2013-0513641I7 Deemed resident trust under subsection 94(3)

Principal Issues: 1. What is the meaning of the expression "maximum amount deductible under subsection 104(6)" in paragraph 104(7.01)a)? 2. Does an amount remitted by the Estate to CRA on filing its income tax and information return, based on the calculation of Part XIII withholding and an amount withheld pursuant to section 215, represent a payment of an amount of tax under Part I or under Part XIII? 3. Does subsection 120(1) apply to the income of the Estate?

Position: 1. The amount otherwise available for a deduction under subsection 104(6). 2. Part I tax. 3. Yes.

Reasons: 1. Wording of paragraph 104(7.01)(a). 2. Application of paragraph 98(3)(g) to the amount withheld pursuant to section 215 and payment on filing for the other amount. 3. Wording of subsections 120(1) and 120(3).

Author: Allaire, Lucie
Section: 94(1), 94(3), 104(6), 104(7.01), 120(1), 120(3), 120(4), 215(1) Regulation 2601

                                                                                                                                                            July 25, 2014

      Non-resident Audit Section                                                                                                           Income Tax Rulings Directorate
      Montreal Tax Services Office                                                                                                        Financial Industries and
                                                                                                                                                            Trust Section
                                                                                                                                                             Lucie Allaire, LL.B., CPA, CGA,
      Attention : Marie-Claude Boucher                                                                                                  D. Fisc.               

                                                                                                                                                             2013-051364

Application of Subsection 104(7.01) and Part I Tax of a Deemed Resident Trust

We are writing in response to your e-mails of November 28, 2013 and December 3, 2013 in which you requested our views on the application of subsection 104(7.01) of the Income Tax Act (“Act”) and the Part I tax of an estate that is deemed to be a resident of Canada pursuant to paragraph 94(3)(a). We also acknowledge the additional information provided in the course of various telephone conversations (Price/Boucher/Charette) and (Boucher/Allaire) and in e-mails dated March 13, 18, and 21, 2014 (Boucher/Allaire).

Unless otherwise specified, each legislative reference is a reference to the Act.

Name of the parties

Beneficiary A           XXXXXXXXXX, the daughter of Mr. X;

Beneficiary B           XXXXXXXXXX, the son of Mr. X;

CRA                         Canada Revenue Agency;

Estate                      Estate of the Late XXXXXXXXXX;

Mr. X.                       Late XXXXXXXXXX;

Representative        XXXXXXXXXX;

Facts

Based on the information provided to us, we understand the facts to be as follows:

1.    Mr. X died on XXXXXXXXXX. At the time of his death, he was a Canadian resident and had been resident for a period of more than 60 months. He was also a resident of the province of XXXXXXXXXX during that period.

2.    Article XXXXXXXXXX of the “XXXXXXXXXX” of Mr. X dated XXXXXXXXXX provides that the sole liquidator of the Estate is Beneficiary A and revokes the paragraphs of the will relating to dispute and replacement of the liquidators. Article XXXXXXXXXX confirms the validity of all other clauses of the last will dated XXXXXXXXXX.

3.    Beneficiary B, a resident of XXXXXXXXXX, and Beneficiary A, a resident of XXXXXXXXXX are the only two beneficiaries of the Estate.

4.    Article XXXXXXXXXX of Mr. X’s will dated XXXXXXXXXX provides that XXXXXXXXXX% of the entire estate including all his property, wherever situated in the world, should be attributed to Beneficiary A and that XXXXXXXXXX% of it to Beneficiary B.

5.    According to Article XXXXXXXXXX of Mr. X’s will dated XXXXXXXXXX, the liquidator of the Estate has the discretion to determine and decide what sum of money and property that are paid or payable to a beneficiary is on account of capital or income.

6.    The Estate is a non-resident of Canada and the liquidator initially treated it as a non-resident for tax purposes. However, the Estate is deemed to be a resident of Canada pursuant to paragraph 94(3)(a).

7.    The Estate owned shares of a private Canadian corporation, which is a taxable Canadian corporation within the meaning of subsection 89(1).

8.    The shares of the Estate were not taxable Canadian property as defined in subsection 248(1).

9.    On XXXXXXXXXX, the Estate was wound up.

10.   During the taxation year ending XXXXXXXXXX of the Estate, a deemed dividend pursuant to subsection 84(3) arose on the redemption of the shares described in paragraph 7 above.

11.   The Estate declared the following income for its taxation year from XXXXXXXXXX to XXXXXXXXXX.

Pension income      $XXXXXXXXXX      
XXXXXXXXXX        $XXXXXXXXXX           
T3 Income slip        $XXXXXXXXXX        
T3 Income slip        $XXXXXXXXXX      
Deemed dividend   $XXXXXXXXXX          
Total revenue         $XXXXXXXXXX

12.   No Part XIII tax was withheld on the pension income, the XXXXXXXXXX and the Trust (T3) income in the amount of $ XXXXXXXXXX.

13.   Part XIII tax in the amount of $ XXXXXXXXXX was withheld on the total amount of the deemed dividend and in the amount of $ XXXXXXXXXX on the T3 income of $ XXXXXXXXXX.

14.   When filing its T3 Trust Income Tax and Information Return for its taxation year ending XXXXXXXXXX, the Estate paid to CRA an amount of $ XXXXXXXXXX. This amount represents  XXXXXXXXXX% of the total income described in paragraph 11 minus a Part XIII withholding of an amount of $ XXXXXXXXXX. This amount was applied by CRA on the T3 account of the Estate.

15.   Before the end of the Estate’s taxation year ending XXXXXXXXXX, the liquidator exercised her discretion in order to allocate and make payable the full amount of deemed dividend of $ XXXXXXXXXX to Beneficiary A.

16.   The list of the Estate’s assets annexed to the income tax and information return ending XXXXXXXXXX provides that the total value of the assets at the date of death was $ XXXXXXXXXX.

17.   There was no other attribution of income to Beneficiary A during the Estate’s taxation year ending XXXXXXXXXX.

Your questions

1. What is the meaning of the expression “the maximum amount that (…) would be deductible under subsection 104(6)” in paragraph 104(7.01)(a)? More specifically, you asked us if this expression refers to the maximum amount that the Estate could have claimed under paragraph 104(6)(b) or to the amount that the Estate could choose to claim pursuant to subsection 104(6).

2. Whether the amounts described in paragraph 13 and the payment by the Estate described in paragraph 14 represents a payment of tax under Part XIII or under Part I?

3. Whether the surtax under subsection 120(1) applies?

Our comments

Amount deductible under subsection 104(6)

Subject to subsections 104(7) to 104(7.1), subparagraph 104(6)(b)(i) generally provides that, the trust may deduct in computing its income for a taxation year an amount, as the trust claims, not exceeding the portion of its income for the year as became payable in the year to a beneficiary.

Where a trust is deemed by subsection 94(3) to be resident in Canada for a taxation year, subsection 104(7.01) provides that for the purpose of computing the trust’s income for the year, the maximum amount deductible under subsection 104(6) in computing its income for the year is a lower amount if the trust paid Canadian-source income to non-resident beneficiaries. The maximum amount deductible is the result of:

*     the maximum amount that would be deductible under subsection 104(6) in computing the trust income for the year, if the Act were read without reference to subsection 104(7.01) (paragraph 104(7.01)(a))

minus

*     the portion of the trust’s designated income for the year (with the meaning assigned by section 210) that became payable in the year to a non-resident beneficiary (subparagraph 104(7.01)(b)(i)), and
*     all amounts each of which is the product obtained by multiplying a specified factor by each particular amount enumerated in clauses 104(7.01)(b)(ii)(A) to (C) (subparagraph 104(7.01)(b)(ii)).

We are of the opinion that the expression “the maximum amount that (…) would be deductible under subsection 104(6)” in paragraph 104(7.01)(a) refers to the maximum amount otherwise available for a deduction by the trust under subsection 104(6) and not the amount that the trust would choose to claim pursuant to paragraph 104(6)(b).

In the situation you have described, the amount to be included pursuant to subsection 104(7.01)(a) would be $XXXXXXXXXX (footnote 1) . This amount would be reduced pursuant to subparagraph 104(7.01)(b)(ii) by $XXXXXXXXXX. Consequently, the maximum amount deductible under subsection 104(6) in computing the Estate’s income for the year would be $XXXXXXXXXX.

The taxpayer’s representative indicated that the income of the Estate other than the deemed dividend, which totalizes an amount of $ XXXXXXXXXX, was taxable in the Estate.  In order to obtain such a result, the Estate would have to claim under subsection 104(6) a deduction for an amount that is less than the full amount of $XXXXXXXXXX.

Based on the assumptions that the income of the Estate other than the deemed dividend was payable to Beneficiary B, and that the Estate chooses to deduct, pursuant to subsection 104(6), an amount of $XXXXXXXXXX, the Estate may wish to designate, pursuant to subsection 104(13.1), to its beneficiaries the respective shares of that portion of the trust’s income, as determined under the rules provided for in that subsection.

Payment of tax of the Estate

Section 212 provides that a non-resident person shall pay a tax of 25% (reduced by many treaties) on certain amounts paid or credited or deemed by Part I to be paid or credit to the non-resident by a resident of Canada.

Paragraph 94(3)(a) deems the trust to be resident of Canada for various purposes. Subparagraph 94(3)(a)(viii) provides inter alia that the trust is deemed to be resident in Canada throughout the particular taxation year for the purposes of determining the liability of the trust for tax under Part I, and under Part XIII on amounts paid or credited to the trust. Consequently, the trust would not be subject to section 212 on an amount paid to the trust.

Paragraph 94(4)(c) provides for greater certainty that the trust is not deemed to be a person resident in Canada for determining the liability of a person that would arise under section 215.

Subsection 215(1) requires inter alia that when a person pays, credits or provides an amount on which an income tax is payable under Part XIII, or would be so payable if this Act were read without reference to subparagraph 94(3)(a)(viii) and to subsection 216.1(1), the person shall
deduct or withhold from it the amount of the tax and forthwith remit that amount to the Receiver General on behalf of the non-resident person. If the payer fails to deduct or withhold such amount, the payor is liable to pay the amount pursuant to subsection 215(6).

Paragraph 94(3)(g) provides that if a person deducts or withholds any withholding amount as required by section 215 from a particular amount paid or credited to the deemed resident trust, and the particular amount has been included in the trust’s income for the particular taxation year, the withholding amount is deemed to have been paid on account of the trust’s tax under Part I for the particular taxation year.

For the purpose of paragraph 94(3)(g), we are on the opinion that the amount of deemed dividend is considered to be included in the total income of the Estate pursuant to paragraph 12(1)(j) and 82(1)(e). Therefore, the amount of tax described in paragraph 13 is deemed to have been paid on account of the Estate’s tax under Part I for the taxation year ending XXXXXXXXXX.

However, based on the those rules, it is our view that the amount described in paragraph 14 is not withheld and remitted by a payer on behalf of the Estate. Consequently, this amount cannot be deemed pursuant to paragraph 94(3)(g) to have been paid on account of the trust Part I tax.

Because the amount described in paragraph 14 was remitted when the Estate filed its T3 Income Tax and Information Return and was applied by CRA on the T3 account of the Estate, it is our view that it is reasonable to consider the amount to the account of its liability of tax under Part I.

Application of the surtax

Subsection 120(1) provides that there shall be added to the tax otherwise payable under Part I by an individual for a taxation year the amount of 48 % of the tax otherwise payable under Part I of the individual’s income for the year, that is not earned in a province.

Subsection 120(4) defines the expression “income earned in the year in a province” to mean “amounts determined under rules prescribed for the purpose by regulations made on the recommendation of the Minister of Finances”.  These rules are found in Part XXVI of the Income Tax Regulations.

Subsection 2601(1) of the Income tax Regulations provides that if an individual resides in a particular province on the last day of a taxation year and has no income for the taxation year from a business with a permanent establishment outside the province, the individual’s income earned in the taxation year in the particular province is the individual’s income for the taxation year.

XXXXXXXXXX.

Therefore, we are of the opinion that the income of the Estate for the year is not income earned in a province as defined in subsection 120(4) and accordingly, the Income Tax Regulations. Consequently, subsection 120(1) is applicable to the income of the Estate for the year ending
XXXXXXXXXX.

Access to information

For your information, a copy of this memorandum will be severed as per the criteria of the Access to Information Act respecting access to information and it will be in the electronic library of the CRA. In addition, a severed copy will be distributed to commercial tax publishers to include it in their databases. The severing process will remove any information that should not be disclosed, including information that may reveal the identity of the taxpayer. If the taxpayer wants a copy of this memorandum, it is possible to provide the electronic version of the electronic library. Based on the Privacy Act, the taxpayer can also request a severed copy which does not remove the taxpayer’s identity. You should direct any requests for the most recent version of this document to Céline Charbonneau at (613) 952-1361. We will send you a copy that you can provide to the taxpayer.

We trust our comments will be of assistance.
Yours truly,

Louise J. Roy, CPA-CGA
For Director
Financial Industries and Trusts Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Because the Estate was wound as of XXXXXXXXXX, it seems that all the amounts of income were payable to the beneficiaries and would be included in subparagraph 104(6)(b)(i).  As well, the amount of deemed dividend included in the trust income pursuant to paragraph 12(1)(j) is the dividend received without any gross-up because of the application of paragraph 82(1)(e).

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