Canada: Tax Notes: NRT Tax Traps And The Non-Specialist Advisor- Part 2

Last Updated: May 11 2016
Article by Michael A. Goldberg

Michael Goldberg, Tax Partner, Minden Gross LLP, MERITAS law firms worldwide and founder of "Tax Talk with Michael Goldberg", a quarterly conference call about current, relevant and real-life tax situations for professional advisors who serve high net worth clients. This article is the second instalment in a four-part series that will appear in Tax Notes over the next few months.

Hopefully the first instalment of this Series of articles grabbed your attention and made you interested (scared) enough to keep on reading! As promised, the second instalment of the Series will begin the arduous task of providing a high-level review of the Section 94 NRT Rules, including providing some context as to just how expansive these rules are. Ready or not. . .

Policy — Application of the Section 94 NRT Rules

From a policy perspective Parliament has made its intentions quite clear: it wants to restrict the ability of trusts to qualify as Pure NRTs. To that end, the Section 94 NRT Rules have been drafted to broadly expand Canada's right to tax otherwise Pure NRTs by deeming them to be Section 94 NRTs that are tax residents of Canada for most purposes of the Income Tax Act including making Section 94 NRTs taxable on their worldwide income.2

The Section 94 NRT Rules will apply whenever there is either a:

(1) "resident contributor", or

(2) "resident beneficiary",

at the end of any relevant period, which is generally, but not always, the end of a trust's fiscal period.3

Before reviewing when a trust will have a resident contributor or a resident beneficiary, it is worth reviewing the "contributor" and "contribution" definitions, which are key building blocks to the resident contributor and resident beneficiary definitions.

Contributor and Contribution Definitions

Most of the key definitions in section 94, including the contributor and contribution definitions, are found in subsection 94(1).4 A contributor is any person, including a corporation, trust, and other entities, that has made a contribution to a trust. A person will continue to be a contributor, regardless of whether or not the person (when human) has died, or (when not human) has ceased to be in existence.

There are some modest exceptions to who will be a contributor, but the list of "exempt persons" is generally limited to government and tax exempt entities.

Clearly the contributor concept covers an extremely broad group of persons. However, since the contributor definition requires there to be a contribution, the importance of the definition does not become clear until one understands the types of acts that will constitute contributions.

Generally, a contribution will involve any direct or indirect transfer or loan of property, or an obligation to make a transfer or loan of property, to a trust. This is an extremely broad concept and is considerably broader in scope than the general process that one thinks of as necessary to establish a trust in Canada (i.e., by direct settlement of property that is provided by a settlor and that is accepted by the trustees of a trust).

It is worth mentioning that as defined in subsection 248(1), "property" is an extremely broad concept and includes property of any kind whatever, whether real or personal, immovable or movable, tangible or intangible, or corporeal or incorporeal.

Thankfully, certain loans or transfers are excluded from being contributions if they are dealt with in the interpretive provisions in subsection 94(2) or if those loans and transfers qualify as "arm's length transfers", a concept that will be discussed below.

Even though some of the subsection 94(2) interpretive rules place limitations on when a contribution will be considered to have occurred,5 other rules in subsection 94(2) contain complex deeming rules, which make the scope of transfers and loans that will constitute contributions exceptionally wide.

For example, pursuant to paragraph 94(2)(a), unless the transfer is determined to be an arm's length transfer, the making of any loan or transfer of property by a person to any other person will be considered to have been a transfer to a trust if:

(1) the fair market value ("FMV") of a property or properties owned by a trust increases, or

(2) a liability or potential liability of a trust decreases,

at the time of the transfer by the person.

The rules in paragraph 94(2)(a) are economic based concepts. They are intended to capture loans or transfers of property that may give rise to the accretion of wealth in a jurisdiction other than Canada, by whatever means, including the reduction of liabilities.

Other key deeming rules in subsection 94(2) will deem, among other things, the issuance of shares, partnership or trust interests,6 and the provision of services by a person7 to be transfers by the issuer or provider of services to a trust. Due to even more complex deeming rules that are beyond the scope of the series, indirect transfers need to be reviewed carefully.

Hopefully by now it is clear that the contributor and contribution concepts cover not only an incredibly broad group of people but also a very wide group of actions by those people in respect of a trust.

Arm's Length Transfer

The term arm's length transfer, which is defined in subsection 94(1), is a bit misleading since the concept applies to both transfers and loans. In any case, if a loan or transfer qualifies as an arm's length transfer it will not result in a contribution having been made to a trust.

There are a number of categories of transactions that are listed in paragraph (b) of the definition that can be considered arm's length transfers. However, pursuant to paragraph (a) of the definition, in order to be an arm's length transfer, it always needs to be reasonable to conclude that none of the reasons for the loan or transfer of property is the acquisition of an interest in a non-resident trust.8

Still, this exception can be quite narrow. For example, the arm's length transfer exception will generally not apply in typical estate freeze situations, since such transactions tend to involve shares that will generally be "restricted property." In addition, as is the case with all arm's length matters, the determination of what transactions will qualify as arm's length is subjective.9

To read the full update, please click here


1 Unless otherwise noted, defined terms in this article have the meaning designated in the first instalment of the Series.

2 Because a Section 94 NRT is still factually non-resident, Canadian persons making distributions to such trusts will be obligated to withhold without treaty relief. Pursuant to the provisions in paragraph 94(2)(g), the Section 94 NRT will be entitled to treat amounts withheld as a credit against its Canadian tax liability. Complex rules are applicable where Section 94 NRTs make distributions to non-resident beneficiaries. For more on this topic, see the articles by Harris et al. and Schweitzer and Brodlieb, both of which were referred to in the first instalment of the Series.

3 See subsection 94(1) "specified time" definition (when a trust ceases to exist, the specified time will be the time immediately before the trust ceased to exist).

4 Unless otherwise noted, defined terms in the Act that are used in the Series can be found in subsection 94(1).

5 No attempt will be made to address such limitations in the Series.

6 See paragraph 94(2)(g).

7 See paragraph 94(2)(h).

8 Interestingly, although nearly all of the categories of transactions listed in paragraph (b) of the arm's length transfer definition appear to require loans or transfers to be carried out using an arm's length standard (subparagraphs (b)(ii) and (vi) do not explicitly contain language requiring such a standard), subparagraph (b)(i), dealing with payments of interest, dividends, rent, royalties, other returns, and substituted returns in respect of property, only seems to be concerned with situations that would involve returns to a trust that are designed to overcompensate a trust. As a result, provided that the terms giving rise to a particular loan or transfer were themselves carried out in an arm's length manner, then based on this interpretation it would appear the payment of non-arm's length returns that act to the detriment of a trust and that otherwise would have resulted in contributions being made to that trust would be considered arm's length transfers and therefore not contributions.

9 For a more detailed discussion on this subject see the article by Harris et al. (cited in the first instalment of the Series).

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Michael A. Goldberg
In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions