2024-1029911I7 Subparagraph 152(4)(b)(vii) and section 94

Principal Issues: Whether subparagraph 152(4)(b)(vii) ITA can operate to extend the normal reassessment period in respect of a taxation year of a non-resident trust (deemed resident under section 94) in which the trust disposed of shares of a foreign affiliate where the purpose of the reassessment is to adjust the proceeds of disposition of the shares ?

Position: No.

Reasons: Wording of the Act.

Author: Fournier-Gendron, François
Section: 152(4)(b)(vii); 94; ITA

October 28, 2024

Roxane Comeau                                                           HEADQUARTERS
Compliance Technical Specialist                                   Income Tax Rulings
Audit Technical Support Division                                   Directorate
National Headquarters                                                  François Fournier-Gendron

                                                                                      2024-102991

Re: Subparagraph 152(4)(b)(vii)

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the “Act”), as amended to the date hereof.

We are writing in response to your email dated August 7, 2024, in which you asked for our views on whether subparagraph 152(4)(b)(vii) could operate to extend the normal reassessment period in a particular situation involving a non-resident trust.

More specifically, your request involves a non-resident trust that was settled on XXXXXXXXXX by a Canadian resident (the “Trust”). The trustees and beneficiaries of the Trust are residents of the United States. In its taxation year ending on December 31, 2020, the Trust sold shares of a foreign affiliate to a non-arm’s length party and realized a capital gain.

We assume that the Trust is deemed to be a resident of Canada throughout its 2020 taxation year pursuant to paragraph 94(3)(a) for the purposes specified therein, notably computing the Trust’s income for the year and determining the rights and obligations of the Trust under Divisions I and J of the Act.

The Trust filed a T3 Trust Income Tax and Information Return for its 2020 taxation year and reported a capital gain in respect of the disposition of the foreign affiliate’s shares. The “normal reassessment period” for the Trust’s 2020 taxation year ended on September 15, 2024 pursuant to paragraph 152(3.1)(b).

In light of these facts, you asked for our views as to whether the Minister could rely on subparagraph 152(4)(b)(vii) to reassess the Trust, with respect to the determination of the proceeds of disposition of the foreign affiliate’s shares, beyond its normal reassessment period for its 2020 taxation year.

Our Comments

Subparagraph 152(4)(b)(vii) permits the Minister to assess or reassess a taxpayer within three years after the end of the normal reassessment period provided that the assessment or reassessment is made to give effect to the application of any of sections 94, 94.1 and 94.2.

Subsection 94(3) is the main operating rule of section 94. It applies generally to a non-resident trust for a taxation year where, at a “specified time” in respect of the trust for the taxation year, there is a “resident contributor” to the trust or a “resident beneficiary” under the trust. The definitions in subsection 94(1) in conjunction with interpretative and deeming rules within section 94 operate to determine whether there is a resident contributor or a resident beneficiary. Where subsection 94(3) applies to a non-resident trust for a taxation year, the trust is deemed under paragraph 94(3)(a) to be resident in Canada throughout the year for the purposes specified therein.

The explanatory notes to subsections 94(9) and 94(10) state that subparagraph 152(4)(b)(vii) was added to ensure, among other things, that a reassessment of a taxpayer arising out of the application of subsection 94(9) or (10) can be undertaken by the CRA within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer’s relevant taxation year.

Subsection 94(9) affects the calculation of the amount of a “contribution” to a trust of “restricted property”. Subsection 94(10) applies to determine whether there is a “connected contributor” to a trust for the purposes of section 94, including the definition of “resident beneficiary”. Both subsections 94(9) and (10) may have an effect over a period of time: up to three years after the “contribution” of a “restricted property” for subsection 94(9) and up to 60 months after a “contribution” for subsection 94(10). Subparagraph 152(4)(b)(vii) was enacted in recognition of the fact that sometimes the effect of subsections 94(9) and (10) will only materialize after the “normal reassessment period” of a taxpayer.

However, the application of subparagraph 152(4)(b)(vii) is not limited to situations involving subsections 94(9) and 94(10) as it allows, more broadly, for assessments or reassessments that are made to give effect to the application of section 94. In our view, the words “to give effect to the application of section 94” in subparagraph 152(4)(b)(vii) means to cause section 94 to apply. Hence in the context of section 94, 152(4)(b)(vii) grants the Minister three additional years to determine, through an assessment or reassessment, that the conditions of application of section 94 are satisfied in respect of a taxpayer for a taxation year, and for that purpose, the Minister may apply any relevant provisions of the Act, including subsections 94(9) and 94(10) as well as other provisions within section 94.

In the situation presented, section 94 already applied to the Trust for its 2020 taxation year such that the Trust was deemed to be a resident in Canada throughout the year for the purposes described under paragraph 94(3)(a), including computing the Trust’s income for the year. An adjustment to the proceeds of disposition of the foreign affiliate’s shares held by the Trust would only impact the computation of the Trust’s income for the year. Section 94 does not provide for the rules of the computation of the Trust’s income. Indeed, in respect of the computation of capital gains, the relevant rules are found in subdivision C of Part I of the Act. As such, in our view, a reassessment to adjust the proceeds of disposition of the foreign affiliate’s shares held by the Trust would not give effect to the application of section 94 and subparagraph 152(4)(b)(vii) cannot apply to extend the normal reassessment period in this situation.

Interestingly, clause 152(4)(b)(iii)(B) operates to extend the normal reassessment period in respect of “any income, loss or other amount in relation to a foreign affiliate of a taxpayer” for a year. In contrast, in subparagraph 152(4)(b)(vii), there is no reference to “the income, loss or other amount” in relation to a trust to which section 94 applies. In our view, this reinforces the conclusion that subparagraph 152(4)(b)(vii), specifically, does not operate to allow for a reassessment beyond the normal reassessment period in the situation described in your question. Clause 152(4)(b)(iii)(B) may, however, have application depending on the circumstances.

We trust that these comments will be of assistance to you.

Yours truly,

Sophie Larochelle
Manager, Speciality tax Section
Speciality tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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