International employee benefit trusts (EBTs) that hold assets
for Canadian resident employees may be subject to tax in Canada
under the recently amended non-resident trust rules (NRT
Rules). A single employee in Canada could create Canadian tax
obligations for the trust. The 31 March 2014 deadline for
filing tax returns in relation to an EBT's 2013 taxation has
passed. The next filing due date is in June 2014 for an
EBT's 2007-2012 taxation years.
An EBT can elect to be taxed on income (and gains) on assets
generally held for Canadian employees. However, if the
election is not made on time, the entire trust fund (including
assets held for non-residents) could become subject to tax in
Canada. In a second election, a Canadian employer can elect
to transfer the trust's tax liability to itself, which would
reduce the applicable tax rate to Canadian corporate rates.
The trustee, the Canadian employer and Canadian beneficiaries of
foreign EBTs may also be required to file information returns in
Canada with respect to the trust. The applicability of the
NRT Rules and the deadlines for filing these elections and the tax
and information returns should be reviewed based on the facts of
The NRT Rules apply to a foreign trust if either (i) a Canada
resident has made a "contribution" (broadly defined) to
the trust (the "resident contributor" test), or (ii) a
trust has a Canadian resident beneficiary and a "connected
contributor" (the "resident beneficiary"
test). If the trust meets one of these two tests at the end
of a taxation (i.e., calendar) year, the trust is deemed resident
in Canada throughout that year and taxable in Canada on its
worldwide income subject to the elections noted above. There
are exemptions for trusts that qualify as an "exempt foreign
trust". The amended NRT Rules came into force in June
2013 and generally apply retroactively from 1 January 2007.
As noted, contributions are widely defined. For example, a
Canadian subsidiary in a multinational group is deemed to
contribute property to a non-resident trust where a person (e.g.,
its foreign parent) transfers property (no matter its value) to the
trust and a purpose or effect of the transfer may reasonably be
considered to provide benefits in respect of services rendered by a
person as an employee of the Canadian subsidiary or affiliate.
What types of trusts are caught?
Trusts that may be caught by the NRT Rules include:
ESOPs (employee share ownership plans), ESPPs (employee share
purchase plans), Employee Benefit Trusts for deferred income,
saving or health plans, cash or equity based, short or long term
incentives, with or without sub-funds or classes of units;
Pension Trusts holding assets of pension, retirement,
termination of service, disability or death plans, whether or not
Trusts for funding or securing Supplemental Executive
Retirement Plans (SERP);
Trusts for Individual Pension Plans (i.e. only one individual
as plan member); and
Trusts holding assets as security of an obligation, for example
an environmental trust.
Other types of trusts that may be caught include employee life
and health trusts, employee trusts, health & welfare trusts,
insurance segregated fund trusts, lifetime benefit trusts, master
trusts, real estate investment trusts or unit trusts.
Exempt foreign trusts
Some EBTs that are trusts governed by an "employees profit
sharing plan", a "retirement compensation
arrangement" or a "foreign retirement arrangement"
may qualify as an exempt foreign trust not subject to NRT
Rules. However, these exemptions are unlikely to be available
to an EBT holding assets of:
(a) foreign benefit plans in which long-term Canadian residents
(b) foreign pension plans established in a jurisdiction that
does not impose tax.
Accordingly, trustees of international EBTs with Canadian
resident beneficiaries should take advice on the implications of
the NRT Rules for the trust, the Canadian employer and
beneficiaries in Canada.
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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