2013-0475421E5 Section 94.2

Principal Issues: 1. To the extent that an exempt foreign trust would be deemed to be a non-resident corporation controlled by its beneficiary under subsection 94.2(2) and, therefore, a CFA of its beneficiary under subsection 95(1) and the beneficiary is a “financial institution” (as defined in subsection 142.2(1)), would the trust also be a “financial institution” (as defined in subsection 142.2(1)) and, therefore, subject to the specified debt obligation and mark-to-market property rules in sections 142.2 to 142.6 when calculating its FAPI? 2. Would the application of the deeming rule in subsection 94.2(2) to the trust result in the trust being required to compute its FAPI in Canadian currency under paragraph 95(2)(f.14) and, if so, could a proxy calculation be used to calculate its foreign currency gains/losses in circumstances where the trust does not provide the required information to the beneficiary?

Position: 1. Yes, the trust would be a financial institution under subparagraph (a)(iii) of the definition of “financial institution” in subsection 142.2(1) and would be subject to the specified debt obligation and mark-to-market rules in sections 142.2 to 142.6 for purposes of computing its FAPI under section 95. 2. Yes, the foreign currency gains and losses that would be FAPI of the trust would be required to be computed using Canadian currency. Although section 94.2 is a relatively new provision of the Act, the question of how to compute FAPI in circumstances where complete and full information may not be accessible is not novel, as it has historically been relevant in connection with CFA status under former subparagraph 94(1)(d) and paragraph (b) of the definition of “controlled foreign affiliate” in subsection 95(1) and as such, we will not comment on the specific proxy used in the particular circumstances.

Reasons: 1) To the extent that the conditions of subsection 94.2(1) would be met, subsection 94.2(2) deems the trust to be a corporation controlled by its beneficiary for the purposes of applying, amongst others, section 95 and subsection 91(1). As such, when applying section 95, the trust would be a CFA of its beneficiary and, therefore, the FAPI of the trust would be determined on the basis of Canadian tax principles which would include subsection 142.2(1) as well as the rules in sections 142.3 to 142.6. 2) Similar to 1), as the trust would be deemed to be a non-resident corporation that is controlled by its beneficiary for the purposes of applying section 95, the trust’s FAPI would be determined as though it were resident in Canada and in Canadian currency under paragraphs 95(2)(f) and 95(2)(f.14), respectively, and as such, the foreign currency gains or losses that would be FAPI of the trust would be computed using Canadian currency and in accordance with the Act.

Author: Chang, Jack Yu-Fan
Section: 91, 94, 94.2, 95(2)(f), 95(2)(f.14), 142.2, 142.3, 142.4, 142.5, 142.6, 162, 163, 220(2.1), 233.4, 233.5, 261

XXXXXXXXXX                                2013-047542
                                                        Jack Chang

July 9, 2015

Dear XXXXXXXXXX,

Re: Section 94.2 of the Income Tax Act

We are writing further to our various phone calls with you and your colleague in February of 2013 and in response to your email of January 15, 2013 in which you requested our views on the application of then proposed section 94.2 of the Income Tax Act (the “Act”), as it read at first reading in the Technical Tax Amendments Act, 2012 (Bill C-48, 41st Parliament, 1st session). 

More specifically, you wished to know whether, in circumstances where

i)    an exempt foreign trust (the “Trust”) was deemed by then proposed subsection 94.2(2) to be a non-resident corporation controlled by a beneficiary resident in Canada and, therefore, a controlled foreign affiliate (“CFA”) of that beneficiary as a result of the definition in subsection 95(1); and

ii)   the beneficiary was a financial institution as defined in subsection 142.2(1),

the Trust would also then be a financial institution and, therefore, subject to the specified debt obligation and mark-to-market rules in sections 142.2 to 142.6 when calculating its foreign accrual property income (“FAPI”). 

You also wished to know whether the Trust’s FAPI would be required to be calculated in Canadian currency pursuant to paragraph 95(2)(f.14) and, if so, in circumstances where the beneficiary did not have the information required to calculate the Trust’s foreign currency gains or losses on transactions, whether it would be acceptable for the beneficiary to report a substitute or proxy amount. In particular, you queried whether it would be acceptable for the beneficiary to calculate the Trust’s foreign currency gains or losses by comparing the Trust’s net asset value at the beginning of the year to its net asset value at the end of the year in Canadian dollars, based on the exchange rates at those relevant times.

As you are aware, subsequent to our discussions with you, Technical Tax Amendments Act, 2012 (Bill C-48) received Royal Assent on June 26, 2013 with no amendment to proposed subsection 94.2(2) as it read at first reading on November 21, 2012. As such, your queries regarding then proposed subsection 94.2(2) similarly apply to current subsection 94.2(2).

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R6, Advance Income Tax Rulings.

To the extent that the conditions of subsection 94.2(1) would be met, subsection 94.2(2) would deem the Trust to be a non-resident corporation that is controlled by its beneficiary for the purposes of applying, amongst others, section 95 and subsection 91(1). As such, where the Trust’s beneficiary is a “financial institution” as defined in subsection 142.2(1), the Trust would be a CFA of that financial institution pursuant to subsection 95(1) and the Trust’s FAPI would be determined as though it were resident in Canada and in accordance with the provisions of the Act pursuant to paragraph 95(2)(f). As a result, because a corporation that is controlled by a financial institution would be a financial institution under subparagraph (a)(iii) of the definition of “financial institution” in subsection 142.2(1), the Trust would be a financial institution and would, for purposes of computing its FAPI under section 95, be subject to the specified debt obligation and mark-to-market rules in sections 142.2 to 142.6. 

Regarding your second query, similar to our comments regarding your first query, as the Trust would be deemed to be a non-resident corporation that is controlled by its beneficiary for the purposes of applying section 95 and subsection 91(1), the Trust’s FAPI would be determined as though it were resident in Canada and in Canadian currency pursuant to paragraphs 95(2)(f) and 95(2)(f.14), respectively. As a result, the foreign currency gains or losses of the Trust would be computed using Canadian currency and in accordance with the Act. Although section 94.2 is a relatively new provision of the Act, the question of how to compute FAPI in circumstances where complete and full information may not be accessible is not novel, as it has historically been relevant in connection with CFA status under former subparagraph 94(1)(d) (the predecessor of current section 94.2) and paragraph (b) of the definition of “controlled foreign affiliate” in subsection 95(1). As such, we will not comment on the specific proxy proposed to be used in the particular circumstances. Also, we note that, in respect of the FAPI of the Trust, a failure to report income as required, and false statements or omissions, in respect of prescribed reporting requirements may result in substantial penalties under section 162 or 163. However, section 233.5 may provide some relief concerning the prescribed reporting requirements where a Canadian taxpayer may not have all the information required to fulfil the reporting requirements of subsection 233.4(4) in respect of their foreign affiliate. The availability of the due diligence exception would be dependent upon the facts and the transactions that give rise to the requirement to file or that affect the information to be reported in the return under subsection 233.4(4). Additional relief in connection with reporting requirements may be available on a case-by-case basis under subsection 220(2.1).

It should be noted that, generally, former paragraph 94(1)(d) was carried forward as current section 94.2 of the Act with no intended modifications to either the income inclusion or the reporting requirements that resulted under prior paragraph 94(1)(d) and subsection 233.4(4). Effectively, section 94.2, in conjunction with subsection 233.4(4), although with some expansion to the number of foreign entities subject to the provisions’ requirements, maintains and accords with the policy announced by the Department of Finance in Budget 2010 of retaining and broadening the reporting requirements in connection with prior subsection 94(1).

We hope these comments have been of assistance.

Yours truly,

Lori M. Carruthers CPA, CA
Section Manager
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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