INTERNATIONAL CANADA
Canadian tax on non-resident trusts
Natasha Miklaucic warns that Canada’s NRT rules may catch foreign commercial trusts with Canadian contributors
ABOUT THE AUTHOR
Natasha Miklaucic is a Partner in the Toronto office of Borden Ladner Gervais LLP
to certain deductions allowed for income distributions to beneficiaries. As well, Canadian investors in an NRT are subject to joint and several, or solidary liability for the tax owing by such trust as a consequence of the application of the NRT rules.
on Banking, Trade and Commerce in recent months. One of the key concerns raised by taxpayers and their advisors has been that these rules may apply to investments by Canadian resident investors in non- resident commercial trusts (NRTs).
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The legislation Several successive drafts of the legislation implementing the foreign investment entity (FIE) rules have been released since 1999. The last release was contained in Bill C-10, which received second reading in the Senate on 4 December 2007. However, this Bill died on the order paper on 7 September 2008 when Parliament dissolved as a result of the federal election being called. If the new government is interested in ‘reviving’ the legislation, it will have to re-introduce the legislation as a new Bill and, as such, it will have the ability to amend the content of the Bill. The most recent draft of the rules stated that they will generally apply to taxation years beginning after 2006.
The NRT rules The NRT rules apply to those non-resident trusts other than ‘exempt foreign trusts’ for which there is a Canadian ‘resident contributor’ or a Canadian ‘resident beneficiary’. Where the NRT rules apply, the trust is deemed to be resident in Canada and therefore subject to Canadian tax on its worldwide income, subject
anada’s non-resident trust rules (the NRT rules) have been a matter of extensive review in hearings of the Standing Senate Committee
Resident contributor A ‘resident contributor’ to a trust is any entity resident in Canada that has made a ‘contribution’ to the trust. However, it excludes individuals who have not been residents of Canada for more than a time of 60 months.
Contribution A contribution is defined, generally, to mean any transfer or loan, directly or indirectly, to the trust by any entity other than an ‘arm’s length transfer’. Therefore, direct or indirect purchasers of units in a non-resident trust will be contributors to the trust unless such contribution is an ‘arm’s length transfer’. In particular, where a trust makes a contribution to an NRT, such contribution is deemed to have been made jointly by the trust and each beneficiary of that trust. Where a Canadian resident investor
purchases units that are ‘specified fixed interests’ in a non-resident trust on a stock exchange, that investor does not make an actual contribution to the trust. However, the NRT rules will, in that situation, deem the investor to be a contributor to the trust.
Specified fixed interest The definition of a ‘specified fixed interest’, generally, includes an interest in a trust (i) that is non-discretionary, (ii) that includes the right to receive income and capital of the trust, (iii) that was issued by the trust to an investor (not necessarily the current holder) pursuant to which that investor became a beneficiary of
the trust, and (iv) that the owner must either transfer or redeem in order to cease to be a beneficiary. Where a Canadian resident investor
purchases, on a stock exchange, units of a non-resident commercial trust with only one class of units (or a trust where the trustee has no discretion with respect to expense or income allocations between classes), such units will generally qualify as ‘specified fixed interests’. Accordingly, such investor will be deemed to be a contributor to the trust unless such contribution is an ‘arm’s length transfer’.
Arm’s length transfer The definition of an arm’s length transfer is complex, but can generally be divided into two requirements. First, a purpose test must be met and, second, the transfer in question must qualify as one of eight types of transfers. The purpose test requires that it must be reasonable to conclude that none of the reasons for the transfer or loan was for any entity to acquire a beneficial interest in the trust. In the case of a commercial trust, the only reason a Canadian resident investor would purchase units of an NRT would be for the purpose of acquiring an interest in the trust. Accordingly, the purpose test would not be met and such a transfer would not be an arm’s length transfer. As a result, where a Canadian resident investor purchases a unit of an NRT, it will be a resident contributor to the NRT. Note that in certain circumstances, even where a Canadian resident investor sells the interest in the NRT, that investor may continue to be a contributor.
Resident beneficiary A resident beneficiary of a commercial trust would include a Canadian resident investor that is a beneficiary of the trust where there is a ‘connected contributor’ to the trust. A
STEPJOURNAL | JANUARY 2009 45
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