The beneficiaries of CdnTrust, a trust resident in Canada that wholly-owns Canco, and of NRTrust, a factually non-resident trust that wholly-owns LLC1, are Canadian-resident and U.S.-resident members of the same family. Canco makes non-interest-bearing loans to LLC1.
Before concluding that because NRTrust thereby will have a resident contributor (Canco), so that NRTrust will be resident under s. 94(3), the Directorate stated:
[T]he loan does not qualify as an arm’s length transfer since it does not meet at least one of the conditions contained in paragraph (b).
… Since LLC1 borrowed funds in a situation where there was no cost to LLC1, the fair market value of the shares of LLC1 have increased as a result of the non-interest bearing loan. …
Therefore … at the time the non-interest bearing loan is made, there is an increase in the fair market value of the shares of LLC1 held by NRTrust. As a result, Canco would be deemed to have made a contribution to NRTrust by virtue of paragraph 94(2)(a).
The application of s. 17 (or s. 247(2)) to that loan would not change the conclusion that NRTrust was tainted as a deemed s. 94-resident trust.