2015-0581941C6 2015 STEP - Q 13- T3 return Q 10

Principal Issues: Does question 10 on the T3 return, about the trust having received any contribution of property since June 22, 2000, have any relevance to a trust that is factually resident in Canada?

Position: Yes. It is relevant to a trust that is factually resident in Canada.

Reasons: The question pertains to one of the conditions laid out in subsection 122(2) of the Act to determine if the trust qualifies as a grandfathered inter vivos trust.

Author: Srikanth, Vyjayanthi
Section: 94(1), 122(2)(d.1)

STEP CRA Roundtable - June 18, 2015

Question 13.

Q 10 on the T3 Return asks:

“Did the trust receive any additional property by way of a contribution of property (as defined in the "Definitions" of the guide) since June 22, 2000? If yes, enter the year, and, if during this tax year, attach a statement giving details.”

The definition “contribution of property” in the Guide reads as follows:

Contribution of property – generally refers to a transfer or loan of property, other than an arm’s length transfer, to a non-resident trust including:

*     a series of transfers or loans that results in a transfer or loan to the non-resident trust; and
*     a transfer or loan made as a result of a transfer or loan involving the non-resident trust.

Accordingly, can it be concluded that for the purpose of Q10 a contribution can only be made to a non-resident trust, and therefore that it will never be appropriate to answer “yes” to this question in a T3 prepared for a trust that is a factual resident of Canada?

CRA Response

Please note that the definition of contribution has been modified in the 2014 T3 Trust Guide (the “Guide”). It now states as follows:

“Contribution of property – generally refers to a transfer or loan of property, other than an “arm’s length transfer” (as defined in subsection 94(1)) to a non-resident trust by a person or partnership. A contribution is also considered to have been made by a person or partnership where the person or partnership makes (or becomes obligated to make) a particular transfer (other than an "arm's length transfer") as part of a series of transactions or events that includes another transfer or loan (other than an “arm's length transfer”), to the trust, by another person or partnership.”

The question that you refer to on the T3 relates to the determination of whether a trust qualifies as a grandfathered inter vivos trust. Grandfathered inter vivos trusts are Canadian resident inter vivos trusts that were created before June 18, 1971 and that satisfy certain conditions. For 2015 and earlier taxation years, such trusts generally have full access to the graduated rates applicable to individuals. The conditions to qualify as a grandfathered inter vivos trust are set out in subsection 122(2) of the Income Tax Act. Specifically, paragraph 122(2)(d.1) requires that the trust is not a trust to which a contribution (as defined by section 94 as it reads for taxation years that end after 2006) was made after June 22, 2000.

The significance of the reference to June 22, 2000 is due to the legislative proposals released by the Department of Finance by way of News Release number 2000-050 dated June 22, 2000 wherein changes were proposed to the non-resident trust rules.

Your concern is whether this question in the T3 return is relevant to a trust that is factually resident in Canada given that the definition of “contribution of property” in the Guide refers to a transfer or loan to a non-resident trust.  It is our view that the fact that the Department of Finance chose to use the definition of contribution in section 94 for the purpose of paragraph 122(2)(d.1) does not support a conclusion that the paragraph will never apply to a factually resident trust. In fact, paragraph 122(2)(b) imposes the requirement that the trust was resident in Canada on June 18, 1971 and without interruption thereafter until the end of the year.

However, it may be noted that for 2016 and subsequent taxation years, the introduction of the Graduated Rate Estate rules and related amendment to subsection 122(2) will result in subsection 122(1) applying to all inter vivos trusts (i.e., they will pay tax at the highest marginal tax rate).

Vyjayanthi Srikanth
2015-058194

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