CRA concluded that a non-resident trust that has never filed Canadian returns was deemed to be a resident trust under s. 94(3)(a) for a particular taxation year. Can the trust make an election for purposes of s. 94(3)(f) (so as to deem the creation of a “non-resident portion trust” to hold the non-resident portion of the taxpayer’s property) in a return for that year (namely, the “first taxation year” as described in s. (b)(i) of the s. 94(1) definition of “electing trust”) that was (1) filed before a CRA assessment of the year, or (2) filed after an arbitrary assessment by CRA of that year pursuant to s. 152(7)?
After noting that “a paragraph 94(3)(f) election cannot be filed separately from a return of income as to do so would not meet the necessary condition noted in paragraph (c) of the definition of ‘electing trust’,” the Directorate indicated, regarding the first scenario:
A paragraph 94(3)(f) election would be considered valid if it is filed with the return of income for the “first taxation year” even if that return is filed past its due date. …
Given the fact that a non-resident that receives a letter containing proposed assessed amounts would almost certainly make a valid paragraph 94(3)(f) election before an audit assessment is actually issued, it appears unlikely that such a non-resident would ever be prevented from making a valid election. This result appears to be contrary to the intention of the Department of Finance, as noted in the explanatory notes for “electing trust”.
Regarding the second scenario, the Directorate indicated that the making of a s. 152(7) assessment did not eliminate the taxpayer’s obligation to file a return and, therefore, would not “necessarily” preclude the election from being made.