2017-0693451C6 2017 STEP - Q3 - Dual-resident estate and Article (IV)

Principal Issues: Dual-resident estate and Article (IV)

Position: Response provided by Competent Authority

Author: Campbell, Katie
Section: -

STEP CRA Roundtable – June 13, 2017

QUESTION 3.  Dual-resident estate and Article IV(4)

Under U.S. law, when a U.S. citizen dies, their estate may be considered a U.S. estate under U.S. domestic law.  However, such an estate may also be considered a Canadian resident estate pursuant to where the central management and control of the estate resides.  Under paragraph 4 of Article IV of the Canada-US Tax Convention (the “Convention”), the Competent Authorities shall by mutual agreement endeavour to settle the question of residency. 

a) Has the CRA ever used Article IV(4) in order to settle this question?

b) Can the CRA tell us what factors are considered by the competent authority when settling the issue?

c) Where a U.S. trust is deemed to be a resident of Canada under the provisions of subsection 94(3) of the Act, is it possible to rely on Article IV(4) of the Convention?

d) Can the CRA provide an example of a “mode of application”?

CRA Response

a)

The competent authority for Canada has received very few requests to resolve the dual residency of a trust or estate with the competent authority for the United States under this provision of the Convention.  However, as a result of the 1999 budget proposals to expand the application of section 94 of the Act, which have recently been amended, the competent authority for Canada received a number of requests seeking its views on the question of dual residence.

b)

In determining whether a trust or estate is a resident of Canada for purposes of the Income Tax Act (the “Act”), the CRA will generally apply the criteria described in Income Tax Folio S6-F1-C1, Residence of a Trust or Estate.  As stated therein, it is generally the CRA’s view that the residence of a trust or estate in Canada, or in a particular province or territory within Canada, is a question of fact to be determined according to the circumstances in each case.  The Supreme Court of Canada (Fundy Settlement v. Canada, 2012 DTC 5063, 2012 SCC 14) has clarified that for purposes of the Act a trust resides where its real business is carried on, which is where the central management and control of the trust actually takes place.

Where the trust or estate is also considered a resident of the United States under its domestic law, and thereby resident of both Contracting States for purposes of the Convention, the competent authority for Canada will consider all the surrounding facts on a case-by-case basis to determine the strength of the trust’s ties to Canada relative to the United States.  In addition to the factors listed in Income Tax Folio S6-F1-C1, some of the factors the competent authority for Canada may consider are the residence of the settlor, the residence of the beneficiaries, the type and location of the trust property, the reason the trust was established in a particular jurisdiction, etc.  This is not intended to be an exhaustive list as each case may warrant different considerations based on its particular fact situation and be settled differently.

c)

The use of foreign trusts to hold capital and earn income is a concern for many countries around the world.  A primary concern for Canada is that such arrangements could result in the deferral or avoidance of Canadian tax on income that would otherwise be taxable in Canada.

Following the initial announcement of the proposed amendments to section 94 in 1999, the Canadian competent authority conducted extensive consultations with other CRA stakeholders and officials of the Department of Finance.  Discussions between representatives of the competent authority for both Canada and the United States were also held to explain Canada’s concerns in these situations. 

Section 4.3 of the Income Tax Conventions Interpretation Act which came into force on March 5, 2010 clarifies that under Canadian law, a trust that is deemed to be resident in Canada by subsection 94(3) will be considered a resident of Canada for the purposes of applying a particular tax convention. 

Where such a trust is also considered a resident of the other country pursuant to its domestic tax legislation, the trust may be considered a resident of both Contracting States and may request competent authority assistance pursuant to paragraph 4 of Article IV of the Convention to endeavour to settle the question and determine the mode of application of the Convention.  In this context, it is generally the Canadian competent authority’s position that it would not be appropriate to cede Canadian residence of trusts subject to section 94 of the Act in the course of negotiations with the competent authority of the other Contracting State. The Canadian competent authority’s policy reflects the view that the test for residency under section 94 of the Act is neither inferior nor subordinate to other tests of residency.  Similarly, we understand that the competent authority for the other Contracting State may be equally reluctant to cede the residence of a trust it otherwise considers resident in its jurisdiction. Furthermore, given that section 94 of the Act anticipates providing full relief for the foreign taxes paid by the trust, if any, we understand the legislation does not contemplate the other country giving up its right to tax the trust’s income from non-Canadian sources.  Accordingly, it is the Canadian competent authority’s expectation that the negotiation of these cases with a view to settle the question of dual residence will generally not be possible or advisable, particularly where both competent authorities are known, more broadly, to be at an impasse on the matter. 

In that respect, we note that paragraph 4 of Article IV of the Convention does not require the competent authorities to come to a common understanding on the question of dual residence.  The provision contemplates that the result may be dual residence for a trust where the countries cannot settle the question. 

This being said however, in situations where section 94 applies, we believe that determining the “mode of application” of the Convention can proceed notwithstanding a failure to settle the question of residency.

d)

It is the Canadian competent authority’s position that the Convention should be applied to a trust subject to section 94 of the Act so as to avoid any unexpected double taxation.  Accordingly, once income tax returns have been filed in Canada, the Canadian competent authority will accept requests from trusts subject to section 94 of the Act seeking relief from double taxation and consider providing unilateral relief or entering into negotiations with the competent authority of the other Contracting State with a view to avoiding any resulting double taxation that remains after the application of section 94.

2017-069345
Katie Campbell (for Competent Authority)

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