Principal Issues: [TaxInterpretations translation] 1. At what point should an individual be considered to be resident in Canada and to have made a contribution to a non-resident trust for the purpose of determining whether the proposed subsection 94(3) rules apply?
2. Request for clarification of the declaration under subsection 233.3(3).
Position: 1. At the specified time, which is generally the end of the trust's taxation year.
2. General comments.
Reasons: 1. Proposed legislative provisions.
2. Legislative provisions.
XXXXXXXXXX 2006-021112
Sylvie Labarre, CA
September 12, 2007
Dear Sirs,
Purpose: Non-resident trust
This is in response to your letter of October 19, 2006, requesting our views on an aspect of the new legislative proposals relating to non-resident trusts and the reporting obligations of beneficiaries of a non-resident trust that is not deemed to be resident for purposes of the Income Tax Act (Canada) (the "Act"). We apologize for the delay in responding to this request.
Under the proposed legislative proposals relating to non-resident trusts, a non-resident trust could be deemed resident in Canada for tax purposes if it had a resident contributor at a specified time in its taxation year.
For an inter vivos trust created on or after January 1, 1960, you understand that a resident contributor at a particular time is an individual who is both resident in Canada and a contributor to the trust and who, at that time, had not been resident in Canada for a period or periods that total more than 60 months.
You wish to know when the dual condition of being resident in Canada and being a contributor must be satisfied for a trust to be deemed resident in Canada for a particular taxation year.
In addition, you asked us to clarify one of the reporting obligations of a Canadian resident beneficiary of a non-resident trust that would not itself be deemed resident in Canada for tax purposes, namely the obligation to complete the prescribed form T1135 Foreign Income Verification Statement.
Our Comments
Resident contributor
Your understanding is that a resident contributor is an individual. Instead, the proposed legislation states that a resident contributor is an entity that is defined as including an association, joint venture, trust, fund, organization, individual, corporation, partnership and syndicate.
In addition, we note that a resident contributor at a particular time does not include an individual - other than a trust and an individual who, before that time, was never a non-resident - who at that time had not been resident in Canada for a period of, or periods the total of which is more than 60 months.
Subject to the exception in the preceding paragraph, a resident contributor in respect of an inter vivos trust established in 1960 or later at any time is an entity that is at that time both resident in Canada and a contributor to the trust. The time referred to in the legislative provisions of subsection 94(3) is the specified time in a particular taxation year of the trust. Consequently, in determining whether the rules in subsection 94(3) (as proposed) apply, we must consider whether the entity was resident in Canada at the specified time and whether it had made a contribution to the trust on or before the specified time. The specified time is generally the trust's taxation year-end.
T1135 Foreign Income Verification Statement
Subsection 233.3(3) provides that a reporting entity for a taxation year or fiscal period is required to file with the Minister of National Revenue a return in prescribed form T1135, Foreign Income Verification Statement on or before the day specified in that subsection.
The term "reporting entity" is defined in subsection 233.3(1) to mean a specified Canadian entity for the year or period where, at any time (other than a time when the entity is non-resident) in the year or period, the total of all amounts each of which is the cost amount to the entity of a specified foreign property of the entity exceeds $100,000.
For purposes of this letter, we have assumed that the only property held by the Canadian beneficiary is an interest in a non-resident trust that would not be deemed to be resident in Canada for tax purposes. Subject to certain exceptions, specified foreign property would include such an interest. The exceptions are as follows:
- an interest in a non-resident trust that was not acquired for consideration by either the person or partnership or a person related to the person or partnership; and
- an interest in a trust described in paragraphs (a) and (b) of the definition "exempt trust" in subsection 233.2(1).
As you can see, a number of situations will be exempt from filing prescribed Form T1135 because the Canadian resident will not have specified foreign property due to the fact that neither the Canadian resident nor a person related to the Canadian resident acquired the interest for consideration. On the other hand, in determining whether a Canadian resident beneficiary must complete a prescribed Form T1135 in respect of specified foreign property in a situation where the interest in the non-resident trust would be specified foreign property, it is not the value of that property that is important but rather its cost amount. In the case of an interest in a non-resident trust, the cost amount will generally be the cost of the specified foreign property (subject to certain situations where the cost will be determined by a provision in the Act), which will be known to the Canadian resident beneficiary. Similarly, the total investment amount claimed on prescribed Form T1135 in respect of the types of property held represents the cost of the property at the end of the year or at the time of its disposition, as the case may be.
Prescribed Form T1135 must be filed for a taxation year even if the non-resident trust did not designate any amount as income to the Canadian resident beneficiary.
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.