CTF - 2005 Annual Conference - Partial Presentation

September 25-27, 2005 57th Annual Conference - Vancouver

Canadian Tax Foundation

Sonja Chong - 1

Non-Resident Trust Rules

• Old Rules

- review of selective structures

• Key Concepts of Proposed Rules

- meaning of Contribution

- Arm’s Length Transfers and S.251

- Consequences of S.94(3)

• Opportunities and Pitfalls

• Case Studies

- Emigrant Trusts – Mr. Tainted Trust

- NRTs holding Canadian Real Estate



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Old Rules – S.94(1)

Three tests must be met

1. Contributor - > 60 months cumulative residency at trustyear end, and residency at any time in thepreceding 18 months

2. Beneficially interested* - at least one beneficiary resident in Canada

3. Contributor and beneficiary related, or an uncle, aunt, nephew or nieceof one another

* Watch definition in S.248(25); extensive scope.



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Background

• Federal Budget Announcement – February 16, 1999

• Draft Legislation – June 22, 2000

• Draft Legislation – August 2, 2002

• Draft Legislation – October 11, 2002

• Draft Legislation – October 30, 2003

• Draft Legislation – July 18, 2005

• Effective date – generally January 1, 2003

• Generally no grandfathering



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Old RulesCanadian Resident as Settlor/Transferor

• Settlor resident for more than 60 months

• Cannot add Canadian residents as beneficiaries

• NRT now deemed resident under new rules

Canadian residentsettlor/transferor

Non-residentbeneficiaries

Investments

NRT



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Old RulesCross Transfers

• Mr. A and Mr. B are long term residents

• The two families are unrelated; transferor and beneficiaries of each trustnot uncles, aunts, nieces and nephews of one another.

• Trusts deemed resident under new rules.



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Old RulesImmigrant Trusts

Immigrant as settlor/transferor Spouse and children as beneficiaries

NRT

Structure A

Investments

Non-resident relative settled trustwith nominal amount

Immigrant, spouse and children asbeneficiaries

NRT

Structure B

Investments

TaxHavenCo Immigrant loaned funds at interest

• Both structures remain intact; now immigrant settlor/contributor can be one of thebeneficiaries without S.75(2) concerns for 60 months.



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Old RulesEmigrant Trusts versus Testamentary Trusts

• Assume residency of transferor/decedent exceeded 60 months prior to time ofdeparture/death.

• Deemed disposition rules apply in both cases at point of departure.

• Thereafter less generous treatment for testamentary trusts.

• Testamentary trusts perpetually not exempt if decedent resident at anytime in18-month period prior to death.

• Emigrant trusts become tax exempt anywhere between 12 months plus 1 day (forthose who left in the first half of a year) to 18 months plus 1 day (for those wholeft in the second half of a year) after point of departure.

12 to 18 months+ 1 day

18 months

Emigrant trusts becomeexempt; testamentary trustsremain taxable

Resident Non-resident

Point of Departure(Dead or Alive)



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Old RulesFreezes – All In The Family

Non-residentsettlor/contributor

Resident beneficiariesincluding Mr. A and family

FORCO

Canadian resident(Mr. A)

Frozen Preferred 100%New Common

Small Business Corporation

• Practitioners debated on whether NRT has received financialassistance from Mr. A.

• Trust deemed resident pursuant to proposed S.94(2)(c) and S.94(2)(g).

CANCO

NRT



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Freezes – Foreign Venture Capital

Non-residentsettlor/contributor(venture capitalists)

Non-resident beneficiaries, norelation to and deals at arm’slength with Mrs. Brown

Canadian resident(Mrs. Brown)

Subscribed to 50%Common from treasury for$5 million

• Mrs. Brown did not provide financial assistance as FORCO paid fullprice for shares.

• Trust non-resident under both old and new rules.

FORCO

CANCO

100% reduced to 50% Common(valued at $5 million) after FORCO’sshare subscription

NRT



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S.94(3)The Charging Section

• Non-resident trust

- excludes exempt foreign trust

• Trust is non-resident and has either a “ResidentContributor” or a “Resident Beneficiary” at a specifiedtime during a particular taxation year of the trust

• Appendices I to VII

• Focus is on the meaning of “Contribution”



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Resident Contributor

• At a particular or any time, a resident and a contributor

• A contributor at any time is an entity ( including one thatdoes not exist anymore) who had made a contribution at orbefore that time

• Exceptions

(a) individuals (other than trusts) resident for 60 monthsor less at that time

- does not include those who have never been non-resident

(b) Certain pre-1960 trusts with individual (other thantrusts) contributors



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Resident Beneficiary

• defined term

• means at any time there is:

(a) a beneficiary who is resident, and

(b) a “connected contributor”

under the trust

• “at any time” – usually at trust’s year end

• excludes beneficiaries that are successor beneficiaries andspecified charities



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Beneficiary

• Includes:

(a) an entity that is beneficially interested in the trust, and

(b) if the entity is not a person, would be deemed to be aperson in applying a modified version of S.248(25)(b)(ii)

• “beneficially interested” is defined in S.248(25) – verywide scope; includes contingent beneficiaries



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Connected Contributor

• An entity that has made a contribution to a trust except forany one of the following two situations:

1. Exception for Short-term Residents

2. Contributions made at Non-Resident Times



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Non-Resident TimeConditions

1. At the time Contribution made (“Contribution Time” or “CT”), Contributor anon-resident or not in existence.

2. Contributor non-resident for 60-month period before and after ContributionTime.

3. Look-back period reduced to 18 months for:

(a) testamentary trusts, and

(b) Contributions before June 23, 2000

4. Look-forward period ends at the date of death if < 60 months after CT.

5. If a Contributor becomes resident within 60 months of contributing, S.94(10)deems Contribution not made at a Non-Resident Time (see note in AppendixVII).



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Examples of Non-Resident TimeInter Vivos Trust



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Examples of Non-Resident TimeTestamentary Trust

• If deceased resident at any time during 18-month period before death,and has accumulated more than 60 months of residency before thetrust’s year end, trust perpetually resident unless all beneficiaries arenon-resident.



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Indirect TransfersParagraph 94(1)(b) of “Contribution”

Example

• Mr. A, a Long-term Resident, gifted $1 million tobrother, Mr. B (non-resident)

• Mr. A wants part of the funds held for Mr. B’sminor children

• Mr. B settled $500,000 on a non-resident trust forbenefit of his children

• Part of the same series?

• Can the $500,000 transfer by Mr. B reasonably beconsidered to have been made in respect of the $1million gift?

• If so, Mr. A deemed to transfer $500,000 to trust.



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Deemed Transfers and Contributions

• S.94(2)(a) to (c)

- deemed transfers unless arm’s length transfers

• S.94(2)(m) to (q)

- deemed contributions (no arm’s lengthtransfer exception)

• S.94(11) to (13)

- certain trust-to-trust transfers deemedContributions (no arm’s length transferexception)

• S.94(2)(r) to (u)

- certain transfers deemed not to be Contributions

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CTF - 2005 Annual Conference - Partial Presentation

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