Budget 2013 proposes to amend the rules with respect to
non-resident trusts to ensure that Canadian resident taxpayers who
contribute property to a non-resident trust and maintain control
over the trust will be taxed on the income and capital gains
derived from the property, even if the property was transferred to
the trust for fair market value consideration or loaned to the
trust on commercial loan terms.
These proposed changes are designed to overrule The Queen v
Sommerer. In that case, both the Federal Court and the Federal
Court of Appeal held, among other things, that there was no
attribution of capital gains back to Mr. Sommerer on the sale of
shares by a non-resident trust, even though Mr. Sommerer had sold
the shares to the trust and was an ultimate beneficiary of the
trust, because he had sold the shares to the trust for fair market
value and therefore could not be considered to be a person who had
contributed property to the trust.
To avoid the Sommerer result in the future, Budget 2013 proposes
to effectively apply the trust attribution rules in subsection
75(2) of the Income Tax Act (Canada) (the
"Tax Act") to non-resident trusts with
modifications to capture any transfer or loan.
Subsection 75(2) which applies to attribute income and losses
and capital gains and capital losses earned or realized by a trust
with respect to a property (or substituted property) back to the
person who transferred the property to the trust if any of certain
conditions are met. The conditions (the "s. 75(2)
conditions") are that:
(a) the property or property substituted for it may
(i) revert to the person from whom the property (or substituted
property) was directly or indirectly received, or
(ii) pass to persons to be determined by the transferor after
the trust was created, or
(b) the property is held on condition that, during the existence
of the person, the property shall not be disposed of without the
person's consent or in accordance with the person's
This provision is very broad, and would cause attribution, for
example, if an individual transferred securities to a trust of
which the individual was the trustee with the right to subsequently
decide which of his children would receive income or capital from
the trust. The underlying theory is that if any of the s. 75(2)
conditions apply, the person has continued to maintain control over
the property and should continue to be regarded as the owner.
Other provisions of the Tax Act would cause a non-resident trust
to be deemed to be a Canadian resident trust (and thus subject to
Canadian income tax) if certain conditions are met. One of the
conditions under which a non-resident trust could become subject to
Canadian income tax is if a person resident in Canada contributes
property to the non-resident trust.
Budget 2013 proposes to revise subsection 75(2) to make it
applicable only to trusts resident in Canada and also to revise
section 94 (pertaining to non-resident trusts) by providing that if
any of the s. 75(2) conditions apply, any transfer or loan to the
trust will be treated as a contribution to the trust by the
Canadian resident transferor or lender. The deemed residence rules
would then apply so as to deem the trust to be resident in Canada
and subject to Canadian income tax.
A further provision of the Tax Act states that trusts to which
subsection 75(2) apply are deemed to sell trust property at fair
market value (thus realizing any inherent capital gains) if
property of the trust is transferred to anyone other than the
person referred to in the s. 75(2) conditions. Budget 2013 proposes
to extend this deeming rule to non-resident trusts if the s. 75(2)
conditions apply to the non-resident trust.
All of these provisions are to apply to taxation years that end
on or after March 21, 2013. As trusts created other than as a
result of an individual's death have a December 31 year end, if
these proposals are passed as presented, these provisions will
apply to attribute income and gains on property transferred in 2013
prior to the announced measures, which may have not otherwise been
subject to any attribution rule. In this regard, the proposed
measures have retroactive effect.
The foregoing provides only an overview. Readers are
cautioned against making any decisions based on this material
alone. Rather, a qualified lawyer should be consulted.
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