2022-0927601C6 STEP 2022 - Q16 - Foreign Entity Classification of a Foundation

Principal Issues: Does CRA have a view on how a foundation created under the laws of a foreign country where civil law applies would be considered under the Income Tax Act?

Position: See below.

Reasons: The CRA would consider the classification of a foreign entity in the context of an advance income tax ruling.

Author: Yan, Cindy Xiao Xian
Section: -

2022 STEP CRA Roundtable – June 15, 2022

QUESTION 16. Foreign Entity Classification of a Foundation

In civil law countries a foundation is often used where the trust concept is not recognized. The foundation typically will have a founder who created the foundation (similar to a settlor), a foundation council with a role similar to that of trustees, and beneficiaries who may have a discretionary entitlement.

Does CRA have a view on how a foundation created under the laws of a country where civil law applies would be considered under the Income Tax Act?

CRA Response

The CRA’s approach to the classification of a foreign entity or arrangement in respect of a property, venture or other object (collectively referred to in this response as the “foreign entity or arrangement”) remains the same as indicated in prior years. That is, to determine the status of an entity or arrangement for Canadian tax purposes, the CRA generally follows the two-step approach described below:

1) Determine the characteristics of the foreign entity or arrangement under applicable foreign law, relevant constating documents, indentures, partnership agreement, contracts and other relevant terms or documentation (the “applicable law and documentation”).

2) Compare these characteristics with those of recognized categories of entity or arrangement under relevant Canadian law in order to classify the foreign entity or arrangement under one of the categories around which the provisions of the Income Tax Act and the Income Tax Regulations are drafted.

As part of this two-step approach, the CRA examines the nature of the relationship between the various parties that are involved and their rights and obligations in respect of the foreign entity or arrangement under the applicable law and documentation.

The two-step approach was applied in prior interpretations on the classification of a foundation created under the laws of a foreign country where civil law applies. These interpretations were issued after a careful examination of the applicable law and documentation. Consistent with the round table response (Question 8) presented by the CRA on May 17, 2022 at the International Fiscal Association Conference, the CRA would consider the classification of a foreign foundation in the context of an advance income tax ruling supported by the information described in that response.

Cindy Yan
2022-092760

UNCLASSIFIED

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