Canada: NRT Tax Traps And The Non-Specialist Advisor - Part 4

Last Updated: July 14 2016
Article by Michael A. Goldberg

This article is the last instalment of the four-part series.

In this, the fourth and final instalment of the Series, we'll examine what happens when trusts become subject to and then cease to be subject to the Section 94 Trust Rules. Using this knowledge and the technical knowledge described in the second and third instalments of the Series we'll then analyze how the Section 94 NRT Rules apply to common cross-border testamentary planning undertaken by Canadians who have US beneficiaries (i.e., the fourth example described in the first instalment of the Series). I have also added a discussion of how the choice of executors, trustees and how even assisting ailing and/or aging family members can inadvertently engage the Section 94 NRT Rules. As a bonus, the Series will close out with a review of some tax traps involving Pure NRTs.

Impact on a trust of becoming and ceasing to be subject to the Section 94 NRT Rules2

Canada is one of the few tax jurisdictions in the world that subjects its residents to tax on emigration: the so-called departure tax, where immediately prior to emigration the departing resident is deemed to have made an FMV disposition of all of the emigrant's property other than property such as Canadian real property and most property used in a business carried on through a permanent establishment in Canada. Similar concepts apply at the time a taxpayer immigrates to Canada; property other than the types of property excluded from the emigration rule is deemed to be brought into Canada at a tax cost equal to its FMV. These rules are found in section 128.1.

A major issue that can arise where a trust becomes or ceases to become subject to the Section 94 NRT Rules is that the rules in subsection 94(4) will cause the trust to become subject to a modified version of the rules in section 128.1 relating to immigration and emigration.

Among other things, the subsection 94(4) rules generally cause a trust to have a deemed year-end prior to its change in status and they will also generally provide for a step-up in the adjusted cost base ("ACB") of most assets owned by a trust that becomes a Section 94 NRT. In addition, a trust that ceases to be a Section 94 NRT will be deemed to dispose of all of its property, immediately prior to the change in status, on a fully taxable basis. As was the case under section 128.1, property such as Canadian real property and most property used in a business carried on from a permanent 1 Unless otherwise noted, defined terms in this article have the meaning designated in the establishment in Canada are excluded from these deemed disposition rules.3

Unfortunately, if a trust is not properly monitored it could change its status among one or more of being a factually resident Canadian trust, a Pure NRT, and a Section 94 NRT, and if these changes in status occur the application of the subsection 94(4) rules could give rise to among other things the untimely creation of year-ends and the deemed taxable realization of gains for Canadian income tax purposes.

Example 4 – Canadian estate planning for US beneficiaries4

Canadian resident clients who have significant estates and who also have US heirs, are often encouraged by their US tax counsel to put in place special planning in respect of the portion of their estate that is intended to be left to their US beneficiaries. In particular, I commonly see US counsel advising those clients to have their estates fund one or more special US trusts (each a "US Trust"). This type of US Trust is generally formed to accomplish objectives that include: potentially continuing the trust indefinitely;5 providing protection of the gift from creditors of the US beneficiary, including spousal creditors of the US beneficiary; and avoiding the gift becoming part of the US beneficiary's US taxable estate, which would otherwise cause the inheritance to become subject to US estate tax.

Unfortunately, the Section 94 NRT Rules would seem to catch otherwise Pure NRTs formed for this purpose. This result occurs because instead of a deceased parent, who will have ceased to exist on his or her death, contributing6 the property to a US Trust, it is the estate of the deceased parent that will be considered to have made the contribution.7 The result is that even with the most careful of planning, the Canadian estate will be a resident contributor to the US Trust and this will cause the US Trust to become a Section 94 NRT.8

While the US Trust is a Section 94 NRT it will be subject to Canadian taxation and based on prior CRA commentary it appears doubtful that treaty relief will be provided under Canada's tax treaties.9 The result could well be double taxation unless the competent authorities intervene.

The US Trust will then continue to be a Section 94 NRT at least until the deceased parent's estate is wound-up, at which time if there are no Canadian resident beneficiaries the Section 94 NRT Rules should cease to apply to the US Trust. As described in the preceding section, immediately prior to losing its status as a Section 94 NRT the US Trust will, pursuant to subsection 94(4), be deemed to have a taxation year-end making it taxable on income earned up until that date and, subject to the exceptions mentioned previously, it will be deemed to dispose of all of its property on a taxable basis for Canadian tax purposes. US advice may be required to ensure that the US Trust, which at that point in time will have become a Pure NRT, has the best US tax attributes possible following emigration from Canada.

Although in cases where there are significant delays in winding up an estate the subsection 94(4) deemed disposition could give rise to material tax consequences, if the US Trust's sojourn in Canada as a Section 94 NRT is a short one, then hopefully the impact of having been a Section 94 NRT will be mainly limited to administrative nuisance and will not give rise to significant tax consequences.

Finally, it is again worth mentioning that even after the US Trust becomes a Pure NRT again, if it is not properly monitored or, if in the future a Canadian becomes a beneficiary of the US Trust, then the US Trust could find itself once again trapped in the Section 94 NRT rules.

Bonus Example – Choice of Executors, Trustees and Assisting Aging and/or Ailing Family Members

While working on a file, I recently discovered another very scary section 94 NRT real-life situation that could impact the general practitioner. I have no doubt that I'll continue to discover other situations.

If non-residents are appointed as executors of an estate and/or are found to have central management and control of an estate they could cause the estate itself to become a Section 94 NRT. If the subsection 70(5) deemed disposition on death taxes would have arisen in any case, then the subsection 94(4) tax consequences of such a status change would hopefully be more aggravating then problematic. However, if the subsection 70(5) taxes had been expected to e deferred because a surviving spouse or spousal trust was to have received the deceased's property, then this status change could be a very serious issue.

Hopefully, because non-resident executors may be required to post an administrative bond before being able to act,10 this issue should not arise too often in an estate context. However, this issue may be much more likely to affect inter-vivos trusts and, in particular, alter-ego and other lifetime trusts, where administrative bond requirements may not be required.11

In such situations, I understand that it is not unusual for a child to be appointed as a successor trustee for his or her parents. Even if a child is not appointed as a trustee of a trust, it is possible to imagine situations in which the child, in caring for his or her aging and/or ailing parents, might become so involved in their affairs that the child could end up exercising the true central management and control of the trust. In both of these types of situations, if the child is a non-resident and unless the child receives proper and timely advice, a change in the trust's status to being a Section 94 NRT might arise while the parent is still alive, which could give rise to potentially untimely and problematic subsection 94(4) tax consequences.12

Pure NRT – A Couple of Tax Traps and a Planning Point

The last topics that will be covered in the Series are thankfully not Section 94 NRT related issues but instead relate to Canadian issues that may impact Pure NRTs.

Tax Trap 1

As is the case for all non-residents of Canada, Pure NRTs can be taxable in Canada, though the exposure to Canadian income tax is generally limited to Canadian source income rather than their worldwide income. One issue that often comes as a surprise to advisors of Pure NRT's is that the 21-year deemed disposition rules in subsection 104(4) can apply to them if they own "taxable Canadian property".13 This tax trap is easily missed and can often catch Pure NRTs off guard.

Tax Trap 2

Another trap that can catch Canadian beneficiaries of Pure NRTs that are personal trusts by surprise can arise where a Pure NRT makes a capital distribution to a Canadian resident beneficiary and the distributed property's FMV exceeds the ACB of the property. The essence of this trap is that even though the distributing trust is a Pure NRT, the rules in subsection 107(2) would generally cause the distribution from the Pure NRT to have been made to the Canadian resident beneficiary on a rollover basis at the ACB of the Pure NRT. As a result, without planning, the Canadian resident beneficiary will be subject to tax on gains realized in the future based on the ACB inherited from the Pure NRT, which depending on the distributed asset, could be significantly less than the FMV of the property at the time of its distribution.

A Planning Point

This issue was discussed in CRA document 2015-0582701E5.14 One way to manage this potential tax trap is to try and ensure that only high ACB properties are distributed by a Pure NRT to its Canadian resident beneficiaries. Even if the Pure NRT does not have high ACB properties, it may still be possible to tax efficiently increase the ACB of properties prior to their distribution to Canadian resident beneficiaries. For example, subject to advice from competent foreign counsel, where a Pure NRT is located in a low tax or no tax jurisdiction and the Pure NRT has low ACB properties that it desires to distribute to Canadian residents, it may be possible to take steps to cause the unrealized gains to be realized in the foreign jurisdiction and thereby increase the ACB of the assets prior to a distribution to Canadian residents.

As this is the end of the Series, I hope that I've been successful in achieving the modest goals of keeping you, the non-specialist advisor's attention and giving you a high-level overview of some of the many tax traps waiting for unsuspecting practitioners in the NRT world. Actually dealing with these issues – well that is likely best left to the specialists . . .

Special thanks to Ryan Chua of Minden Gross LLP for his comments on earlier drafts of this article.


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

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

3 It would appear that the rules that permit the posting of security pursuant to the provisions in subsection 220(4.5) et seq., should apply to Section 94 NRTs that become liable to pay emigration taxes pursuant to subsection 128.1(4).

4 Because my practice is limited to Canadian law, the discussion below is only based on my general understanding of US laws and should not be construed as US tax or legal advice.

5 Such trusts are often referred to as "dynasty trusts".

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

7 See for example, CRA document number 2013-0514771E5 dated June 26, 2014, and CRA document number 2014-0523071C6 dated June 16, 2014 (from the CRA Round Table at the 2014 STEP Conference, Question 12). The CRA's 2014 response contains a statement that, pursuant to paragraph 94(2)(g), the time the interest in the deceased's estate is acquired by the otherwise Pure NRT (usually the date of death of the deceased) will give rise to the deemed transfer by the deceased's estate to the otherwise Pure NRT and will result in a contribution to the otherwise Pure NRT by the estate. Whether this position is correct or whether the correct time of the estate's contribution is the actual time when the otherwise Pure NRT receives property from the estate is a matter that remains open to debate.

8 As mentioned in the preceding section, the rules in subsection 94(4) will apply to deem the US Trust to have effectively immigrated to Canada. Assuming at the time of immigration the US Trust has only nominal assets then the consequences of such immigration should, in general, be mainly administrative but otherwise inconsequential from a Canadian tax perspective.

9 See section 4.3 Income Tax Conventions Interpretations Act, and see cases such as Perry v. MNR et al., 2008 DTC 6623 (FCA); aff'g. 2007 DTC 5625 (FC).

10 For example, see the Estates Act, R.S.O. 1990, c. E.21

11 There is no requirement in the Trustee Act, R.S.O. 1990, c. T.23, for a trustee of an inter-vivos trust in Ontario to post an administrative bond.

12 Subject to the possibility of posting security for such tax with the CRA (which is often problematic), the results could be extremely problematic if there is insufficient liquidity to fund the subsection 94(4) taxes arising upon the status change of the trust.

13 As that term is defined in subsection 248(1). Gains that are subject to treaty protection or that involve "exempt property" would not be caught under the 21-year rule.

14 Dated May 25, 2015

Previously published by Wolters Kluwer

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