Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues: seeking clarification of the comments in E 2000-0023997 on the application of the transfer pricing rules to an interest free loan to an immigration trust
Position: matter is currently under review by the International Tax Operations Directorate
Reasons: While the transfer pricing rules may apply as a result of the lack of interest charged on the loans, the responsibility for the administration of the transfer pricing rules rests with the International Tax Operations Directorate
2001-009867
October 10, 2001
XXXXXXXXXX
Dear XXXXXXXXXX:
The Honourable Martin Cauchon, Minister of National Revenue, has asked me to reply to your correspondence of July 26, 2001, concerning the application of subsection 69(3) of the Income Tax Act to an interest-free loan made by a resident of Canada to a non-resident trust.
Regarding your concern about the attitude of the Canada Custom and Revenue Agency (CCRA) toward immigrant trust structures, I assure you that the CCRA recognizes and supports the tax policy that excludes certain trusts from the application of paragraph 94(1)(c) during an initial period of approximately 60 months following the settlor's immigration to Canada. The internal memorandum to which you refer in your letter addresses a specific situation and cannot be read as a challenge to all immigrant trust structures. As the confidentiality provisions of the Act prevent me from disclosing the details of a taxpayer's affairs without his or her written authorization, I cannot discuss the particular situation you describe.
The fact that certain trusts are excluded from the application of paragraph 94(1)(c) by reason of the settlor's recent immigration to Canada does not preclude the application of other provisions of the Act that may be relevant to the immigrant or to the beneficiaries of the trust during this period. Examples of provisions that may apply include subsections 56(4.1), 74.3(1), 75(2), 104(13) and 69(3). It is important to mention that the exclusion from taxation in Canada during this period applies to the income of the non-resident trust established by an immigrant, and not to the income of the immigrant generally.
Various groups, including the Technical Committee on Business Taxation, have expressed concerns that a substantial number of transactions involving foreign trust structures may be undermining the integrity of and confidence in the Canadian tax system. As a result of these concerns, the CCRA has undertaken to devote more resources to the review and audit of transactions involving such trusts. This initiative allows CCRA officials to identify issues and develop policies and procedures related to non-resident trusts.
With respect to the lack of consistency between the two documents referred to in your letter, please note that the CCRA strives to provide complete and accurate information on all issues of concern to taxpayers. However, Information Circular IC 70-6R4 states that technical interpretations issued by the Income Tax Rulings Directorate are not advance income tax rulings or statements of policy and, therefore, are not binding on the CCRA. Officials of the Income Tax Rulings Directorate have reviewed the earlier document and determined that it does not reflect the CCRA's views with respect to the application of subsection 69(3) to loans involving non-resident trusts.
When a non-resident person is not dealing at arm's length with a particular person and the non-resident person has neither paid nor agreed to pay an amount for the use of that person's property during taxation years that began before 1998, subsection 69(3) applies to deem the owner of the property to have received a reasonable amount for the use of the property. The International Tax Operations Division of the International Tax Directorate is responsible for administering the transfer pricing rules. I have been advised that they have no policy that would preclude the application of subsection 69(3) in a situation where it otherwise applies. However, the matter is currently under consideration and a decision should be made shortly. I have sent a copy of your letter to Mr. Marcel Clément, Director of International Tax Operations, so that he may be aware of your concerns. Should you have any further questions on this matter, I invite you to contact Mr. Clément by writing to 5th Floor, Minto Place, 344 Slater Street, Ottawa, Ontario K1A 0L5, or by calling 0-613-952-8738 collect.
I appreciate the opportunity to address your concerns.
Yours sincerely,
Bill McCloskey Assistant Commissioner Policy and Legislation Branch
C.C. Mr. Marcel Clément
Director
International Tax Operations Division
International Tax Directorate
5th Floor, Minto Place
344 Slater Street
Ottawa, Ontario
K1A 0L5
A. Humenuk - 957-8585
2001-009867
MCG Editor: Wendy Post/957-9242
Finalized 2001/10/04 - WP/ll
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