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: Can the CRA comment on the tax implications associated with the distribution of taxable Canadian property (other than property described in subparagraphs 128.1(4)(b)(i) to (iii)) from a discretionary family trust to a Canadian corporation that is wholly owned by a non-resident individual in order to avoid the application of subsection 107(5)?
Position: GAAR likely applicable.
Reasons: The transaction described circumvents the application of subsections 107(5) and 107(2.1).
Author: Campbell, Katie
Section: 107(5); 104(4); 107(2); 107(2.1)
2020 STEP CRA Roundtable – November 26, 2020
QUESTION 12: Distribution of Property by a Canadian Resident Trust to a Canadian Corporation that is Wholly Owned by One or More Non-Residents
At the 2017 CTF Annual Conference the CRA addressed a situation involving the distribution of property by a Canadian resident discretionary trust to a Canadian corporation whose shares would be wholly owned by a non-resident beneficiary. It was noted that it is the CRA’s view that the situation addressed circumvented the application of subsections 107(5) and 107(2.1) in a manner that frustrates or defeats the object, spirit or purpose of those provisions, subsections 70(5), 104(4) and 107(2) and the Act as a whole. Would your view be different where the property distributed from a Canadian resident discretionary trust to a Canadian corporation, the shares of which are held by one or more non-resident beneficiaries, constituted taxable Canadian property?
Consider a situation where the trustees of a Canadian resident discretionary family trust (the “Trust”) are planning to distribute all or a portion of the Trust’s property (the “Property”) to one or more of its beneficiaries in advance of the Trust’s 21st anniversary. The Property is taxable Canadian property, as defined in subsection 248(1), but is not property described in subparagraphs 128.1(4)(b)(i) to (iii) nor a share of the capital stock of a non-resident-owned investment corporation. The beneficiaries of the Trust that are intended to receive the Property are natural persons who are non-residents of Canada at the relevant time (“NR beneficiaries”).
Instead of distributing the Property to the NR beneficiaries directly, the trustees propose to distribute the Property, on a tax-deferred basis pursuant to subsection 107(2), to one or more Canadian corporations (“Canco”) that are wholly owned by one or more of the NR beneficiaries, and that are beneficiaries of the Trust. The result is that the Property will no longer be held by the Trust and as such will not be subject to the 21-year deemed disposition rule. In addition, since the Property will be distributed to one or more Canadian resident corporations, subsection 107(5) should not be applicable. Therefore, the Property will be transferred out of the Trust on a tax-deferred basis pursuant to subsection 107(2).
Does the CRA agree with this conclusion?
Consistent with our response at the 2019 CTF Conference, it is the CRA’s view that if the Property distributed to Canco constitutes taxable Canadian property, other than a property described in subparagraphs 128.1(4)(b)(i) to (iii) or a share of the capital stock of a non-resident-owned investment corporation, such transactions would result in a misuse or abuse of subsections 107(2), (2.1) and (5). Subsections 107(2.1) and (5) effectively result in the immediate realization of capital gains on property distributed to non-residents over which Canada does not retain the absolute right to tax without restriction. It is the CRA’s view that the intention of subsection 107(5) is to ensure that Canada maintains the ability to tax capital gains that accrue during the period that property is held by a Canadian resident trust and that the transactions described herein are not consistent with this intention.
The CRA has significant concerns regarding these transactions and will consider the application of the General Anti-Avoidance Rule (GAAR) when faced with a similar set of transactions unless substantial evidence supporting its non-application is provided. In addition to the specific transactions described herein, it is the CRA’s view that the GAAR may be applicable in respect of other situations involving the distribution of property from a family trust to a Canadian corporation with one or more non-resident shareholders. For instance, it is the CRA’s view that it would be appropriate to consider that the same conclusion would apply regardless of whether or not the transactions are being undertaken to avoid the 21-year deemed disposition rule in subsection 104(4).
Accordingly, unless substantial evidence supporting the non-application of GAAR is provided, the CRA will not provide any Advance Income Tax Ruling where such structure is proposed to be put in place.
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