2018-0781041I7 Non-resident trust ceasing to be deemed resident

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: Is our position in 2013-0509111E5 valid?

Position: The result is correct; however, there is an inaccurate statement.

Reasons: See below.

Author: Robinson, Katie

Section: 94(2)(g), 94(2)(t), 94(3)(a), 94(4)(e), 94(5)

                                                                                                                  January 17, 2019

HEADQUARTERS                                                                                    HEADQUARTERS
International and Large Business Directorate                                           Income Tax Rulings
Non-Resident Trust & OIFP Section                                                          Directorate
                                                                                                                   Katie Robinson
Attention: Dawn Dannehl                                                                           (613) 670-9042


Non-Resident Trust Ceasing to be a Deemed Resident

We are responding to your query requesting clarification of statements made in our technical interpretation 2013-0509111E5, dated February 24, 2014.  You referenced an article contained in the 2016 Canadian Tax Journal titled, “Non-Resident Trusts: Selected Interpretive and Planning Issues—Part 1” by Elie S. Roth and Kim Brown, wherein the authors indicated that some of the statements made by the Canada Revenue Agency in the 2014 technical interpretation were unclear.  More specifically, you would like us to confirm our position and if necessary, correct any inaccurate statements made in the 2014 technical interpretation.

For clarity, we will use the same hypothetical fact situation described in the 2014 technical interpretation:

*     In 2010, Trust A, a factual non-resident trust was deemed a resident by reason of subsection 94(3) of the Income Tax Act (“Act”) because Corp X, a Canadian resident corporation, issued 100 common shares to Trust A thereby triggering paragraph 94(2)(g) and making Corp X a resident contributor of Trust A.  Trust A is not an exempt foreign trust.

*     In calendar 2011, none of the trust circumstances changed except that Trust A ceased to have a resident contributor when the trust sold its 100 common shares of Corp X at fair market value to an unrelated third party on August 15th, 2011 in a transaction, the terms of which met the requirements of paragraph 94(2)(t) of the Act.

Our comments

The following passage is taken from the technical notes provided by the Department of Finance on paragraph 94(2)(t) of the Act:

“Paragraph 94(2)(t) generally expunges a contribution of shares or indebtedness of a Canadian corporation from the corporation to a trust if the corporation issued (in circumstances described in subparagraph 94(2)(g)(i) or (iv)) the shares or the debt to the trust and the trust later sells the shares or indebtedness in circumstances in which the parties to the sale deal with each other on an arm’s length basis.  However, the application of paragraph 94(2)(t) will not affect the application of paragraph 94(2)(g) in respect of the original transfer by the corporation to the trust or the other person or partnership: such transfers will continue to be treated as transfers under section 94.”

It is our view that paragraph 94(2)(t) of the Act applies to expunge the contribution after the time of the sale (i.e., from the time of the sale forward, the contribution is considered to have never occurred).  As such, at the end of the 2011 taxation year (i.e., December 31, 2011) of Trust A, paragraph 94(3)(a) would not apply as there is no resident contributor.  Conversely, subsection 94(5) would apply since the conditions therein are met, including that at the end of the 2011 taxation year, there is no resident contributor.

Accordingly, pursuant to subsection 94(5) of the Act, Trust A is deemed to cease to be a resident when it ceases to have any resident contributor.  As a result, subsection 128.1(4) applies to create a deemed year-end immediately before that time.  Trust A would be deemed resident under subsection 94(3) for the taxation year ending August 15th, 2011 since at the end of that particular taxation year, there is a resident contributor.  However, Trust A would not be deemed resident for its taxation year beginning on August 16th, 2011 and ending December 31st, 2011 since at the end of that particular taxation year, there is no resident contributor.

As such, the following statement made in the 2014 technical interpretation is inaccurate and should be disregarded:

“Pursuant to paragraph 94(3)(a) of the Act, in the absence of subsection 94(5), Trust A would have remained deemed resident throughout the 2011 taxation year and would not have ceased to be deemed resident until December 31st, 2011.”

We trust our comments will be of assistance.

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

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