections 104(22) to (22.3) of the Act that apply in respect of amounts made payable to beneficiaries under a trust. Note that the rules in paragraph 94(3)(b) will apply in determining the source of the designated income and the amount of foreign tax paid to that source. For more information on how to compute the trust’s income from a foreign source and the amount of foreign taxes paid, see the commentary on paragraph 94(3)(b).

A trust designation under these rules in respect of a source of its income is valid only if it is reasonable to consider that the amount designated is part of the amount included under paragraph 94(16)(a) in the income of the electing contributor for the electing contributor’s taxation year in which that trust year ends, and only if the total of all amounts each of which is an amount designated by the trust under paragraph 94(16)(c) or subsection 104(22) in respect of that source does not exceed the trust’s income for its taxation year from that source.

Paragraph 94(16)(d) treats an electing contributor, as a consequence of the trust’s designation of a source under paragraph 94(16)(c) in the contributor’s favour, as having paid in respect of the source a pro rata share of the business-income tax or non-business-income tax paid by the trust. The pro rata share for the electing contributor is equal to the proportion of the trust’s income from that source giving rise to such tax that was designated by the trust in favour of the electing contributor. For this purpose, paragraph 94(16)(d) specifies that the terms “business-income tax” and “non-business-income tax” have, in subsection 94(16), the meanings they have under subsection 126(7) of the Act.

Paragraph 94(16)(e) requires that a trust recalculate, for purposes of the trust computing certain deductions in respect of foreign taxes paid by it, amounts of its income and business-income tax and non-business-income tax to account for the designation made in favour of electing contributors.

Paragraph 94(16)(f) provides a trust with a deduction for a taxation year corresponding to amounts included in an electing contributor’s income under paragraph 94(16)(a).

Paragraph 94(16)(g) is an anti-avoidance rule that prevents the definition “joint contributor” from applying in certain circumstances. If an electing contributor makes a contribution to a trust as part of a series of transactions or events in respect of which another person has made the same contribution (e.g., because of the extended transfer or contribution rules in subsection 94(2)), and one of the main purposes of the series of the transactions was to obtain a specified tax benefit, the contributor and the other person are not treated as joint contributors in applying the rules in paragraph 94(16)(a) to (f) to them. In effect, the income amount computed in respect of each of the other joint contributors’ amounts in respect of the contribution will be based on subparagraph (i) of A of the formula in paragraph 94(16)(a), and the resulting income inclusion will be higher than otherwise determined. For this purpose, a specified tax benefit means a benefit from any deduction in computing income, taxable income or tax payable under the Act or any balance of undeducted outlays, expenses or other amounts available to the other person or any exemption available to the other person from tax payable under the Act.

Note that in respect of a contribution made by a person who is non-resident at the particular time of the contribution, if the person later becomes resident in Canada within 60 months after the particular time, subsection 94(10) applies to treat the person as having made that contribution at a time other than a non-resident time. As a result, the person will be treated as a connected contributor at the time (referred to in this commentary as the “change-in-status time”) at which the requirements of paragraph (a) of the definition “connected contributor” cease to be met in respect of the person. That contribution will, as of the change-in-status time, be treated as having become part of the resident portion at the time at which the contribution was made. In these circumstances, and assuming that the trust has existing electing contributors at all relevant times, the portion of the trust’s income derived from that contribution and that is required to be included in computing the trust’s income for a taxation year that ends before the change-in-status time will not be attributed to any contributor during the time that is before the change-in-status time, but will instead be taxed at the trust level.

Subsection 94(16) applies to taxation years that end after March 4, 2010.

The examples below help to illustrate the operation of subsection 94(16).

Example 1

Prior to 2011, several persons have made contributions, while they were resident in Canada, to a pre-existing non-resident trust, totalling $30,000. None of those persons is resident in Canada in 2011. The trust has also received contributions from non-resident persons who have never been resident in Canada totalling $10,000. No distributions are made from the trust during its 2011 taxation year. The trust is not an exempt foreign trust.

Kamil, Prasanna and Chris are long-term residents of Canada. In February 2011, Kamil makes a contribution of $10,000 to the trust and Prasanna makes a contribution of $5,000 to the trust. Both contributions were made in cash. In August 2011, Chris contributes securities that have a total fair market value of $5,000, to the trust. None of Kamil, Prasanna or Chris has previously contributed to trust. None of them takes an interest in the trust in exchange for their contributions.

The trust realizes income of $2,500 and losses of $500 during its 2011 taxation year. All of the income and losses result from the property contributed by the current and former residents of Canada. The $10,000 of property contributed by persons who have never been resident in Canada did not result in any income or losses during the 2011 taxation year.

Kamil and Prasanna do not elect to be “electing contributors” in respect of the trust. Chris elects to be an “electing contributor” in respect of the trust.

Results

1. The trust is resident in Canada for its 2011 taxation year because of subsection 94(3). Assume that the trust is not an “electing trust” as defined in subsection 94(1).

2. Since Chris is an “electing contributor” in respect of the trust, he is required to include an amount in income in respect of his contribution for his taxation year in which the trust’s 2011 taxation year ends. Applying the formula in paragraph 94(16)(a), he will be attributed $200 to be included in income as follows:

($5,000 / $50,000) x ($2,500 – $500) = $200

3. Under paragraph 94(16)(f), the trust will be permitted a $200 deduction in computing its income for its 2011 taxation year.

4. Since Kamil and Prasanna do not elect to be “electing contributors” in respect of the trust, they will be jointly, severally and solidarily liable with the trust for the Canadian income tax liability on its remaining income of $1,800 for its 2011 taxation year (as will be any resident beneficiaries under the trust).

5. Note that the “non-resident portion” of the trust is not involved in these computations. In other words, the results described above would be obtained even if the trust did realize income or losses resulting from the $10,000 of property contributed by the non-resident persons who have never been resident in Canada.

Example 2

Assume the same facts as in Example 1 except that the trust’s income for the year before any deduction under subsection 104(6) or paragraph 94(16)(f) is $50,000 and that the trust has non-capital losses of other years totalling $15,000 and net capital losses of other years totalling $10,000, which are available to be deducted by the trust in computing its taxable income for 2011. In addition, the trust has made $20,000 of its income payable to its beneficiaries.

Results

1. The trust is resident in Canada for its 2011 taxation year because of subsection 94(3). Assume that the trust is not an “electing trust” as defined in subsection 94(1).

2. The trust’s income for 2011(computed without reference to paragraph 94(16)(f)) is $50,000 less the $20,000 payable to the beneficiaries of the trust, or $30,000. The trust decides to deduct $10,000 of its non-capital losses of other years and $10,000 of its net capital losses of other years. After the application of its losses to 2011, the trust will have $5,000 in non-capital losses of other years available to be applied to future years.

3. Since Chris is an “electing contributor” in respect of the trust, he is required to include an amount in income for his taxation year in which the trust’s 2011 taxation year ends. Applying the formula in paragraph 94(16)(a), he will be required to include $1,000 in income as income from property from a source in Canada as follows:

($5,000 / $50,000) x ($30,000 – $20,000) = $1,000

4. Under paragraph 94(16)(f), the trust will be permitted to deduct $1,000 in computing its income for its 2011 taxation year. As a result, its net income will be $29,000 ($50,000 -$20,000 – $1,000 (taking into account the $20,000 payable to its beneficiaries)) and its taxable income will be $9,000 ($29,000 – $20,000 (taking into account the $20,000 of total losses deducted by it)) for 2011. Kamil and Prasanna will be jointly, severally and solidarily liable with the trust for its resulting income tax liability on that income (as will be any resident beneficiaries under the trust).

5. Note that if the trust had made an election under subsection 104(13.1) in respect of the $20,000 of income payable to its beneficiaries, the amount to be included in Chris’ income would have been $3,000 ($5,000 / $50,000) x ($50,000 – $20,000)), and the taxable income of the trust would have been $27,000 ($47,000 – $20,000).

Example 3

Luke and Marie are long-term residents of Canada and in 2004 each contributed $10,000 to a non-resident trust for the benefit of their adult children, Karen and Paul. There are no other beneficiaries under the trust. Karen lives in Canada and Paul lives in Country X. The trust is considered to be resident in Country X, a country with which Canada does not have a tax treaty. David, who is unrelated to Luke and Marie and their children, was a life-long Canadian resident who ceased to be resident in Canada on May 15, 2004 and made a $10,000 contribution to the trust on May 17, 2004. Marie elects to be an “electing contributor” in respect of the trust, but Luke does not.

The trust realizes $10,000 in income from property during its 2011 taxation year, of which $2,000 was earned in Country Y, $4,000 was earned in Country X, and the remainder was earned in Canada. The trust distributes $2,000 cash to each beneficiary. The terms of the trust are silent on the source of income to be distributed to the beneficiaries. The trust does not have any losses to apply during its 2011 taxation year.

Country Y imposes tax of 25% on the $2,000 earned in Country Y such that the trust pays $500 in tax to Country Y. Country X imposes tax on all of the trust’s income at a rate of 30%, but allows a foreign tax credit for tax payable to another country to a maximum of 15% such that the trust pays $2,100 in tax to Country X (30% x $10,000 – 15% x $6,000). Although the tax payable to Canada and Country Y exceeds 15% of the income earned in each of those countries, Country X limits the foreign tax credit to 15%.

Results

1. The trust is resident in Canada for its 2011 taxation year because of subsection 94(3). Assume that the trust is not an “electing trust” as defined in subsection 94(1).

2. Under paragraph 94(16)(a), Marie is required to include an amount in her 2011 income computed according to the formula

A/B (C – D)

where

A is the total of each of Marie’s contributions, or $10,000 in this example.

B is the total of all amounts each of which is the amount that would be determined under A for each resident contributor, or connected contributor, to the trust at the specified time if all of those contributors were electing contributors in respect of the trust, or $30,000 in this example.

C is the trust’s income for the year computed without reference to paragraph 94(16)(f), or $6,000 ($10,000 – $4,000) in this example.

D is the amount of net capital loss or non-capital loss of the trust applied in the year, or nil in this example.

As a result, Marie is required to include $2,000 ($10,000 / $30,000 x $6,000) in her income for 2011, and the trust is entitled to a deduction for that $2,000 under paragraph 94(16)(f).

3. Under paragraph 94(16)(c), the trust may designate an amount, in respect of Marie, not exceeding the lesser of its income from a source in a country other than Canada ($6,000) and the amount that may reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust) to be part of the amount included in Marie’s income because of paragraph 94(16)(a) ($2,000).

Note that the amount designated in respect of Marie reduces the amount that can be designated in respect of Karen under subsection 104(22). Alternatively, an amount designated in respect of Karen would reduce the amount that could be designated in respect of Marie.

Assuming that the trust makes a designation of $2,000 in respect of Marie under paragraph 94(16)(c), in addition to any non-business-income tax otherwise paid by Marie, Marie is, under paragraph 94(16)(d), deemed to have paid non-business-income tax equal to the amount determined by the formula

A × B/C

where

A is the total non-business-income tax of the trust for its 2011 taxation year paid to a country other than Canada in respect of the designated income source computed without reference to paragraph 94(16)(e), or the $2,600 in total paid to Countries X and Y.

B is the amount designated in respect of Marie, or $2,000 in this example.

C is the amount of the trust’s income for the year from the designated income source, or $6,000 in this example. Note that paragraph 94(3)(b)(ii)(A) deems the income from Country Y to be from Country X and not from any other source.

As a result, Marie is deemed to have paid $866.67 in non-business-income tax under paragraph 94(16)(d).

4. In conjunction with the designation in respect of Marie under paragraph 94(16)(d), paragraph 94(16)(e) operates to reduce the trust’s income from Country X for 2011 by the amount designated in respect of Marie, and to reduce the amount of non-business-income tax paid by the trust for 2011 by the amount deemed to have been paid by Marie. As a result of the application of paragraph 94(16)(e), the maximum amount of foreign income from a source other than Canada that can be designated for the year in respect of any beneficiary under subsection 104(22) is limited to the trust’s income from that source less any amounts designated to electing contributors. Similarly, the amount of foreign tax paid by the trust for the year that can be designated to a beneficiary under subsection 104(22.1) is limited to the foreign tax paid by the trust less the amounts deemed to have been paid by electing contributors.

5. In this example, the trust would be able to designate an amount under subsection 104(22) not exceeding the lesser of the amount of the trust’s available foreign income of $4,000 ($6,000 – $2,000) and the amount of income paid to Karen out of the income of the trust as income from Country X ($2,000). Assuming the trust designates $2,000 of its income from Country X in respect of Karen, she will be deemed to have paid $866.67 ($1,733.33 x $2,000 / $4,000) in non-business-income tax for the purposes of computing her foreign tax credit.

6. As a result of the designations of $2,000 of its foreign income to Marie under paragraph 94(16)(e), and $2,000 to Karen under subsection 104(22), the trust has foreign income of $2,000 ($6,000 – $2,000 – $2,000) and foreign tax paid of $1,033.33 ($2,600 – $866.67 – $866.67) to use in computing its own foreign tax credit under section 126 (or alternatively, as a deduction under subsection 20(12)).

Liability for Joint Contribution

ITA 94(17)

Subsection 94(17) applies where there is an electing contributor (as defined in subsection 94(1)) in respect of a trust who is a joint contributor (as defined in subsection 94(1)) in respect of a contribution to the trust. Subject to the limits in paragraph 94(17)(b), paragraph 94(17)(a) provides that each joint contributor (as defined in subsection 94(1)) in respect of the contribution has jointly, severally and solidarily with each other person who is a joint contributor in respect of the contribution, the rights and obligations under Divisions I and J of the Act of each other joint contributor for the taxation years of each other joint contributor in which the trust’s taxation year ends. Note that paragraph 94(17)(a) will apply irrespective of whether a particular joint contributor is an electing contributor. Paragraph 94(17)(a) also provides that a “joint contributor” is subject to Part XV of the Act in respect of the rights and obligations mentioned above. For more information on the definitions “electing contributor” and “joint contributor” in subsection 94(1), see the commentary on those definitions. For more detail on the expression “solidarily”, please refer to the introductory commentary above on new section 94.

Paragraph 94(17)(b) is a recovery limit rule in respect of amounts otherwise recoverable from a particular person in respect of another person’s liabilities under the provisions referred to in paragraph 94(17)(a). The recovery amount is limited to the amount of tax, interest and penalties payable by the other person in respect of amounts arising from a contribution in respect of which the two persons are both joint contributors. The amount recoverable is further reduced by amounts already recovered in respect of those liabilities.

Subsection 94(17) applies to taxation years that end after March 4, 2010.

The examples below help to illustrate the operation of subsection 94(17).

Example 1: Liability for Joint Contributions

Assume that the securities transferred by Chris to the trust in Example 1 above describing the application of subsection 94(16) were acquired by him from Kelly, a resident of Canada, as part of a series of transactions by which Kelly’s securities would be transferred to the trust. The facts are otherwise the same as set out in Example 1 above, and are restated as follows.

Prior to 2011, Canadians have made contributions to a pre-existing non-resident trust totalling $30,000. None of those persons is resident in Canada in 2011. The trust has also received contributions from non-resident persons who have never been resident in Canada totalling $10,000. No distributions are made from the trust during its 2011 taxation year.

Kamil and Prasanna are long-term residents of Canada. In February 2011, Kamil makes a contribution of $10,000 to the trust and Prasanna makes a contribution of $5,000 to the trust. Chris and Kelly are also long-term residents of Canada. In June 2011, Kelly transfers securities to Chris. In August 2011, Chris contributes those same securities to the trust as part of a series of transactions that includes the transfer of Kelly’s securities to Chris. The total fair market value of the securities at the time of their transfer to the trust is $5,000. None of Kamil, Prasanna, Chris or Kelly has previously contributed to trust. None of them takes an interest in the trust in exchange for their contributions.

The trust realizes income of $2,500 and losses of $500 during its 2011 taxation year. All of the income and losses result from the property contributed by the current and former residents of Canada. The $10,000 of property contributed by persons who have never been resident in Canada did not result in any income or losses during the 2011 taxation year.

Kamil and Prasanna do not elect to be “electing contributors” in respect of the trust. Chris and Kelly do elect to be “electing contributors” in respect of the trust.

Results

1. The trust is resident in Canada for its 2011 taxation year because of subsection 94(3). Assume that the trust is not an “electing trust” as defined in subsection 94(1).

2. Kelly is deemed to have made a contribution to the trust of $5,000 by reason of paragraph (b) of the definition “contribution”. As Chris and Kelly are both deemed to have made a contribution to the trust, they may both elect to be an “electing contributor” in respect of the trust.

3. For the purpose of computing the amount of income to be attributed to each of Chris and Kelly, they are each deemed to have made a contribution of $2,500 by reason of subparagraph (ii) of the description of A in paragraph 94(16)(a). Note that if Chris had also made a separate contribution to the trust of $10,000, such that his total contributions to the trust would have been $15,000, for the purpose of computing the amount of income to be attributed to him, the amount determined for him under A of the formula in subsection 94(16) would be $12,500.

4. Since Chris and Kelly have elected to be “electing contributors” in respect of the trust, they are each required to include an amount in income in respect of the contribution of securities for their taxation years in which the trust’s 2011 taxation year ends. Applying the formula in paragraph 94(16)(a), they will each be attributed $100 to be included in income as follows:

($2,500 / $50,000) x ($2,500 – $500) = $100

5. Under paragraph 94(16)(f), the trust will be permitted a $200 deduction in computing its income for its 2011 taxation year reflecting the amounts attributed to Chris and Kelly as electing contributors (2 x $100).

6. Since Kamil and Prasanna do not elect to be “electing contributors” in respect of the trust, they will be jointly, severally and solidarily liable with the trust for the Canadian income tax liability on its remaining income of $1,800 for its 2011 taxation year (as will be any resident beneficiaries under the trust).

7. Since Kelly has jointly and severally, or solidarily, the same obligations under Divisions I and J as Chris in respect of the contribution of securities to the trust (and vice versa), if Chris is not able to pay the tax on the $100 included in his income as required under the Act, or does not do so, Kelly may be called upon to pay the tax, interest and penalties that would otherwise be paid by Chris, but only to the extent provided in paragraph 94(17)(b). Assume that Chris’ tax payable for 2011 is $15,000, but that he computes his tax payable without regard to the $100 income inclusion such that he only pays $14,950. Further assume that he refuses to pay the additional $50 and that $5 in interest has accrued on the amount of his outstanding tax payable for 2011. Under subsection 160(2.1), the Minister of National Revenue may issue Kelly a notice of assessment in respect of the $50 tax and the $5 in interest. If either Chris or Kelly subsequently pays the full amount owing, the liability of each is extinguished. See the commentary under subsection 160(2.1) for further details.

Example 2

Adding to the facts of Example 1 above, assume that instead of transferring the securities to Chris, Kelly had transferred the securities to a Canadian corporation, Corporation A, which then transferred the securities to the trust. Assume further that Corporation A had significant losses of other years available to be applied against its 2011 income. In addition, assume that the total of the trust’s income for 2011 is $5,000,000 instead of $2,500. Lastly, assume that the trust has no losses to apply in 2011. The facts are otherwise the same as set out in the example above.

Results

1. The trust is resident in Canada for its 2011 taxation year because of subsection 94(3). Assume that the trust is not an “electing trust” as defined in subsection 94(1).

2. Kelly and Corporation A are each deemed to have made a contribution to the trust of $5,000 in respect of Corporation A’s transfer of the securities to the trust. As Corporation A and Kelly are both deemed to have made a contribution to the trust, they may both elect to be an “electing contributor” to the trust.

3. Provided that paragraph 94(16)(g) does not apply, Corporation A and Kelly will each be attributed $250,000 to be included in income as follows:

($2,500 / $50,000) x $5,000,000 = $ 250,000

Corporation A applies its losses of other years to reduce its taxable income for 2011 such that it has no tax payable for 2011. Kelly includes $250,000 in income for 2011 and pays the resulting tax on that amount. However, if it can reasonably be considered that one of the main purposes of transferring the securities to Corporation A, instead of directly to the trust, was to allow Corporation A to apply its losses against a portion of the amount that would otherwise have been included in Kelly’s income, paragraph 94(16)(g) will deem Corporation A to not be a contributor to the trust for the purpose of computing the amount to be attributed to electing contributors. As a result, Kelly would include the full $500,000 in income, instead of only $250,000.

 

History

Budget 2010

Non-Resident Trusts

The revised proposals are based on the outstanding proposals with respect to non-resident trusts, but with substantial modifications meant to simplify the outstanding proposals and to better target arrangements that seek to avoid paying the appropriate amount of Canadian tax.

Scope of the Rules

The existing rules in the Income Tax Act deem a non-resident discretionary trust to be resident in Canada if it has a Canadian contributor and a related Canadian beneficiary. Such a trust is required to pay tax on its income in the same manner as other residents of Canada. The Canada Revenue Agency, however, has identified complex tax-planning arrangements that attempt to frustrate the fundamental policy objectives of these rules. The outstanding proposals were intended to prevent this type of tax avoidance by broadening the scope of non-resident trusts to which deemed residence would apply.

The outstanding proposals would have applied to non-resident trusts (other than exempt foreign trusts) with a resident contributor regardless of the current existence of a Canadian beneficiary. They would have also applied where the non-resident trust had a Canadian beneficiary and the contributor had been resident in Canada within 60 months of having made the contribution to the trust (referred to as a resident beneficiary under the outstanding proposals). A deemed resident trust would have been taxed on all of its income, regardless of who contributed the property upon which the income was earned or the source of the income. The outstanding proposals would have generally made both resident contributors and resident beneficiaries jointly and severally, or solidarily, liable for tax payable by a trust deemed resident.

The Government has received representations from taxpayers citing the complexity of the outstanding proposals and the difficulty for taxpayers in proceeding with legitimate, non-tax-motivated transactions because of uncertainty as to how those proposals would apply in a variety of particular situations. It is proposed that the scope of the outstanding proposals be simplified and better targeted in several ways.

First, concerns have been expressed that the outstanding proposals would have inadvertently caused a Canadian tax-exempt entity, such as a pension plan, that invested in a non-resident trust to become jointly and severally, or solidarily, liable for the trust’s income tax liability despite its tax-exempt status under the Income Tax Act. It is proposed that an exemption from resident-contributor and resident-beneficiary status be provided for all persons exempt from tax under section 149 of the Income Tax Act (for example, pension funds, Crown corporations and registered charities). However, if a tax-exempt entity were to be used as a conduit to allow a resident of Canada to make an indirect contribution to a non-resident trust, provisions in the outstanding proposals would continue to ensure that the resident of Canada making the indirect contribution is still considered a resident contributor to the trust.

Secondly, concerns have been raised that under the outstanding proposals, an investor would be unable to determine with certainty whether any particular commercial trust would be deemed resident in Canada. Concerns have also been raised about the possibility that a commercial trust might be deemed resident in Canada due to circumstances beyond the investor’s control. It has been argued that these uncertainties with respect to the potential application of the outstanding proposals deter genuine commercial investments from being made.

It is not intended that investments in bona fide commercial trusts be deterred; nor is it intended that bona fide commercial trusts be deemed resident in Canada. Consequently, it is proposed that the provision in the outstanding proposals that would have imposed deemed Canadian residence on a trust by reason only of the trust acquiring or holding restricted property be eliminated. This change will have the effect of expanding the exemption for commercial trusts under paragraph (h) of the definition “exempt foreign trust” in the outstanding proposals. Furthermore, a commercial trust will not be deemed resident in Canada if the trust satisfies all the following conditions:

  • each beneficiary is entitled to both the income and capital of the trust;
  • any transfer of an interest by a beneficiary results in a disposition for the purposes of the Income Tax Act and interests in the trust cannot cease to exist otherwise than as a consequence of a redemption or cancellation under which the beneficiary is entitled to receive the fair market value of the interests;
  • the amount of income and capital payable to a beneficiary does not depend on the exercise of, or failure to exercise, discretion by any person (discretion only with respect to the timing of distributions will not prevent a trust from being an exempt foreign trust);
  • interests in the trust: (i) are listed and regularly traded on a designated stock exchange, (ii) were issued by the trust for fair market value, or (iii) where the trust has at least 150 investors, are available to the public in an open market;
  • the terms of the trust cannot be varied without the consent of all the beneficiaries or, in the case of a widely held trust, a majority of the beneficiaries; and
  • the trust is not a personal trust.

A commercial trust that is varied in a non-permitted way will lose its status as an exempt foreign trust and, at that time, will be taxable on all the trust’s income that has been accumulated (together with an interest amount) since the time it first acquired a resident beneficiary or resident contributor. Taxing the trust on its accumulated income in this manner reflects the fact that the trust would not have qualified as an exempt foreign trust in the first place had the terms of the trust always provided for the trust to be varied in that manner; and consequently, the trust should have been subject to tax in Canada in earlier years. This new anti-avoidance rule is intended to reduce the incentive for Canadians to seek to avoid tax on their personal investments by structuring an arrangement to mimic a genuine commercial trust. However, recognizing that legitimate circumstances may exist in which non-resident beneficiaries may disclaim an interest in a commercial trust for non-tax reasons, a safe harbour will be provided where the interest being disclaimed is under a de minimus threshold.

Thirdly, as a result of the proposed changes to the definition “exempt foreign trust”, the role of restricted property will be significantly reduced. Restricted property will, however, remain relevant for certain other purposes (for example, in determining whether a particular transfer of property results in an “arm’s length transfer” as defined in the outstanding proposals). It is proposed that the definition “restricted property” be narrowed and better targeted. It will be limited to shares or rights (or property that derives its value from such shares or rights) acquired, held, loaned or transferred by a taxpayer as part of a series of transactions or events in which “specified shares” (as defined in the outstanding proposals being, generally, shares with fixed entitlement rights) of a closely-held corporation were issued at a tax cost less than their fair market value.

Finally, it was noted that under the outstanding proposals a conventional loan made by a Canadian financial institution to a non-resident trust in the ordinary course of its business could be viewed as a contribution to that trust, if as part of the terms and conditions of the loan, there was a potential for a transfer of restricted property between the parties (on default of the loan, for example). It is proposed that a new rule be added to ensure that loans made by a Canadian financial institution to a non-resident trust will not result in the financial institution being a resident contributor to the trust as long as the loan is made in the ordinary course of the financial institution’s business.

Application of the Rules

Taxation of a Deemed Resident Trust

Where a non-resident trust has a resident beneficiary or a resident contributor, the outstanding proposals would have imposed tax on all of the trust’s income and generally made the resident beneficiaries and resident contributors jointly and severally, or solidarily, liable for that tax. It is proposed that a number of refinements to the taxation of a trust deemed resident in Canada be made. For this purpose, it is proposed that the trust’s property be divided into a resident portion and a non-resident portion.   The resident portion will consist of property acquired by the trust by way of contributions from residents and certain former residents, and any property substituted for such property. The non-resident portion will consist of any property that is not part of the resident portion.

It is proposed that any income arising from property that is part of the non-resident portion, other than income from sources in Canada upon which non-residents are normally required to pay tax, be excluded from the trust’s income for Canadian tax purposes. In addition, it is proposed that the trust’s income be attributed to its resident contributors in proportion to their relative contributions to the trust (discussed below). The trust will be entitled to a deduction for both the amount of its income that is payable to its beneficiaries in the year and for amounts attributed to resident contributors. As a result, the trust itself will ordinarily pay tax in Canada only on income derived from contributions of certain former resident contributors.

It is proposed that, when income of the trust is not distributed to beneficiaries, the amount of the accumulated income for the relevant taxation year will be deemed to be a contribution by the trust’s connected contributors and will form part of the resident portion for the next taxation year. There will be an exception to this deeming rule; accumulated income that arises from property that is part of the non-resident portion will not be subject to the deeming rule if it is kept separate and apart from all the property of the resident portion.

In addition, it is proposed that ordering rules be introduced with respect to distributions to beneficiaries of the trust. Distributions to resident beneficiaries will be deemed to be made first out of the resident portion of the trust’s income while distributions to non-resident beneficiaries will be deemed to be made first out of the non-resident portion. Distributions to non-resident beneficiaries out of the non-resident portion of the trust will not be subject to Part XIII tax, but distributions to non-resident beneficiaries out of the resident portion of the trust will be subject to Part XIII tax.

It has been noted that the outstanding proposals do not fully recognize the foreign taxes paid to another country that also treats the trust as a resident for tax purposes. It is proposed to address this concern by permitting a trust that is deemed to be resident in Canada under these rules to claim a foreign tax credit for income taxes paid to another country that treats the trust as a resident of that country for income tax purposes, irrespective of the limits under subsection 20(11) of the Income Tax Act but up to the Canadian tax rate (which generally limits the foreign tax credit in respect of property income to 15% of the foreign income).

Attribution

As noted, the outstanding proposals would have generally made both resident contributors and resident beneficiaries jointly and severally, or solidarily, liable for tax payable by a trust deemed resident. This liability has raised concerns on the basis that resident contributors could be held liable for tax on income that has no connection with the property they contributed to the trust.

In response to these concerns, it is proposed that resident contributors to a trust that is deemed to be resident under these rules be attributed, and taxed on, their proportionate share of the trust’s income for Canadian tax purposes. They will not be jointly and severally, or solidarily, liable for the trust’s own income tax obligations (although resident beneficiaries will be liable with respect to the trust’s income tax payable to the same extent as under the outstanding proposals).

The income attributed to resident contributors will generally be based on the proportion of the fair market value of their contributions to the trust (at the times the contributions were made) to the fair market value of all contributions received by the trust from connected contributors. Income distributions from the trust will reduce the amount of income that is attributed to resident contributors. When a resident contributor dies or otherwise ceases to be resident in Canada in a year, the income to be attributed to that person for that year will be limited to the relevant portion of the trust’s income earned to the date of death or departure, as the case may be.

As part of the attribution rules, the amount attributed to resident contributors will be reduced by the amount of losses of other years claimed by the trust. In addition, it is proposed that a trust be able to designate a reasonable portion of its foreign tax credit to those contributors to whom amounts have been attributed, in a manner similar to the allocation of foreign tax credits to beneficiaries under the existing rules.

It is further proposed that the relevant reassessment period for income in respect of trusts subject to these rules be extended by three years. As indicated above with respect to foreign investment entities, this will assist the Canada Revenue Agency in identifying and reassessing those taxpayers who have not properly reported their income from transactions involving these trusts.

It is further proposed that the Income Tax Conventions Interpretation Act be amended to clarify that a trust that is deemed to be resident in Canada under these rules is a resident of Canada and subject to tax under the Income Tax Act for tax treaty purposes. One of the major purposes of Canada’s tax treaties is to prevent tax avoidance and tax evasion. These proposals are anti-avoidance rules aimed at ensuring that residents of Canada pay tax on their worldwide income and as such, they are consistent with Canada’s treaty obligations.

 


Reference:

  1. Technical Tax Amendments Act, 2012
  2.  Explanatory Notes Relating to the Income Tax Act, the Excise Tax Act and Related Legislation (October 2012) (Link)
  3. Budget 2010 (Link)

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