7 March 1997 External T.I. 9629965 - NON-RESIDENT TRUST -BENEFICIARY/SETTLOR CDN

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 Department.

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

BACKGROUND:

"Hypothetical" fact pattern- pre-1972 Mr. X, a non-resident, transferred ppty to a trust; no subsequent trust transfers have occurred. The trust may be revoked or amended by X with written consent of the Trustee. In the 1980's X became a resident of Canada. In March 1994 the Trustee made the election under 104(5.3) to defer the disposition of trust assets for CDN tx purposes (which would have otherwise occurred on Jan. 1, 1993. The trust is administered outside Canada by a non-resident Trustee.

Principal Issues:

1. Is the trust subject to 75(2)?

2. Is trust deemed to be Cdn resident?

3. When 75(2) & 94(1) are applicable - which one takes precedence? Is there double taxation?

4. If trust revoked 104(5.3) election - so that 104(5.31) provides that election is deemed never to have been made - when does the clock start for determination of 21-yr rule? from date trust was created or from the date the trust is deemed to be a CDN resident trust?

Position:

1. Yes
2. Yes

3.Contrary to technical interpretation dated 10/01/96 #940686 75(2) would take precedence over 94(1) with no double taxation resulting.

4.From the date the trust is created

Reasons:

1.Given that pprty may revert to the settlor, albeit with the Trustee's concurrence - 75(2) is applicable- per wording of 75(2)

2.Ss. 94(1) provides that where the settlor of a nr trust becomes resident in Cda, & beneficiaries are Cdn resident- the trust will be deemed to be Cdn resident after 60 mths.

3. Income becomes that of settlor when 75(2) is applicable - no double taxation results - see 75(2) wording of the Act XXXXXXXXXX

4. See wording of 104(4) - 21 years after later of when trust is created - and 01/01/72 -WHICH WOULD BE 01/01/93 in this case

962996
XXXXXXXXXX L. Holloway
(613) 957-2104

Attention: XXXXXXXXXX

March 7, 1997

Dear Sirs:

Re: Request for technical interpretation

This is in reply to your letter dated October 7, 1996, requesting our confirmation of the tax consequences of a scenario involving a non-resident settlor/beneficiary of a non-resident discretionary trust becoming a Canadian resident. We apologize for the delay in responding to your letter.

It appears that the interpretation you seek relates to a specific taxpayer and actual past and proposed transactions; therefore, we bring to your attention Information Circular 70-6R3 dated December 30, 1996 issued by Revenue Canada. The review of actual transactions which have already been implemented falls within the responsibility of the tax services offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling should be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Our Comments

Subsection 75(2) applies where property in a trust is held on condition

"(a) that it or property substituted therefor may

(i) revert to the person from whom the property or property for which it was substituted was directly or indirectly received (in this section referred to as "the person") or

(ii) pass to persons to be determined by the person at a time subsequent to the creation of the trust or

(b)that, during the lifetime of the person, the property shall not be disposed of except with the person's consent or in accordance with the person's direction,"

where the person is living and resident in Canada.

It is our view that subsection 75(2) would be applicable where the person is entitled to revoke or amend an indenture, even where such actions would require written consent from the trustee of the trust, as the property is being held on condition that it may revert to that person. Additionally, subsection 75(2) is applicable whether a trust is resident in Canada or not.

Interpretation Bulletin IT-369R, Attribution of trust income to settlor, outlines in paragraph 10 the following:

"10. Subsection 212(12) provides that where an amount is attributed to a person under subsection 75(2) on account of an amount paid or credited to a non-resident, no Part XIII tax is payable upon that amount. Similarly, the Department considers that an amount which has been attributed to a person under subsection 75(2) is normally to be excluded from the income of a resident beneficiary to whom it was paid or payable in the year, and from the income of the trust where it was not paid or payable to the resident beneficiary."

The above paragraph reflects the Department's position with respect to the operation of subsection 75(2) and indicates that double taxation would not result in its application. Therefore, where a non-resident trust has made the election under subsection 104(5.3), and subsection 75(2) is otherwise applicable, taxable capital gains resulting from the deemed dispositions under subsection 104(4) (on January 1, 1999 assuming there continue to be one or more exempt beneficiaries until that date) will be included in the income of the person from whom the trust directly or indirectly received the property, provided that the person is living and resident in Canada. If the election made under subsection 104(5.3) is revoked, as provided for in subsection 104(5.31), and the non-resident trust was created prior to January 1, 1972, the first deemed disposition date would be January 1, 1993. The first taxation year in which the trust is deemed to be a person resident in Canada under subparagraph 94(1)(c)(i) is not relevant for purposes of subsection 104(4).

The definition of personal trust in subsection 248(1) of the Act provides, in the case of an inter vivos trust, that no beneficial interest in the trust may be acquired for consideration payable directly or indirectly to the trust or any person who has made a contribution to the trust. It further provides that where a beneficial interest in the trust is acquired by transfer of property to the trust by one person, such a beneficial interest in the trust shall be deemed to be acquired by such person for no consideration. Where two or more persons have acquired beneficial interests by virtue of transferring property to the trust those persons must be related in order that their interests be deemed to have been acquired for no consideration. We do not interpret the definition as requiring that all beneficiaries must be related, in our opinion only those who have transferred property to the trust must be related.

In response to your last query, generally subsection 107(2) and not subsection 106(3) would generally apply on the wind-up of a personal trust where a beneficiary with both an income interest and a capital interest therein receives property of the trust in satisfaction of his or her interests.

While we trust our comments will be of assistance to you, as stated in paragraph 22 of Information Circular 70-6R3, they do not constitute an advance income tax ruling and, accordingly, they are not binding on Revenue Canada.

Yours truly,

T. Murphy
A/Section Chief
Resources, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch