| 19(1) | File No. 5-8820 |
| O. Laurikainen | |
| (613) 957-2125 |
March 2, 1990
Dear Sirs:
Re: Deemed Residence of Discretionary Trust
This is in reply to your letter of October 4, 1989 concerning the application of sections 94 and 94.1 of the Income Tax Act (the "Act").
Paragraphs 94(1)(c) and (d) of the Act
We concur with your view that a discretionary trust (e.g. A trust with two or more beneficiaries where the trustee has the power to distribute the assets or income of the trust at his discretion to any of the beneficiaries at the exclusion of the others.) which is not resident Canada would be deemed by paragraph 94(1)(c) of the Act to be a person resident in Canada on the first day of the first taxation year of the trust during which the criteria in paragraphs 94(1)(a) and (b) of the Act are met. Accordingly, at that point in time subsection 48(3) of the Act may apply.
In addition, we concur with your view that at the time such a discretionary trust becomes resident in Canada by virtue of paragraph 94(1)(c) of the Act, each corporation (other than a corporation resident in Canada) in which the trust's equity percentage, as defined by paragraph 95(4)(b) of the Act, was not less than 10%, would become a foreign affiliate of the trust. Therefore, for the purposes of calculating a taxable capital gain under paragraph 95(2)(f) of the Act of such a foreign affiliate on the disposition of its capital property, the foreign affiliate will be considered to have become a foreign affiliate of the discretionary trust at the time that the trust is deemed to be a person resident in Canada.
We would however, like to clarify that a trust where the discretion by any person is limited to determining when the distributions are to be made is not the type of discretionary power contemplated in paragraph 94(1)(c) of the Act. In our view the type of trust envisaged by paragraph 94(1)(c) of the Act is one where because of any person's discretionary power, it is impossible to determine the fair market value of the Canadian beneficiary's interest.
Paragraph 94.1(2)(b)
We agree with your view that a trust, to which the provisions of paragraph 94(1)(c) or (d) of the Act would apply but for the provisions of paragraph 94(1)(b) of the Act, is not a "non-resident entity" within the meaning of paragraph 94.1(2)(b) of the Act.
We trust the above information will be of assistance to you.
Yours truly,
for DirectorReorganizations and Non-Resident DivisionSpecialty Rulings DirectorateLegislative and Intergovernmental Affairs Branch