Canada: Québec Budget Announces Changes To Taxation Of Inter Vivos Trusts

In its recent 2012-2013 Budget delivered on March 20, 2012, the Government of Québec announced a number of changes to the taxation of inter vivos trusts.

Tax payable by an inter vivos trust

  • The tax rate applicable for determining the tax payable by inter vivos trusts in Québec will correspond to the highest tax rate applicable for the calculation of tax payable by an individual i.e. 24%. This amendment will apply for taxation years of an inter vivos trust ending on or after March 20, 2012.

Tax rates applicable to non-resident inter vivos trusts

  • Prior to the Budget, non-resident inter vivos trusts owning Québec immovable property were not taxed in Québec on income from property (i.e. passive rental income that did not constitute business income earned through an establishment in Québec) but were only subject to federal tax and an additional surtax for a combined rate of 42.92%. As a result of the announced changes, there will now be an additional 5.3% provincial tax on such trusts (defined as "Specified Trusts") earning property income from such property (defined as "Specified Immovable Property") so that the rate applicable for determining the tax payable corresponds to the highest rate applicable for the calculation of the tax payable by an individual, being 48.22%. The property income derived from the rental of specified immovable properties must be calculated separately from the income from other sources of a specified trust. Accordingly, a property loss of the specified trust may not reduce its income earned in Québec from another source in a taxation year.
  • A specified trust will be required to file a tax return for each taxation year in which it owns a specified immovable property, whether or not it has tax payable for the year.
  • From a tax policy perspective, this change is designed to ensure the taxation of non-resident trusts is similar to the taxation of non-resident corporations owning real estate in Québec. The Taxation Act (Québec) (the "QTA") contains a deeming rule which provides that a corporation has an establishment in each province in which an immovable owned by the corporation and used principally for the purpose of earning or producing gross revenue that is rent is situated. In the case of partnerships, the Budget contains a look-through rule to affect a similar result.
  • These amendments will apply to a taxation year ending on or after March 20, 2012.

Migration of non-resident inter vivos trusts

  • The QTA will be amended to stipulate that a non-resident inter vivos trust that becomes a resident of Canada will be deemed to have disposed of its specified immovable properties prior to becoming a resident of Canada.
  • The Budget states that non-resident trusts attempt to avoid Québec taxation by migrating to another province in Canada prior to a sale of real estate situated in Québec. More particularly, such trusts use migration as a means to avoid double taxation1 and clearance certificate requirements. As a result of the announced changes, Québec tax will now be payable on inherent gains and recapture on specified immovable properties at the time the specified trust migrates to Canada. Accordingly, migration is no longer an effective solution to avoid double taxation.
  • Additionally, a Québec compliance certificate (the Québec equivalent to a federal section 116 certificate) containing prescribed information will now be required prior to disposition by an inter vivos trust that began to reside in Canada at a time when it owned a specified immovable property. If such a certificate is not obtained, the purchaser may be liable for withholding tax amounting to 12% of the purchase price (subject to a reasonable enquiry exception). Thus, a purchaser of an immovable in Québec from a trust may wish to request a representation not only that the trust is resident in Canada at the time of sale, but that it has been resident in Canada at all times since it owned the property.
  • These changes will apply to migrations occurring on or after March 20, 2012.


1. Non-resident trusts disposing of immovables in Québec are subject to federal tax at a rate of 29% plus 48% surtax, as well as Québec taxation.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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