Q.7A
How is the “resident portion” (as defined in s. 94(1)) computed where (i) a Canadian resident beneficiary uses a residential property owned by a non-resident trust (which has made a valid (resident portion) election under s. 94(3)(f)) and pays certain expenses of the property directly, (ii) a loan is made by the trust to a Canadian resident beneficiary, or (iii) such loan is then repaid?
Re (i), after noting that such payment of expenses constituted a contribution under s. 94(2)(a) by reason of reducing a trust liability, CRA noted that under s. (a)(ii)(A)(II) of the definition of resident portion, the trust must select property to be allocated to the resident portion having an FMV at least equal to the absolute value of the decrease in the liability or potential liability of the trust.
Re (ii), CRA noted that s. 94(2)(g)(iv) provides that the loan to the beneficiary involves the acquisition by the trust of the debt entailing a deemed transfer by the debtor – so that, here, there is a deemed transfer of property from the beneficiary to the trust. Accordingly, under para. (a) of the “resident portion” definition, the amount of the loan owing by the beneficiary would be considered as a contribution by the beneficiary (viewed in this regard as a resident contributor) and would be included in the resident portion.
Re (iii), the repayment of the loan would be considered to be a contribution to the trust by the resident beneficiary so that the cash repayment proceeds would be added to the resident portion. Since the debt ceased to exist, it is expected that it would no longer be included in the resident portion.
Q.7B
49% of the shares of a non-resident corporation owned by the trust subject to s. 94(3) were included in the resident portion but the trust held 100% of the shares in all. Was the corporation a “controlled foreign affiliate” (CFA) as defined in s. 95(1) and if so, how would foreign accrual property income (“FAPI”) be calculated?
CRA noted that s. 94(3)(f)(viii) provides that the resident portion trust and the non-resident portion trust are deemed to not deal with each other at arm’s length and s. 94(3)(a)(x) provides that a deemed resident trust is deemed to be resident in Canada throughout the particular tax year for purposes of determining whether a foreign affiliate is a CFA of the taxpayer. Accordingly, in light of s. (b)(ii) of the CFA definition (effectively deeming the resident portion trust to hold the shares of a non-arm’s length person), the corporation would constitute a CFA of the resident portion trust. Accordingly, its FAPI would be computed in the usual way based on its participating percentage (based on its 49% shareholding).