Income Trusts and Non-Resident Ownership
Subsection 132(7) provides that, save certain exceptions, a trust established or maintained primarily for the benefit of non-resident persons loses its mutual fund trust status. There have been a number of media reports on the increasing number of non-resident investors in certain income trusts.
Question 1
Assuming the exception in paragraph 132(7)(a) is not available, would a trust be subject to the application of that provision if the governing trust indenture specifically provides that the trust is not established for the benefit of non-residents and that some action will be undertaken to ensure that the trust does not exist primarily for the benefit of non-resident persons?
Response 1
If circumstances supporting a contrary conclusion are absent, a trust indenture containing such terms might support a conclusion that the trust is not established primarily for the benefit of non-residents. However, irrespective of the intention of the settlor, the terms of the trust indenture and the circumstances existing when the trust was created, subsection 132(7) deems it not to be a mutual fund trust after that time if it is maintained primarily for the benefit of non-residents at any moment during its existence. Therefore, the application of subsection 132(7) will not hinge solely on the terms of the trust indenture but on the nature and extent of the benefits enjoyed by non-residents in respect of the trust.
Question 2
How significant is the onus on the trustees of an income trust to track the magnitude of the benefits flowing to non-residents?
Response 2
A trust, which happens at some point to exist primarily for the benefit of non-resident persons, can only rely on the exception in paragraph 132(7)(b) if it makes a reasonable inquiry in respect of every unit that it issues to ensure that the purchaser is a resident of Canada. Absent that exception, prompt action is required to ensure that it ceases to exist primarily for the benefit of non-resident persons.
In order to be in a position to prove that it has not been maintained primarily for the benefit of non-resident persons, the trustee needs:
(a) to monitor the level of non-resident ownership using the available instruments (e.g., see 2004-0073171 and the use of ADP reports to show geographical ownership of units) at intervals which are reasonable in light of the circumstances; and
(b) to have mechanisms in place which effectively and efficiently enable the trustee to ensure that benefits to non-residents can be reduced or diluted before the trust is considered to be primarily maintained for the benefit of non-residents.
The above elements are significant, as even if the trust subsequently ceases to be maintained primarily for the benefit of non-residents and meets all the conditions to be a mutual fund trust under the Act, the trust will not recovers its mutual fund trust status.