Principal Issues: Will section 94 apply to a trust for a particular taxation year if the only contributor to the trust is a connected contributor and the only beneficiary resident in Canada under the trust is a registered charity resident in Canada?
Position: No.
Reasons: An exempt person defined in subsection 94(1) is excluded from the definition of resident beneficiary in subsection 94(1).
2023 STEP CRA Roundtable – June 20, 2023
Question 6: Non-Resident Trust and Canadian Charity
A long-term Canadian resident becomes a non-resident and within 60 months, for reasons not related to Canadian tax, settles a non-resident trust for non-resident family members. Assume there are no beneficiaries resident in Canada other than by virtue of a general provision in the trust document that states that beneficiaries include as a class registered charities as defined in subsection 248(1) (footnote 1) . Such charities may benefit at any time.
By virtue solely of a registered charity being a beneficiary, does the trust then become a deemed resident trust per section 94 of the Income Tax Act (the “Act”) (footnote 2) ?
CRA Response
Paragraph 94(3)(a) will deem a trust to be resident in Canada (footnote 3) throughout a particular taxation year of the trust when the following conditions in the preamble of subsection 94(3) are satisfied at a specified time in respect of the trust’s particular taxation year:
- The trust is factually non-resident;
- The trust is not an exempt foreign trust as defined in subsection 94(1); and
- There is a resident contributor (footnote 4) to the trust or a resident beneficiary under the trust.
Subsection 94(1) defines a specified time in respect of a trust for a taxation year of the trust. Paragraph (a) of the definition states that if the trust exists at the end of the taxation year, the specified time is the end of that taxation year.
For the purpose of our response, we assume the trust is factually non-resident and it is not an exempt foreign trust as defined by subsection 94(1). Given the settlor is the only “contributor” (footnote 5) to the trust, the only determination that is relevant in this case is whether there is a resident beneficiary under the trust.
Resident beneficiary is defined in subsection 94(1) as,
“resident beneficiary” under a trust at any time means a person (other than a person that is at that time a successor beneficiary under the trust or an exempt person) that is, at that time, a beneficiary under the trust, if at that time,
(a) the person is resident in Canada; and
(b) there is a connected contributor (footnote 6) to the trust.
However, it is important to note that the definition of “resident beneficiary” excludes a person that is an “exempt person”.
An “exempt person” is defined in subsection 94(1) to mean at any time, inter alia, a person whose taxable income for the taxation year that includes that time is exempt from tax under Part I because of subsection 149(1). Pursuant to paragraph 149(1)(f) one such person is a registered charity.
Since there are no other beneficiaries under the trust who are persons resident in Canada, there is no resident beneficiary under the trust as defined by subsection 94(1). As there is neither a resident contributor to the trust nor a resident beneficiary under the trust at the end of the trust’s particular taxation year, section 94 will not apply to the trust.
Dawn Dannehl
2023-095957
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Pursuant to the definition in subsection 248(1) a “registered charity” must be resident in Canada.
2 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.
3 A trust to which paragraph 94(3)(a) applies is deemed to be resident in Canada only for the purposes listed in subparagraphs 94(3)(a)(i) to (x).
4 Resident contributor is defined in subsection 94(1) as, “ ‘resident contributor’ to a trust at any time, means a person that is, at that time, resident in Canada and a contributor to the trust...” Since no other person has contributed to the trust, there is no resident contributor to the trust.
5 Contributor is defined in subsection 94(1) as, “contributor” to a trust at any time means a person (other than an exempt person but including a person that has ceased to exist) that, at or before that time, has made a contribution to the trust.
6 Subsection 94(1) defines a “connected contributor” to a trust at a particular time to mean a contributor to the trust at the particular time, other than a person all of whose contributions to the trust made at or before the particular time were made at a non-resident time of the person.