Canada: Dual-Resident Estate

For Canadian tax purposes, an estate is now deemed to be a trust under a 2013 amendment to the subsection 248(1) definition of a trust. My article on Hess (see "Trust or Estate?" Canadian Tax Highlights, April 2012) is no longer relevant. Thus, a distribution from a foreign estate must be reported on form T1142, "Information Return in Respect of Distributions from and Indebtedness to a Non-Resident Trust," where a testamentary trust arises out of an estate. This deeming provision may create complications for a trust that is deemed to be a Canadian resident under subsection 94(3). An argument can be made pursuant to subsection 233.6(1) that an estate is not subject to T1142 filing because the language of subsection 233.6(1) excludes an estate that arose as a consequence of the death of an individual.

At the 2017 STEP Canada round table, the CRA was asked about the filing position of a US estate with a Canadian trustee. Under Canadian law, a US estate that is managed and controlled by a Canadian trustee is deemed to be a Canadian resident according to the factual test set out in Fundy Settlement (2012 SCC 14). The CRA referred to paragraphs 1.6 and 1.7 of Income Tax Folio S6-F1-C1, in which the CRA says the following:

1.6 For example, when making a determination as to the jurisdiction in which the central management and control of a trust is exercised, the CRA will consider any relevant factor, which may include:

  • the factual role of a trustee and other persons with respect to the trust property, including any decision-making limitations imposed thereon, either directly or indirectly, by any beneficiary, settlor or other relevant person; and
  • the ability of a trustee and other persons to select and instruct trust advisors with respect to the overall management of the trust.

For this purpose, the CRA will look to any evidentiary support that demonstrates the exercise of decision-making powers and responsibilities over the trust.

1.7 After an examination of all factors, it may be determined that a trust is resident in Canada even if another country considers the trust to be resident in that other country.

For US tax purposes, an estate is not a trust. Whether an estate is a US estate for US tax purposes will determine the US tax it will bear. A US estate is taxed on its worldwide income, but a non-US estate is taxed only on its USsource income and its ECI. Whether an estate is a US estate is determined on the basis of the surrounding facts and circumstances. In Rev. ruling 81-112, 1981-1 CB 598, the IRS concluded that the estate was a US estate after considering the following factors: the domicile of the decedent at time of death, the location of the estate fiduciaries, the physical location of the primary beneficiaries, and the physical location of the estate's major assets.

A non-resident trust is generally deemed to be a Canadian trust if it either had a Canadian-resident contributor or has a Canadian-resident beneficiary and a connected contributor. A "connected contributor" is defined as a person who contributed to the trust and was a Canadian resident within five years before or after the contribution. The fiveyear preceding period is amended to 18 months if the trust arose as a consequence of the person's death.

For a non-subsection 94(3) trust, the competent authorities for Canada and for the United States consider all the facts concerning the estate to determine whether it is a Canadian or a US estate. However, for a subsection 94(3) trust, the CRA says that "it is generally the Canadian competent authority's position that it would not be appropriate to cede Canadian residence of trusts subject to section 94 of the Act in the course of negotiations with the competent authority of the other Contracting State." The CRA views this position as if it were a treaty override. Section 4.3 of the Income Tax Conventions Interpretation Act (in force March 5, 2010) clarifies that under Canadian law, a trust that is deemed to be resident in Canada by subsection 94(3) is a Canadian-resident trust for the purposes of applying a tax convention.

The CRA says that,

[f]urthermore, given that section 94 of the Act anticipates providing full relief for the foreign taxes paid by the trust, if any, we understand the legislation does not contemplate the other country giving up its right to tax the trust's income from non-Canadian sources. Accordingly, it is the Canadian competent authority's expectation that the negotiation of these cases with a view to settle the question of dual residence will generally not be possible or advisable, particularly where both competent authorities are known, more broadly, to be at an impasse on the matter.

The characterization of an estate as a trust, in combination with subsection 94(3), can raise questions. For example, a US estate created by a US-resident decedent may be deemed a Canadian trust if the decedent died within 18 months of a move to the United States, even if the person was US-domiciled because he or she had expressed an intent to live there permanently. Can and should Canada lay a taxation claim to the estate of that former Canadian resident?

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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