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 provided services for no consideration to LLC1.
The Directorate concluded that Canco thereby was rendered a resident contributor to NRTrust (so that NRTrust was deemed to be a s. 94-resident trust) because
- s. 94(2)(f) deemed there to be a transfer of property to that trust, and
- it would be reasonable to view there as having been a resulting increase in the fair market value of the LLC1 shares.
In the Directorate’s view, this result obtained even if s. 247(2) also applied to deem Canco to have received FMV consideration for its services.
Essentially the same result obtained if Canco made an interest-free loan to LLC1 rather than providing free services. Similarly, 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. Respecting s. 247(2), the Directorate stated:
When an adjustment is made to increase the taxable income of Canco pursuant to subsection 247(2), the Competent Authority for the country of residence of LLC1 (if there is a treaty with the particular country of residence) may allow a corresponding downward adjustment to reduce the income of LLC1. In addition, it is possible that a repatriation payment may be made from LLC1 to Canco. However, as discussed above, the application of paragraph 94(2)(a) occurs at the time the loan is issued. Consequently, any subsequent adjustments, by virtue of subsection 247(2), would not impact the increase to the fair market value of the shares of LLC1 at the time the loan was issued. Therefore, any transfer pricing adjustments and repatriation that occur as a result of the non-interest bearing loan would have no impact on the application of section 94 to NRTrust.