2018-0744161C6 STEP 2018 - Q13 - 75(2) and Foreign Tax Credit

Principal Issues: Where an alter ego trust under which dividends on foreign stocks it holds are attributed to the settlor, is the foreign tax paid by the trust attributed to the settlor as well?

Position: No.

Reasons: Consistent with the law.

Author: Kohnen, Phil
Section: 75(2) and 126(1)

2018 STEP CRA Roundtable – May 29, 2018

QUESTION 13. Alter ego trust subject to foreign withholding tax

Assume that an individual (the “Settlor”) creates an alter ego trust, and transfers various securities to the trust.  Included with the securities are U.S. stocks on which dividends are paid.  These U.S. stocks are subject to a 15% withholding tax.

Subsection 75(2) of the Income Tax Act (the "Act") applies so that the income of the alter ego trust is considered to be the income of the Settlor, who created the trust and who is, under the trust, a lifetime beneficiary.  Is it correct that in this circumstance, the foreign tax (being the withholding tax on the dividend) would not be attributed to the Settlor, and remains in the trust?

CRA Response:

Pursuant to subsection 248(1) of the Act, the term "alter ego trust" refers to a trust to which paragraph 104(4)(a) applies, if read without reference to subparagraph 104(4)(a)(iii) and clauses 104(4)(a)(iv)(B) and (C). Accordingly, a reference to an alter ego trust in the Act is a reference to an inter vivos trust established after 1999 by an individual who is at least 65 years old when the trust is settled, and under which that individual is entitled to receive all the income of the trust arising before his or her death and under which no person except that individual may receive or otherwise obtain the use of any of the income or capital of the trust before that individual's death.

While it is given as a fact statement in the question posed that subsection 75(2) does apply to the U.S. stocks held by the alter ego trust, it would be a question of fact as to whether property is held by a trust under either of the conditions described in paragraph 75(2)(a) or (b), such that subsection 75(2) may apply to attribute income received by the trust in respect of the property.

Where subsection 75(2) is determined to apply in respect of a particular property, it will deem any income or loss from the property, or any taxable capital gain or allowable capital loss from the disposition of the property to be that of the person from whom the trust received the property. Note, however, that in the scenario posed, subsection 75(2) would not attribute the payment of the foreign non-business income tax paid to the U.S. (which was paid by the trust) to the Settlor.

Subsection 126(1) of the Act requires that any non-business income tax must have been paid by the taxpayer claiming the foreign tax credit.  Since it is the trust that paid the tax, the Settlor would not be eligible to claim a credit pursuant to subsection 126(1) in respect of the U.S. tax paid by the alter ego trust. It should also be noted that a deduction by the Settlor pursuant to subsection 20(11) or 20(12) in respect of the U.S. tax paid would not be available, for the same reason. Note, however, that if the requirements of subsection 20(11) and subsection 20(12) are met, the alter ego trust may claim deductions pursuant to these provisions in computing the amount to be attributed to the Settlor.

Phillip Kohnen
2018-074416

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