2021-0892681C6 STEP 2021 -Q1- Trust Residency and Departure Tax

Principal Issues: When an inter vivos personal trust does not have sufficient liquidity to pay its departure tax and seeks a deferral by providing security, from an administrative perspective, is there a difference between a trust and an individual? Would the CRA consider a secured line of credit that it can draw on as adequate security?

Position: In general there is no difference. The CRA would not normally consider a line of credit to be adequate security.

Reasons: See below.

Author: Dannehl, Dawn
Section: 128.1(4); 220(4.5)-(4.54)

2021 STEP CRA Roundtable – June 15, 2021
QUESTION 1. Trust Residency and Departure Tax

If a Canadian resident inter vivos personal trust becomes a non-resident of Canada (because its central management and control has shifted to somewhere outside of Canada), this would cause the provisions of subsection 128.1(4) of the Income Tax Act to apply.  If the trust does not have liquidity to pay its “departure tax”, its trustee(s) would likely seek to defer the amount owing by providing security pursuant to the provisions of subsections 220(4.5) – (4.54) (noting that the relief provided for in subsection 220(4.51) does not apply to a trust). 

a)    From an administrative perspective, could the CRA provide its general comments on how it deals with security issues with a trust vs an individual? 

b)    Because a Letter of Credit or a Letter of Guarantee carries a high continuing maintenance cost which results in these being impractical for most taxpayers, would the CRA consider a secured line of credit that it can draw on as adequate security?

CRA Response

a)    In general, there is no practical difference in the CRA’s handling of departure tax security when dealing with a trust taxpayer compared to an individual taxpayer. This is because the adequacy of security is primarily determined on the merits of the security itself and not on the party providing it.

The required terms for security agreements are also based on the nature of the security provided and do not typically differ for trust and individual taxpayers. Additionally, suitability of any necessary intermediaries is determined based on qualities and certifications which do not limit the intermediaries’ ability to provide service to either individuals or trusts.

b)    There are several key differences between Letters of Credit or Guarantee and lines of credit, whether secured or otherwise, which affect their respective acceptability as security.

Several fundamental features of Letters of Credit or Guarantee make them particularly suitable as security for departure tax. For example, they are irrevocable and they unconditionally guarantee payment to a single beneficiary (CRA) for the entire time they are in effect. While the lender retains the right to cancel the Letter, the prescribed manner in which this can be done allows the CRA a reasonable opportunity to realize payment from the Letter should the taxpayer be unable to provide replacement security or payment by alternate means.

Unlike Letters of Credit or Guarantee, lines of credit are typically subject to numerous conditions that diminish their suitability as security. For example, lines of credit can generally be reduced, cancelled or limited at the lender’s discretion without advance notice to the borrower, even when secured. Additionally, lines of credit do not commonly allow third parties (i.e. CRA) to draw upon the credit while simultaneously denying the borrower (i.e. the taxpayer or their third party guarantor) the ability to do the same.

Such provisions effectively nullify the reliability of a line of credit to guarantee future payment. Because of this, the CRA would not normally consider a line of credit to be adequate security given that the purpose of security is to guarantee future payment within an acceptable margin of certainty.

It should be noted that Letters of Credit or Guarantee are not the only forms of security that the CRA generally considers to be acceptable. We recommend taxpayers contact the CRA as soon as possible before the security due date to discuss the various security options available. If you do not yet have an assigned Migration Specialist, the Migration Collections team can be reached from within North America at 1-877-301-3131. Collect calls from outside North America can be made to General Enquiries at 613-940-8495, where a call back from a Migration Specialist can be requested.

Dawn Dannehl 
2021-089268

Response prepared by:
Ellen Ramsay
Specialty Workload Section
Collections Directorate
Collections and Verification Branch

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