Originally published in Blakes Bulletin on Pension & Employee Benefits, December 2007
Special Report On Cross-Border Compensation And Pension Issues
New income tax legislation relating to non-resident trusts is expected to be enacted early in the new year. The legislation is contained in Bill C-10 which is now before the Senate. The proposed legislation generally applies where a Canadian resident (a corporation, trust (including a pension trust and an elected master trust) or individual) contributes or invests in a trust that is not resident in Canada. The proposed legislation was the subject of a May 2007 Blakes Pension & Employee Benefits Bulletin.
If the proposed legislation applies, the non-resident trust will be treated as a resident of Canada for Canadian income tax purposes. In addition, the Canadian resident that made the contribution or investment could be jointly and severally liable for the Canadian tax liability of the non-resident trust. There are a number of important exceptions to the proposed non-resident trust rules which will exempt various types of non-resident trusts from the new tax legislation. These exceptions need to be carefully reviewed before a Canadian resident employer, trust or employee contributes to a non-resident trust.
As the draft legislation now stands, the legislation could apply to a Canadian resident investor which invests in a non-resident trust so as to make that investor liable for Canadian tax payable by the non-resident trust even if that investor is generally exempt from tax on its own income (for example, a registered pension plan). Canadian pension funds and their advisors should carefully review potential non-resident investment structures in order to determine if the structure is a trust and if it is a trust, whether any of the exceptions are applicable. The application of the proposed legislation to tax exempt investors such as pension funds has been the subject of extensive discussion with the Canadian Department of Finance and it is possible that the proposed legislation could be modified to provide some form of exception or exclusion for the investment by a Canadian tax exempt pension fund in a non-resident trust.
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