23 September 2003 External T.I. 2003-0009935 - Resident Contributor

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether a natural person can be a "resident contributor" after death?

Position: No

Reasons: The concept of residence implies for an entity to be in existence.

XXXXXXXXXX 						Pascal Tétrault
							2003-000993
September 23, 2003

Dear XXXXXXXXXX:

Re: Legislative Proposals and Explanatory Notes on Taxation of Non-Resident Trusts and Foreign Entities

We are writing in response to your letter dated March 21, 2003 regarding the above captioned matter. More specifically, you have requested our opinion on the expression "resident contributor" found under Clause 11 of the Legislative Proposals and Explanatory Notes on Taxation of Non-Resident Trust and Foreign Entities published in October 2002 by the Honourable John Manley, P.C., M.P. Deputy Prime Minister and Minister of Finance ("the Proposals"). Clause 11 of the Proposals purports to replace section 94 of the Income Tax Act and for ease of reference, we will simply refer to the proposed sections of the Income Tax Act.

In you letter, you are submitting a factual scenario in which, Mr. X, a natural person resident in Canada settles a non-resident trust ("NR Trust") for the sole benefit of non-residents such that there will never be under the NR Trust a "resident beneficiary".¹ Mr. X makes contributions to the NR Trust during his lifetime while he is a resident of Canada and he is the only "entity" to do so.

Your question is whether Mr. X should be considered a "resident contributor" to the NR Trust, as per proposed subsection 94(1), following his death. In your opinion, Mr. X could not be considered a "resident contributor" after his death because he could not be resident in Canada after such an event. Accordingly, the NR Trust would not fall within the ambit of proposed subsection 94(3) after Mr. A's death.

COMMENTS

The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to offer the following general comments which may be of assistance.

Proposed subsection 94(3) provides, inter alia, that a non-resident trust will be deemed to be resident of Canada for certain purposes including for the purposes of computing its income. One of two conditions must be met in order for this deeming provision to have effect: there needs to be either a "resident beneficiary" or a "resident contributor" under the trust at the end of the particular year of the trust.

In your hypothetical scenario, you have stated that there will never be a "resident beneficiary" under the trust; therefore, we will only address the "resident contributor" issue. The relevant definitions read as follows:

"contributor", to a trust at any time, means an entity (including an entity that has ceased to exist) that, at or before that time, has made a contribution to the trust.

"resident contributor", to a particular trust at a particular time, means an entity that is, at that time, resident in Canada and a contributor to the particular trust, but does not include

(a) an individual (other than a trust) who has not, at that time, been resident in Canada for a period of, or periods the total of which is, more than 60 months (other than an individual who, before that time, was never non-resident); or (b) an individual (other than a trust), if

(i) the particular trust is an inter vivos trust that was created before 1960 by a
person who was non-resident when the trust was created, and

(ii) the individual has not, after 1959, made a contribution to the particular trust.²

" contribuant " En ce qui concerne une fiducie à un moment donné, entité (y compris celle qui a cessé d'exister) qui, à ce moment ou antérieurement, a fait un apport à la fiducie.

" contribuant résidant " En ce qui concerne une fiducie à un moment donné, entité qui, à ce moment, est à la fois un résident du Canada et un contribuant de la fiducie. Ne sont pas des contribuants résidants :

a) le particulier (sauf une fiducie) qui, à ce moment, n'avait pas résidé au Canada
pendant une ou des périodes totalisant plus de 60 mois (mais à l'exclusion d'un
particulier qui, avant ce moment, n'a jamais été un non-résident);

b) un particulier (sauf une fiducie), si, à la fois :

(i) la fiducie est une fiducie non testamentaire établie avant 1960 par une
personne qui était un non-résident au moment de l'établissement de la
fiducie,

(ii) le particulier n'a pas fait d'apport à la fiducie après 1959.

In order for an entity to be a "resident contributor", the entity must be resident in Canada and a "contributor". As can be read from the definition of "contributor", a deceased natural person will continue to qualify as a contributor because of the reference to an entity that has ceased to exist. However, the concept of residence necessarily implies for an entity to be in existence. Therefore, a deceased natural person would no longer be a resident of Canada and the definition of "resident contributor" would not be met.

Proposed subsection 94(3) will operate on a yearly basis at the end of the each taxation year of the trust. Either the "resident contributor" test or the "resident beneficiary" test must be met for proposed subsection 94(3) to be applicable. Once either of those tests are met they will not necessarily always be met for each and every taxation year of the trust during the trust's existence. For instance, in your scenario, the NR Trust would no longer be deemed resident in Canada after Mr. X's death because the "resident contributor" test will no longer be met after that time. The NR Trust could fall back within the ambit of proposed subsection 94(3) if a beneficiary of the NR Trust would become resident in Canada. In these circumstances, the "resident beneficiary" test of proposed subsection 94(3) could be met.³

Your hypothetical scenario suggests that the "resident contributor" test was met during Mr. X's life and that no other entity could qualify as "resident contributor". Accordingly, the NR Trust would be deemed to be resident in Canada during Mr. X's lifetime and on Mr. X's death, the NR Trust would be deemed to have ceased to be resident in Canada as provided by proposed subsection 94(5). Subsection 128.1(4) of the Income Tax Act would trigger the end of the trust's taxation year immediately before Mr. X's death and the disposition of the trust's asset immediately before the time immediately before Mr. X's death.

As requested in your letter, we are confirming that the above reasoning is equally valid in interpreting both the English and French version of the relevant provisions.

Yours truly,

Alain Godin
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

ENDNOTES

¹ As defined under the proposed subsection 94(1).

² You will note from this excerpt that you have quoted in your letter the version of August 2001 of the Legislative Proposals and Explanatory Notes on Taxation of Non-Resident Trust and Foreign Entities. Notwithstanding the distinction in wording in the previous version ("to a particular trust at any time" found under the definition of "resident contributor"), the end result is the same. Informal discussions with representatives of the Department of Finance on this issue revealed that the wording may revert to the version of August 2001 to avoid confusion.

³ See the definitions "resident beneficiary", "contributor" and "connected contributor".

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