Principal Issues: How does the CRA apply the tie breaker rules provided by the Canada-U.S. Tax Convention in the context of a (1) double statutory residency of a trust and (2) a double residency of a trust under section 94 of the Act?
Position: (1) The double statutory residency of a trust will generally be settled by the competent authorities on a case-by-case basis, pursuant to the subsection IV(4) of the Canada-U.S. Tax Convention. In order to establish the residency of a trust, the Canadian Competent Authority may consider, among others, the settlor and beneficiaries' residency, the location of the trust's assets, the reason why the trust has been settled in a particular country, etc.
(2) The CRA considers that a deemed resident trust under section 94 is resident of Canada for the Tax Conventions' purposes and such rule is established in the new section 4.3 of the Income Tax Conventions Interpretation Act. In a case of a double taxation, a foreign tax credit calculated under the provisions of paragraph 94(3)(b) and section 126 will be available to the trust.
Reasons: Application of the Act, the Canada-U.S. Tax Convention, the Income Tax Conventions Interpretation Act and previous interpretations.
Financial Strategies and Financial Instruments Roundtable, 11 October 2013
2013 APFF Conference
Question 3
Residence of Trusts
The presence of US beneficiaries in a Canadian family trust can complicate the analysis of a situation and involve a significant compliance and double taxation burden.
One solution is the migration of trusts to the US to facilitate US taxation and compliance. The residency requirements for Canadian and US trusts are not the same, so a trust may have double Canadian and US residency under domestic law.
In addition, it is possible to have double residency of a trust by having deemed residence in Canada by virtue of section 94, and residence in America because of the rules for American residence. In the latter case, the Garron judgment (St. Michael Trust Corp. v. The Queen) suggests that a trust that is deemed to be resident in Canada by the deeming rules in section 94, will not be deemed to be resident in Canada for the purposes of Canada's tax treaties.
Question 3(a) - Double residency effective by domestic laws
How would the Canada-U.S. Tax Convention (the "Convention") tie-breaker rules apply in a double residency case under the Convention?
CRA response to Question 3(a)
In the event that a trust is considered to be a resident of Canada and the United States ("Contracting States") within the meaning of paragraph IV(1) of the Convention, the competent authorities of the Contracting States shall endeavor by mutual agreement to decide the matter under paragraph IV(4) of the Convention. To this end, the competent authority in Canada has informed us that it will consider all the facts of the given situation in order to assess the significance of the trust's relationship with Canada relative to the United States. In addition to the factors set out in Interpretation Bulletin IT-447, Residence of a Trust or Estate, the Canadian competent authority may consider some of the following factors: the settlor's residency; the residency of the beneficiaries; the location of the property of the trust; the reason the trust was established in a particular jurisdiction, etc. This list is not exhaustive since the facts of each case may raise different considerations, which could lead to different conclusions and negotiations. The tie-breaker rule under paragraph IV(4) of the Convention, if applicable, is therefore applied on a case-by-case basis according to the facts relating to the particular situation under analysis.
It should be noted that paragraph IV(4) of the Convention does not require Contracting States to come to an agreement. As in the case of the mutual agreement procedure clause in Canadian tax treaties, there is an obligation on the part of the competent authorities to attempt to resolve the matter without having an obligation to reach agreement. In situations where the two countries cannot find common ground, it is possible that the negotiations would result in the double residency of the trust.
Question 3(b) - Double residency of a deemed resident of Canada
Is there any tie-breaker mechanisms that could be used?
CRA response to Question 3(b)
The CRA has considered the impact of the comments made by Sharlow JA in St. Michael Trust Corp. et al. v. The Queen, 2010 FCA 309, as to the residency of a trust for purposes of Canada's tax treaties. The Canadian competent authority is of the view that the Judge's comments were obiter dicta and therefore do not alter our position on residency for the purposes of the Convention. Thus, the CRA remains of the view that trusts deemed resident pursuant to section 94 are residents of Canada for the purposes of the Convention and will not generally be prepared to relinquish their residency to the other Contracting State.
In addition, the legislative amendments concerning non-resident trusts received royal assent on June 26, 2013. These legislative amendments include a change to the Income Tax Conventions Interpretation Act ("Interpretation Act"), retroactive to March 5, 2010. Under this change, a trust deemed to be resident in Canada pursuant to subsection 94(3) is deemed to be resident in Canada and not in the other Contracting State for the purposes of the Convention. Since the Interpretation Act takes precedence over a Convention, the Canadian Competent Authority is of the view that the effect of this new provision is to make it impossible to break the tie because it deems such an equality to be non-existent.
Question 3(c) Double residency of a deemed resident of Canada
What means would be available to address double taxation issues on world income?
CRA response to Question 3(c)
The rules provided in section 94 ensure that a foreign tax credit should be available to eliminate the double taxation of trust income in Canada, even though paragraph IV(4) of the Convention failed to break the tie in the case of double residency.
In the unlikely event that there is evidence of taxation imposed contrary to the Convention and double taxation, the Canadian competent authority has confirmed to us that it would be prepared to consider the matter and facts specific to the situation leading to double taxation in order to determine whether a unilateral solution is possible or if negotiations with the other Contracting State are required to eliminate double taxation, in accordance with the Article on the mutual agreement procedure in the Convention.
Marie-Claude Routhier
2013-049282