Principal Issues: [TaxInterpretations translation] For the purposes of the definition of resident contributor and connected contributor and paragraph 75(3)(c.2), as proposed in Bill C-10 of November 9, 2006, is a period of residence in Canada that occurs before a period of non-resident status followed by a return to Canada one of the periods counted in determining whether the number of months exceeds 60?
Position: Yes
Reasons: Wording of the text of the proposed amendments.
XXXXXXXXXX 2007-025927 Sylvie Labarre, CA May 21, 2008
Dear Sir,
Re: Non-resident trust
This is in response to your email of November 6, 2007, in which you asked our opinion regarding deemed residence. We apologize for the delay in responding to your request.
Your letter contained information for determining your client's residence status for the periods August 31, 1977 to August 31, 1978, August 31, 1978 to December 31, 1999 and January 1, 2000 to December 31, 2007. You requested a determination of residence for all those periods. We have forwarded your request for confirmation of your client's residence status in certain years to the International Tax Services Office which handles requests for determination of residence status.
You informed us that your client wishes to settle permanently in Canada and become a Canadian tax resident commencing in 2008. You asked us whether she could benefit from a 60-month tax exemption for all income from property transferred to a non-resident trust before her final departure for Canada, given the assumption that your client would become a tax resident of Canada during 2008 and the assumption that she would have been a tax resident of Canada during the one-year period beginning August 31, 1977.
Our Comments
As stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, it is the practice of the Canada Revenue Agency (CRA) not to issue written opinions on proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to determining whether a completed transaction has received appropriate tax treatment, that determination is made first by our Tax Services Offices as a result of their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments that we hope may be helpful to you. These comments may, however, under certain circumstances, not apply to your particular situation.
Assuming your client is a resident of Canada in 2008, her world income will be subject to Canadian tax unless a tax treaty provides otherwise. For example, income of the trust that would be paid or payable by the trust to your client would be required to be included in your client's income pursuant to subsection 104(13) of the Income Tax Act (the "Act") unless it is income deemed to be received by your client pursuant to subsection 75(2), which would also be subject to Canadian tax. Thus, if property was transferred to the trust by your client and such property, or property substituted for it, could revert to your client (for example, if your client is a beneficiary of the trust), it would be necessary to determine whether subsection 75(2) applies to deem, inter alia, the income from the property transferred, or property substituted for it, to be income of your client. In that regard, subsection 75(3) provides that subsection 75(2) will not apply to property held by certain trusts. Bill C-10 of November 9, 2006 proposes an addition to the list of trusts enumerated in subsection 75(3), so that the exception will apply to property held by a trust that is non-resident, for the purpose of computing its income for the year, because a contributor (as defined by subsection 94(1)) to the trust is an individual (other than a trust) who is, at the end of the year, resident in Canada and has, at the end of the year, been resident in Canada for a period of, or for periods the total of which is, not more than 60 months.
In our view, any period of residence in Canada, even if it is prior to a period when the person was not a resident of Canada, would form part of the total number of months calculated in paragraph 75(3)(c.2) as proposed. Thus, based on the assumption stated above, the one-year period beginning August 31, 1977 would be included.
On the other hand, even if subsection 75(2) did not apply where the trust's income was not payable to the beneficiaries (and instead was capitalized by the trust), there are situations where the non-resident trust's income could be subject to Canadian tax because the trust would be considered to be resident in Canada for certain purposes of the Act. Under the measures proposed in Bill C-10 of November 9, 2006, that would be the case for a trust that, at a specified time in its particular taxation year, is a non-resident (determined without reference to subsection 94(3), as proposed), has a resident contributor or resident beneficiary and is not an exempt foreign trust.
It would therefore be necessary to determine whether the non-resident trust has a resident contributor or a resident beneficiary.
Subject to certain exceptions, a resident contributor is an entity that, at that time, is both resident in Canada and a contributor to the trust. One of the exceptions is an individual (other than a trust and an individual who, before that time, has never been a non-resident) who, at that time, had not been resident in Canada for a period or periods totalling more than 60 months. For this purpose, we are of the view that any period of residence in Canada, even if it precedes a period when the person was not resident in Canada, would form part of the total number of months calculated in determining whether an individual is a resident contributor for the purposes of section 94 as proposed. Thus, based on the assumption stated above, if your client transferred the property to a non-resident trust, the portion of the year beginning August 31, 1977 would have to be included in calculating the number of months.
A resident beneficiary is, subject to certain exceptions, an entity that is a beneficiary under the trust at that time if, at that time, the entity is resident in Canada and the trust has a connected contributor. A connected contributor is, subject to certain exceptions, an entity that is a contributor to the trust. An individual (other than a trust and an individual who, before that time, has never been a non-resident) who, at or before that time, was resident in Canada for a period or periods not exceeding, in total, 60 months is not a connected contributor. For that purpose, we are also of the view that any period of residence in Canada even if it is prior to a period when the person was not resident in Canada would form part of the total number of months calculated to determine whether an individual is a connected contributor for the purposes of section 94 as proposed. Thus, based on the assumption stated above, if your client transferred the property to a non-resident trust, the portion of the year beginning August 31, 1977 would have to be included in calculating the number of months.
We hope that these comments are of assistance.
Best regards,
Alain Godin
for the Director
International Operations and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.