Section 94 of Canada’s Income Tax Act (“ITA”) will deem a non-resident trust to be a resident of Canada for the purposes of the ITA if there is a Canadian-resident contributor to the trust or a Canadian-resident beneficiary at the end of a particular taxation year.
The deeming provisions of section 94 will bring about unintended consequences for trusts that would otherwise remain non-resident trusts that have no tax liability to the Canada Revenue Agency (“CRA”). A non-resident trust deemed to be a trust resident in Canada will be subject to taxation in Canada and will generally be taxed as if it were a regular Canadian trust. Certain tax planning strategies can be implemented to ensure that a non-resident trust remains a non-resident of Canada. Please contact us for help with your particular situation, and keep reading for details about how section 94 deems non-resident trusts as Canadian residents.
Section 94 of the ITA will deem a non-resident trust to be a Canadian resident where the trust has had a resident contributor.[i] A Canadian resident contributor is any “entity” that is a Canadian resident and a “contributor” to the trust.[ii] The term “entity” is interpreted in a substantially broad manner and includes persons with no legal personality such as partnerships, joint ventures, and syndicates.[iii]
A resident beneficiary is defined in subsection 94(1) as a person who is a beneficiary under the trust at any time if that person is resident in Canada, and there is a “connected contributor” to the trust at the end of the taxation year.[iv] Both criteria must be satisfied for the presence of a resident beneficiary to be determined.[v]
A “resident beneficiary” is an entity that is resident in Canada where there is a “connected contributor” to the trust.
Subsection 94(1) defines a “beneficiary” as a person or partnership that is beneficially interested in the trust as per paragraph 248(25)(a).
A “connected contributor” is any entity that has made a contribution to the trust. A connected contributor must be a resident living in Canada for more than 60 months. Therefore, to avoid being a connected contributor, a non-resident contributor must have been a non-resident of Canada for at least five years before the contribution was made.[vi]
A “contributor” is any person, other than an “exempt person”, who has made a contribution to a trust at any time.[vii] An individual must be a non-resident of Canada for more than 60 months at the time the non-resident made the contribution to avoid being classified as a resident contributor.[viii] “Exempt persons” are defined in section 94(1). “Exempt persons” include the federal government, as well as other persons generally exempt from tax in subsection 149(1).[ix]
A “contribution” is defined in subsection 94(1) as “any transfer or loan of property” to a trust, other than an arm’s length transfer.[x] Included in the definition of “any transfer or loan of property” are indirect transfers or loans of property. For example, where a first person transfers property to a trust through several intermediary transfers in a series of transactions, the first person will be deemed to have transferred the property to the trust.[xi]
What is critical to understand about the notion of “transfer” within this context is that it is interpreted in a substantially broad manner. The notion of “transfer” is not defined in the ITA; its meaning is derived from the common law.[xii] In Hamel v M.N.R. (1995), the court defined “transfer” as “impoverishment of the transferor, where the transfer is made directly or indirectly, and corresponding enrichment of the transferee”.[xiii] The meaning of “transfer” thus far extends from just a direct conveyance of property, as per Boardman v The Queen (1985) 1 C.T.C 103 at 106.[xiv]