Principal Issues: [TaxInterpretations translation] What are examples of situations where family trusts are being abused and how does the CRA intend to challenge abusive results?
Position: Question of fact. We have presented various scenarios and how we believe we can challenge the result obtained.
Reasons: The Income Tax Act.
FEDERAL TAX ROUNDTABLE
APFF CONFERENCE 2010
Question 34
Misuse of Family Trusts
Could the CRA give us some examples of situations where it considers family trusts to be used in an abusive manner and what legal basis it intends to use to challenge results that are considered abusive?
CRA Response
The use of family trusts in tax planning is commonly encountered in our audits. In that regard, we characterize the following tax planning schemes as abusive and as, in our opinion, resulting in the application of the general anti-avoidance rule (GAAR), provided for in subsection 245(2).
- Relocation of capital gains
The CRA is challenging various plans involving the use of non-resident trusts to effect a capital gains relocation. One of the purposes of these transactions is to avoid tax under Part I and/or Part XIII of the Act. These plans contain a series of transactions whose purpose is to thwart the spirit of the Act, which is essentially to tax Canadian residents on their earned income as well as on their capital gains accrued during the period that they reside in Canada. Where appropriate, the CRA will challenge the residency of the trust.
- To circumvent the application of the provisions of the Act respecting split income with minor children
A trust is commonly employed in income splitting strategies. The Act provides that any dividend that a trust wishes to distribute to a minor beneficiary is taxable at the highest marginal tax rate applicable to individuals. To avoid the application of those rules, a series of transactions is implemented to convert the dividend into a capital gain and subsequently distribute it to the minor children.
- To strip a corporation's surplus using subsection 75(2).
The creation of a family trust combined with the application of the anti-avoidance provision in subsection 75(2) and the dividend deduction in subsection 112(1) for corporations is a strategy used to avoid the payment of any tax in respect of dividends paid by the corporation and received by the trust.
- Capital Gain Splitting and Multiplying the Capital Gain Deduction
In connection with the disposition of a taxpayer's shares, a structure involving a family trust and the participation of accommodation parties is implemented in order to avoid tax on the capital gain resulting from the disposition of the shares through the use of the capital gains deduction.
Other situations involving trusts may be subject to the application of the GAAR as well as other provisions of the Act, including the following:
- The residence of a trust
As stated in Interpretation Bulletin IT-447, Residence of a Trust or Estate, it has always been the position of the CRA that the residence of a trust in Canada, or in a particular province or territory within Canada, is a question of fact to be determined according to the circumstances in each case.
- Provincial tax avoidance
Dual Trusts: A trust in a high-tax province or territory receives management fees from a corporation operating in the same province or territory. Income and distributions are transferred for tax purposes to a second trust that is resident in a low-tax province or territory. That scheme is, as applicable, subject to redress either by the application of subsection 104(2), by determining that the trust is resident in the high-tax province or territory, or by the application of the anti-avoidance rules of the affected province or territory.
Answer prepared by:
Jennifer Tong
Specialized Audits Section
Medium Business Audit Division
Compliance Programs Branch
Person in the Income Tax Rulings Directorate responsible:
François Bordeleau
(613) 957-8972
October 8, 2010
2010-037362.