Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Where a non-resident trust distributes property to a Canadian resident beneficiary, can the beneficiary elect to have the distribution at fmv?
Position: Perhaps - provided the property is not a taxable Canadian property or business property connected with a Canadian permanent establishment.
Reasons: Pursuant to subsection 107(2.002), where a non-resident trust makes a distribution, after 1999, of a property (other than taxable Canadian property or business property connected with a Canadian permanent establishment) to a beneficiary of the trust in satisfaction of the beneficiary's capital interest in the trust, the beneficiary may elect out of the rules in subsection 107(2) in respect of the distribution, with the result that subsection 107(2.1) applies in respect of the distribution.
Author: Srikanth, Vyjayanthi
Section: 94(1), 94(3), 107(1.1), 107(2), 107(2.1), 107(2.002), 248(1)
May 25, 2015
Re: Distribution of property by a non-resident trust
This is in response to your e-mail dated April 13, 2015 where in you requested our views on the income tax implications to a distribution of capital property from a non-resident trust to a resident beneficiary. Specifically, you wanted to know if a non-resident trust could distribute the property to a resident beneficiary at fair market value (“FMV”). You have provided the following facts:
* The settlor of the non-resident trust (the “Trust”) is a resident of the United Kingdom (“UK”) and has never been a resident of Canada.
* The Trust has both Canadian resident and non-resident beneficiaries.
* The sole Canadian resident beneficiary is a capital beneficiary.
* The sole property of the Trust is shares of a non-resident corporation (the “Corp”).
* The Corp is a resident of the UK.
* The sole property held by the Corp is a rental property in the UK.
This technical interpretation provides general comments about the provisions of the Income Tax Act (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 and Technical Interpretations.
Subsection 107(2) provides the rules for the tax-deferred ‘rollout’ of the property of a personal trust to a beneficiary under the trust in full or partial satisfaction of the beneficiary’s capital interest in the trust. As well, pursuant to subsection 107(2.002), where a non-resident trust makes a distribution, after 1999, of a property (other than taxable Canadian property or certain property connected with a business carried on through a Canadian permanent establishment) to a beneficiary of the trust in satisfaction of the beneficiary's capital interest in the trust, the beneficiary may elect out of the rules in subsection 107(2) in respect of the distribution, with the result that subsection 107(2.1) applies to the distribution. Where subsection 107(2.1) applies the trust is deemed to have disposed of the property for proceeds equal to FMV and the beneficiary will be deemed to have acquired the property at a cost equal to those proceeds.
Your submission states that the Trust is resident in the UK. Whether the Trust is deemed to be resident in Canada, however, is a question of fact. Where a trust is deemed to be resident in Canada, subsection 107(2.002) will not apply pursuant to subparagraph 94(3)(a)(iv). A factually non-resident trust will be deemed to be resident in Canada in a particular taxation year if the non-resident trust has at a “specified time” in the taxation year, either a “resident contributor” to the trust or a “resident beneficiary” under the trust. All these terms are defined in subsection 94(1) of the Act.
In the given instance, for purposes of our response, it is assumed that the non-resident settlor is the sole contributor to the Trust and that there is neither a “resident contributor” nor a “resident beneficiary”, and thus, the Trust is not a deemed resident trust pursuant to subsection 94(3) of the Act. Further, it is also assumed that the Trust is a “personal trust” as defined in subsection 248(1) of the Act.
Accordingly, when the Trust distributes property to the Canadian resident beneficiary in satisfaction of the beneficiary's capital interest in the Trust, if the beneficiary elects out of the rules in subsection 107(2) pursuant to subsection 107(2.002), paragraph 107(2.1)(d) will apply in respect of the distribution.
(i) Paragraph 107(2.1)(d) applies to distributions of property (other than taxable Canadian property or business property connected to a Canadian permanent establishment) from a non-resident trust provided subsection 75(2) does not apply. Pursuant to paragraph 107(2.1)(d) the beneficiary is deemed to acquire the property at its FMV and to dispose of the corresponding portion of the capital interest in the trust for proceeds equal to the FMV of the property less the total of the following two amounts: the portion of the distribution that is a payment to which paragraph (h) or (i) of the definition of “disposition” in subsection 248(1) applies; and
(ii) an eligible offset as defined in subsection 108(1).
Where the beneficiary makes the election, the election must be filed with the beneficiary’s return of income for the taxation year in which the non-resident trust distributes the property. As there is no prescribed form available for the subsection 107(2.002) election, the beneficiary should attach a letter to his/her return of income for the year in which the non-resident trust distributes the property. Further, where the election is made, the cost amount of the beneficiary's interest also is deemed to be nil for the purposes of subparagraph 107(1)(a)(ii). As a result, the beneficiary may realize a capital gain from the disposition of the capital interest in the trust.
We trust our comments will be of assistance.
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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