2018-0768281I7 Section 94 and pre-June 23, 2000 contributions

Principal Issues: Would section 94 apply for years after 2006 to the factually non-resident trusts in a given fact scenario?

Position: Not in this case, given the facts and assumptions as stated.

Reasons: The coming-into-force rule in Bill C-48 relating to the definition of "non-resident time".

Author: Kohnen, Phil
Section: 94(1) and 94(3)(a)

                                    July 26, 2018

HEADQUARTERS                            HEADQUARTERS
International and Large Business Directorate        Income Tax Rulings
Non-resident Trust & OIFP Section                    Directorate
                                    Phillip Kohnen
Attention: Bertrand Lemieux                    (613) 670-8916

                                    2018-076828

Applying section 94 to a particular fact scenario

This is in response to your submission dated July 6, 2018, wherein you requested our views as to whether section 94 of the Income Tax Act (the “Act”) would apply to deem the trusts described in the fact scenario provided to be resident in Canada for years after 2006.

A brief description of our understanding of the relevant facts in your example is as follows:

1.    Mr. X emigrated from Canada to XXXXXXXXXX on XXXXXXXXXX and ceased being resident in Canada from that time onward.

2.    On XXXXXXXXXX, Trust A was settled in XXXXXXXXXX. Trust A has always been factually resident in XXXXXXXXXX and its beneficiaries, who are the children of Mr. X were and continue to be resident in Canada.

3.    On XXXXXXXXXX, Trust B was settled in XXXXXXXXXX. Trust B has always been factually resident in XXXXXXXXXX, and its beneficiaries, who are the children of Mr. X were and continue to be resident in Canada.

4.    On XXXXXXXXXX there was a transfer of property worth $XXXXXXXXXX from Mr. X to Trust B. Since that time there have been various transfers of property to these trusts by Mr. X, as well as transfers of property from trust to trust.

Our comments

Pursuant to paragraph 94(3)(a) of the Act, a trust (other than an exempt foreign trust) which is otherwise factually non-resident will be deemed to be resident in Canada for certain purposes if, at the end of the taxation year (provided the trust exists at that date) or at the time in the taxation year immediately before it ceases to exist (known as the “specified time”), there is a “resident contributor” to the trust or a “resident beneficiary” under the trust, each term as defined in subsection 94(1) of the Act. For purposes of this response, it is assumed, given the facts as provided in your example, that there would not be a resident contributor to Trust A or Trust B at any time and that neither trust is an exempt foreign trust. Given these two assumptions, it remains to be determined whether or not there is a resident beneficiary under Trust A or Trust B at a specified time after 2006.

Pursuant to subsection 94(1) of the Act, the following definitions are relevant in making such a determination:

"resident beneficiary" under a trust at any time means a person (other than a person that is at that time a successor beneficiary under the trust or an exempt person) that is, at that time, a beneficiary under the trust if, at that time,

(a)    the person is resident in Canada; and

(b)    there is a connected contributor to the trust.

“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.

“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.

These definitions were added to the Act as part of the substantial amendments to section 94 contained in Bill C-48, which received Royal Assent on June 26, 2013. The amendments to section 94 generally applied to taxation years that end after 2006, however, Bill C-48 also contained various coming-into-force provisions, including one that impacts the “non-resident time” definition, in respect of contributions made before June 23, 2000.

Pursuant to that rule and in respect of contributions made before June 23, 2000, the expression “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” in the definition “non-resident time” is to be read as the expression “if the contribution time is before June 23, 2000, 18 months before the end of the trust’s taxation year that includes the contribution time”.

The impact of this coming-into-force rule, for contributions made before June 23, 2000, is explained in the Department of Finance Explanatory Notes to the “non-resident time” definition, as follows:

As indicated in the coming-into-force provision for new section 94 of the Act, where the contribution time occurs before June 23, 2000, the specified period is the period that begins 18 months before the end of the trust's taxation year that includes the contribution time and ends at the earlier of 60 months after the contribution time and the particular time. In effect, a contribution made before June 23, 2000 will be considered to have been made by a person at a non-resident time if the person was non-resident in Canada for at least 18 consecutive months before the contribution was made, and remained non-resident for at least another 60 consecutive months after the contribution.

Applying this coming-into-force provision to the above-noted fact scenario, all of Mr. X’s contributions would have been made at a non-resident time. Accordingly, Mr. X would not be a connected contributor to Trust A or Trust B, and assuming that there are no other persons that could be connected contributors to those trusts, there would not be a resident beneficiary under Trust A or Trust B. 

We trust these comments will be of assistance to you.

Yours truly, 

Phillip Kohnen, CPA, CMA, TEP
Manager, Trust Section I
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2018

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2018