Mr. C, who is a Canadian resident and U.S. citizen, settled a revocable living trust for him and his family which, as a “grantor trust”, is disregarded for Code purposes, so that for Code purposes all trust income is that of Mr. C. However as Mr. C is a “resident contributor” to the trust, the trust is subject by virtue of s. 94(3) to Canadian income taxation on its worldwide income. Since the Code taxes are not payable by the trust, it cannot claim a foreign tax credit or an s. 20(12) deduction. Could this mismatch be remedied by making all its income payable to Mr. C in each year and making an s. 104(22) designation so that the income retains its character as U.S. source income in his hands – or could he elect under s. 94(16) so that the trust’s income will be attributed to him?
CRA noted that s. 94(3)(a) does not deem the trust (assumed to be resident in the U.S.) to be resident in Canada for purposes of s. 108(5), s. 108(5) does not impact the territorial source of the income, and that an amount included in Mr. C’s income pursuant to s.104(13) would be considered to be US-source income. Accordingly, as Mr. C paid the U.S. tax, he may claim the foreign tax credit in respect of the tax paid, subject to the s. 126(1) conditions. Thus, an s. 104(22) designation is not needed in this case in order to be eligible for a foreign tax credit.
CRA also noted that s. 108(5) applies to deem any amount included in Mr. C’s income under s. 104(13) to be his income from a property that is an interest in a trust and that an amount included in his income under s.104(13) would be U.S.-source income, and indicated that a deduction may be claimed under s. 20(12) in respect of US income tax paid by Mr. C in respect of the trust income that was paid or made payable to him by the US grantor trust in the year (with any such claim reducing the amount of non-business income tax paid by him for s. 126 purposes).
As Mr. C is the only contributor, he would report under s. 94(16)(a) 100% of the income earned by the trust. S. 94(16)(c) would deem such income to have a U.S. source for purposes of s. 126 and paras. (c) and (d). Thus, Mr. C can claim the foreign tax credit under s. 126(1), in respect of the foreign income that the trust designates under s. 94(16)(c). As para. (c) does not apply for purposes other than those specified, pursuant to s. 94(16)(b) Mr. C’s income under s. 94(16)(a) remains sourced to Canada for the purposes of s. 20(11), so that he canot cannot claim a deduction under s. 20(11).
Finally, Mr. C may claim a deduction under s. 20(12) in respect of the US income tax he paid in respect of the income attributed to him under s. 94(16)(a).