2018-0744091C6 STEP 2018 - Q14 - NRT filing obligations

Principal Issues: Retroactive application of subsection 94(3) when a non-resident individual makes a contribution to a trust and immigrates to Canada within 60 months of making the contribution.

Position: Where the non-resident individual immigrates 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)

2018 STEP CRA Roundtable - May 29, 2018

QUESTION 14. Non-resident trust filing obligations

Question 14(a)

In certain circumstances, a non-resident trust will be deemed to be resident in Canada by virtue of section 94.  The main circumstances will be situations where a resident of Canada has contributed property to a non-resident trust such that the non-resident trust has a resident contributor, as defined in subsection 94(1).  Assume that a person immigrating to Canada has contributed property to a non-resident trust.  Upon becoming resident, does the CRA agree that the non-resident trust will be deemed resident in Canada by virtue of paragraph 94(3)(a) as of January 1 of the taxation year in which the contributor immigrated to Canada?

CRA Response

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 (other than an exempt 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 14(b)

Assume that the non-resident trust has beneficiaries resident in Canada who are not successor beneficiaries (within the meaning of subsection 94(1)) when the contributor immigrates to Canada, and the contributor has made a contribution to the trust less than 60 months before becoming resident.  Does the CRA agree that the non-resident trust may be deemed resident for up to five taxation years before the taxation year in which the individual became resident in Canada?

If so, would the CRA expect T3 income tax returns to be filed for these previous years?  Would the CRA expect foreign reporting forms, such as the T1135 and the T1134, to be filed as well?  Would the CRA apply interest and late-filing penalties to any tax owing by the non-resident trust for these prior years?

CRA Response

Provided that the individual 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 contributor 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 contributor makes the contribution to the non-resident trust.

This result can best be demonstrated through the use of an example.

Assume the following facts:

*     In July 2013, Mr. X made a contribution to a non-resident trust (the “Trust”).

*     In March 2018, Mr. X became a resident of Canada.

*     Prior to immigrating to Canada in 2018, Mr. X had never been a resident of Canada.

*     Trust has beneficiaries resident in Canada who are not successor beneficiaries (within the meaning found in subsection 94(1)).

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.

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, 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 2013 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.

Although Mr. X was a non-resident for more than 60 months before the contribution time, he became resident in Canada within 60 months after the contribution time; therefore, Mr. X would be considered to have made the contribution to Trust at a time other than a non-resident time for the 2018 taxation year of Trust.  As a result, Mr. X would be a connected contributor.  Consequently, Trust would have resident beneficiaries, as defined in subsection 94(1).  In addition, since Mr. X is resident in Canada in 2018 and is a contributor to Trust, Trust will have a resident contributor for the 2018 taxation year.  Therefore, Trust would be deemed to be resident in Canada for the 2018 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 paragraphs 94(10)(a) and (b) 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 2013, 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 2013 taxation year). The same result would be obtained at the end of each taxation year up to the 2017 taxation year. Therefore, the requirement in paragraph 94(10)(a) is met.

The condition in 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 2013 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 2013.  This would result in Trust being deemed resident in Canada pursuant to subsection 94(3) for a total of six taxation years (2013 to 2018 inclusive).

Trust will be subject to Canadian tax by virtue of paragraph 94(3)(a) for each taxation year commencing in 2013.  Trust will also be subject to interest and penalties, as determined under Division I, related to each taxation year for which a tax return was not filed (in the example provided, interest and penalties would be assessed for the taxation years of 2013-2017 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 2013.  Again, any interest and penalties calculated by virtue of Division I will be assessed for the relevant taxation years.

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.

In addition, subparagraph 152(4)(b)(vii) allows the Minister of National Revenue to assess or reassess tax, interest, or penalties within an additional 3 years after the end of the normal reassessment period where the assessment or reassessment is made to give effect to the application of section 94.

As indicated above, where the contributor 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 contributor makes the contribution to the non-resident trust.

This situation can also be best described using an example:

*     Mr. Z was a long term resident of Canada.

*     In January 2010, Mr. Z became a non-resident of Canada. 

*     In July 2013, Mr. Z made a contribution to a non-resident trust (the “Trust2”).

*     In March 2018, Mr. Z became a resident of Canada.

*     Trust2 has beneficiaries resident in Canada who are not successor beneficiaries (within the meaning found in subsection 94(1)).

In applying subsection 94(3) at the end of the 2013 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 2013 onward without any retroactive application.

Finally, as more fully explained in Question 7 at the 2015 STEP CRA Roundtable (document 2015-0572141C6), it is not necessary for the contributor to have never been a resident of Canada before making the contribution to a non-resident trust for subsection 94(10) to apply.

Consider the following example: 

*     Mr. Y was a long-term resident of Canada. 

*     In January 2008, Mr. Y became a non-resident of Canada. 

*     In July 2013, Mr. Y made a contribution to a non-resident trust (the “Trust3”).

*     In March 2018, Mr. Y became a resident of Canada.

*     Trust3 has beneficiaries resident in Canada who are not successor beneficiaries (within the meaning found in subsection 94(1)).

Consequently, subsection 94(10) will deem Mr. Y to have made the 2013 contribution to Trust3 at a time other than a non-resident time for each taxation year commencing with the taxation year during which Mr. Y made the contribution to the Trust3.  Therefore, when Mr. Y becomes resident in Canada in 2018, Trust3 will be retroactively deemed to be a trust resident in Canada for each taxation year commencing in 2013.

Katie Campbell
2018-074409

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