2015-0572141C6 2015 STEP–Q7-Deemed Res Trust-subsection 94(10)

Principal Issues: Retroactive application of subsection 94(3) when an individual leaves Canada, makes a contribution to a trust, and subsequently returns to Canada within 60 months of making the contribution.

Position: Where the individual was a non-resident of Canada for 60 months prior to making the contribution to the trust and returns to Canada within 60 months of making the contribution, there will be a retroactive application of subsection 94(3) for each taxation year commencing in the year the contribution is made provided that the trust has a resident beneficiary.

Reasons: See below.

Author: Campbell, Katie
Section: 94(3); 94(10)

STEP CRA Roundtable – June 18 2015
Question 7 - Deemed Resident Trust

Question 7(a)

Under the rules concerning deemed resident trusts, an individual who becomes resident in Canada for the first time, and who has previously contributed property to a non-resident trust, will be considered a resident contributor. As such, the trust would come within the provisions of section 94 with the result that the trust would be deemed resident. Paragraph 94(3)(a) seems to deem the trust resident from January 1 of that taxation year. This pre-dates the time at which the person became Canadian resident. Does CRA agree with this interpretation?

CRA Response

We have assumed, for the purpose of our response, that the individual becomes resident in Canada in 2015.  As paragraph 94(3)(a) deems the trust to be resident in Canada throughout the particular taxation year, we would agree with this interpretation.

Analysis

Paragraph 94(3)(a) states that if, at a specified time in a trust’s particular taxation year, the trust is a non-resident trust and there is a resident contributor to the trust, the trust is deemed to be resident in Canada throughout the particular taxation year for certain purposes described therein. 

A resident contributor is defined in subsection 94(1) as “a person that is, at that time, resident in Canada and a contributor to the trust …” Contributor is defined in subsection 94(1) as “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.”  Since the individual has previously contributed property to the trust, the individual will be a contributor.  Since the individual is a contributor and is resident in Canada, the individual will be a resident contributor.

Therefore, the non-resident trust will be deemed to be resident in Canada throughout the taxation year, even if the taxation year commenced before the individual became a resident of Canada.

Question 7(b)

Suppose that the person was previously a long-term Canadian resident, left more than 5 years ago, and then made a contribution to the non-resident trust but within five years becomes Canadian resident again. Assume also that the trust has Canadian resident beneficiaries who are not successor beneficiaries (within the meaning of subsection 94(1)).

Our analysis of this situation is that upon the individual becoming Canadian resident, the non-resident trust is deemed to become Canadian resident, with retroactive application of potentially up to six taxation years, including the current year. We reach this conclusion because a contribution would have been made at a time which is not a non-resident time, and the trust throughout the taxation years in question had Canadian resident beneficiaries.

In such a situation, it would seem that the trust would be responsible for filing tax returns for up to five previous taxation years, furnishing foreign reporting forms in respect of its holdings (T1134 and T1135), and paying income tax on any income of the trust, computed in accordance with Canadian rules, subject to foreign tax credit relief. No relief would be provided under an international tax treaty, by virtue of the overriding provision of section 4.3 of the Income Tax Conventions Interpretation Act. In addition late filing penalties and interest may apply.

Does CRA agree with our interpretation in these circumstances? If so, can CRA offer any strategy whereby the adverse tax consequences described above can be mitigated (for example winding up the trust before becoming Canadian resident)?

CRA Response

We have assumed, for the purpose of our response, that the individual was previously resident in Canada for more than 60 months.  Provided that the person was a non-resident for more than 60 months prior to making the contribution to the non-resident trust, we would agree that the deeming provision in subsection 94(10) would result in the retroactive application of subsection 94(3) beginning in the taxation year during which the contribution was made to the non-resident trust.  Where the person was not a non-resident for 60 months prior to making the contribution, the non-resident trust would be deemed to be resident in Canada by virtue of subsection 94(3) commencing in the taxation year during which the person makes the contribution to the non-resident trust. 

Analysis

For the purpose of the analysis, assume the following facts:

*     Mr. X was a long-term resident of Canada. 
*     In January 2005, Mr. X became a non-resident of Canada. 
*     In July 2010, Mr. X made a contribution to a non-resident trust (the “Trust”).
*     In March 2015, Mr. X became a resident of Canada.
*     Trust has Canadian resident beneficiaries who are not successor beneficiaries (within the meaning found in subsection 94(1)).

We need to determine for which taxation years Trust will be deemed to be resident in Canada by virtue of subsection 94(3).  In order for Trust to be deemed to be resident in Canada for a particular taxation year, by virtue of subsection 94(3), Trust must have either a resident beneficiary or a resident contributor.

Once Mr. X becomes resident in Canada in 2015, Trust will have a resident contributor based on the same reasoning outlined in the analysis related to question 7(a).  Therefore, Trust will be deemed to be resident in Canada for the 2015 taxation year. 

The determination as to whether Trust will be retroactively deemed to be resident in Canada is based on the definition of resident beneficiary in subsection 94(1).  As described in the facts, Trust has beneficiaries that are resident in Canada.  In order for Trust to have a resident beneficiary at a specified time in a taxation year, as defined in subsection 94(1), Trust must also have a connected contributor at that time. 

A connected contributor is defined as follows:

“connected contributor”, to a trust at a particular time, means 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.

Mr. X is a contributor to Trust, as defined in subsection 94(1).  Therefore, we need to consider whether the contribution in 2010 was made at a non-resident time of Mr. X.  Non-resident time is defined in subsection 94(1) as follows:

“non-resident time” of a person in respect of a contribution to a trust and a particular time means a time (referred to in this definition as the “contribution time”) at which the person made a contribution to a trust that is before the particular time and at which the person was non-resident (or, if the person is not in existence at the contribution time, the person was non-resident throughout the 18 months before ceasing to exist), if the person was non-resident or not in existence throughout the period that began 60 months before the contribution time (or, if the person is an individual and the trust arose on and as a consequence of the death of the individual, 18 months before the contribution time) and ends at the earlier of

(a)   the time that is 60 months after the contribution time, and

(b) the particular time.

For the 2015 taxation year of Trust, Mr. X would be considered to have made the contribution to Trust at a time other than a non-resident time since Mr. X was a non-resident for more than 60 months before the contribution time but became resident in Canada within 60 months after the contribution time.  As a result, Mr. X would be a connected contributor.  Consequently, Trust would have resident beneficiaries, as defined in subsection 94(1).  Therefore, Trust would be deemed to be resident in Canada for the 2015 taxation year.

Where subsection 94(10) applies there will be a retroactive application of subsection 94(3) to a non-resident trust.  Subsection 94(10) reads as follows:

In applying this section at each specified time, in respect of a trust’s taxation year, that is before the particular time at which a contributor to the trust becomes resident in Canada within 60 months after making a contribution to the trust, the contribution is deemed to have been made at a time other than a non-resident time of the contributor if

(a)   in applying the definition “non-resident time” in subsection (1) at each of those specified times, the contribution was made at a non-resident time of the contributor; and

(b)   in applying the definition “non-resident time” in subsection (1) immediately after the particular time, the contribution is made at a time other than a non-resident time of the contributor.

Subsection 94(10) provides that where a contributor to the trust becomes resident in Canada within 60 months after making a contribution to the trust, the contribution is deemed to have been made at a time other than a non-resident time of the contributor provided that the conditions contained in (a) and (b) of the definition are both met. 

The condition in paragraph 94(10)(a) requires that when applying the definition of “non-resident time” at each of the relevant specified times, which is referring to the end of each taxation year that occurs before the particular time at which the contributor become resident, the contribution was made at a non-resident time of the contributor.  At the end of 2010, the contribution by Mr. X would have been made at a non-resident time of Mr. X as he was a non-resident of Canada throughout the period from 60 months before the contribution up to that time (being the end of the 2010 taxation year). The same result would be obtained at the end of each taxation year up to the 2014 taxation year. Therefore, the requirement in paragraph 94(10)(a) is met. 

The condition is paragraph 94(10)(b) requires that when applying the definition of “non-resident time” immediately after the particular time, the contribution must have been made at a time other than a non-resident time of the contributor.  In this case, immediately after the particular time (being the time at which Mr. X became resident in Canada), the contribution by Mr. X would be considered to have been made at a time other than a non-resident time of Mr. X since Mr. X became a resident of Canada within 60 months of making the contribution to Trust.  Therefore, the requirement in paragraph 94(10)(b) is met.

Consequently, subsection 94(10) will deem Mr. X to have made the contribution to Trust at a time other than a non-resident time for each taxation year commencing with the taxation year during which Mr. X made the contribution to the Trust.  Therefore, Trust will be deemed to be a trust resident in Canada for each taxation year commencing in 2010.  This would result in Trust being deemed resident in Canada pursuant to subsection 94(3) for a total of six taxation years (2010 – 2015 inclusive). 

By virtue of subparagraph 94(3)(a)(vi) Trust will be required to complete foreign reporting forms (T1135 and T1134), if applicable, for each taxation year commencing in 2010.  Trust will also be subject to Canadian tax by virtue of paragraph 94(3)(a) for each taxation year commencing in 2010.  As noted, by virtue of section 4.3 of the Income Tax Conventions Interpretation Act, Trust will be deemed not to be a resident of any state other than Canada for purposes of applying a tax treaty.  Subparagraph 152(4)(b)(vii) allows the Minister of National Revenue to assess or reassess tax, interest, or penalties within an additional 3 years where the assessment or reassessment is made to give effect to the application of section 94.

There is another example that meets the criteria provided in the question that would not result in a retroactive application of subsection 94(3).  Assume the following facts:

*     Mr. Z was a long term resident of Canada.
*     In January 2007, Mr. Z became a non-resident of Canada. 
*     In July 2010, Mr. Z made a contribution to a non-resident trust (the “Trust2”).
*     In March 2015, Mr. Z became a resident of Canada.
*     Trust has Canadian resident beneficiaries who are not successor beneficiaries (within the meaning found in subsection 94(1)).

In applying subsection 94(3) at the end of the 2010 taxation year, Trust2 would have a resident beneficiary, as defined in subsection 94(1), as there are beneficiaries of the trust that are resident in Canada and Mr. Z would be considered to be a connected contributor.  Mr. Z would be a connected contributor because at the time the contribution was made, Mr. Z would not have been a non-resident of Canada for a period of 60 months before the contribution was made.  Consequently, the contribution would not be considered to have been made at a non-resident time of Mr. Z.  As a result, Trust2 would be deemed to be resident in Canada from 2010 onward without any retroactive application.

With respect to the second portion of your question as to whether CRA could offer any strategy whereby the adverse tax consequences could be mitigated, please note that the CRA cannot offer tax planning or financial planning advice. Accordingly, we are unable to provide you with a definitive response to your question. 

Katie Campbell
2015-057214

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