Explanatory Notes on Taxation of Non-Resident Trusts and Foreign Investment Entities : 1

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Preface

These explanatory notes describe proposed amendments to the Income Tax Act and a related Act. These explanatory notes describe these amendments, clause by clause, for the assistance of Members of Parliament, taxpayers and their professional advisors.

The Honourable John Manley, P.C., M.P.
Deputy Prime Minister and Minister of Finance

These explanatory notes are provided to assist in an understanding of proposed amendments to the Income Tax Act and a related Act. These notes are intended for information purposes only and should not be construed as an official interpretation of the provisions they describe.

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Clause 1

Income from Business or Property

ITA
12(1)(k)

Section 12 of the Income Tax Act provides for the inclusion of various amounts in computing a taxpayer's income for a taxation year from business or property. Paragraph 12(1)(k) refers to certain dividends required by existing sections 90 to 95 to be so added.

Paragraph 12(1)(k) is amended so that it refers to all amounts required to be added in computing income under amended sections 90 to 95, including new sections 94.1 and 94.2 relating to foreign investment entities. For more information, see the commentary on those sections.

This amendment applies to taxation years that begin after 2002.

Clause 2

Loan to Non-resident - Controlled Foreign Affiliate

ITA
17(15)

Subsection 17(15) of the Act defines expressions that apply for the purposes of section 17, which provides rules under which imputed interest, in connection with debt owing to a taxpayer from a non-resident person, is included in computing the taxpayer's income. The expression "controlled foreign affiliate" is defined to have the same meaning as it does under subsection 95(1) of the Act, except that for the purpose of section 17, a non-resident corporation must be controlled by Canadian residents in order to be treated as a controlled foreign affiliate of a taxpayer resident in Canada.

The definition "controlled foreign affiliate" in subsection 17(15) is amended so that new paragraph 94.1(2)(h) does not apply for the purposes of section 17. Under that paragraph, an election is available under which a foreign affiliate of a taxpayer is generally treated as a controlled foreign affiliate of the taxpayer.

This amendment applies after 2002.

Clause 3

Capital Gain from Disposition of Property

ITA
39(1)(a)(ii.3)

Paragraph 39(1)(a) of the Act describes a taxpayer's capital gain for a taxation year from the disposition of property. This paragraph provides that gains from dispositions of specified properties are to be excluded in determining a capital gain. Under subparagraph 39(1)(a)(ii.2), the specified properties include specified debt obligations, where subsection 142.4(4) or (5) applies to the disposition, and mark-to-market properties where subsection 142.5(1) applies to the disposition. Under subparagraph 39(1)(b)(ii), the same exclusion generally applies with regard to a taxpayer's capital loss.

New subparagraph 39(1)(a)(ii.3) provides a similar exclusion for property in respect of which subsection 94.2(3) applies (and subsection 94.2(20) does not apply) to a taxpayer for a taxation year. Subsection 94.2(3) sets out the conditions for the application of the mark-to-market taxation regime under section 94.2 for participating interests in foreign investment entities. Because of paragraph 94.2(5)(b), this exclusion does not apply in the case of a taxpayer who is not resident in Canada immediately before the time of the disposition.

This amendment applies to dispositions that occur after 2002.

Clause 4

Convertible Property

ITA
51

Section 51 of the Act generally permits a tax-deferred transfer of property where a taxpayer, pursuant to a right of conversion, exchanges capital property (referred to in the commentary on this section as the "convertible property") that is a share, bond, debenture or note of a corporation for capital property that is another share of the capital stock of the corporation.

ITA
51(1)(c)

Paragraph 51(1)(c) of the Act provides that, except for the purpose of subsection 20(21), an exchange described in paragraph 51(1)(a) or (b) is deemed not to be to be a disposition of the convertible property.

Paragraph 51(1)(c) is amended to ensure that an exchange of convertible property will be considered to be a disposition for the purpose of paragraph 94(2)(m) of the Act.

This amendment applies to taxation years that begin after 2002. It also applies to taxation years of a taxpayer that begin

• after 2000 if a trust, to which the taxpayer, directly or indirectly, transferred property in 2001 (or would have so transferred property if new section 94 of the Act applied in 2001), makes a valid election under the coming-into-force provision of new section 94, and
• after 2001 if a trust, to which the taxpayer, directly or indirectly, transferred property in 2002 (or would have so transferred property if new section 94 of the Act applied in 2002), makes a valid election under the coming-into-force provision of new section 94.

ITA
51(4)

Subsection 51(4) of the Act provides that subsections 51(1) and (2) will not apply to any exchange to which subsection 85(1) or (2) or section 86 applies.

Subsection 51(4) is amended to provide that subsections 51(1) and (2) also will not apply to any exchange of property if that property is, immediately before the exchange, a specified participating interest. The concept of a specified participating interest is generally relevant in the context of the foreign investment entity rules in sections 94.1 to 94.4. For more information on the definition "specified participating interest" in subsection 248(1), see the commentary on that definition.

This amendment applies toexchanges that occur in taxation years that begin after 2002.

Clause 5

Cost of Certain Property

ITA
52(1)

Section 52 of the Act sets out the rules for determining the cost of certain property for the purposes of measuring any gain or loss on its disposition.

Subject to a number of exceptions, subsection 52(1) of the Act applies where a taxpayer acquires property and a particular amount in respect of its value was included in computing the taxpayer's income for a taxation year throughout which the taxpayer was resident in Canada (or in computing a non-resident taxpayer's taxable income earned in Canada under section 115, taxable income under section 114 or an amount from which tax is withheld under Part XIII). In these circumstances, the particular amount is added in determining the cost to the taxpayer of the property for the purposes of determining capital gains and losses in respect of the property.

Where subsection 94.2(3) applies (and subsection 94.2(20) does not apply) to a taxpayer for a taxation year in respect of a property, an amount in respect of the taxpayer's cost of the property may be included under subsection 94.2(4) in computing the taxpayer's income from the property. Subsection 52(1) is amended so that it does not apply to add an amount to the cost to a taxpayer of a property where the amount may have been so included under subsection 94.2(4).

This amendment is made, even though property subject to the mark-to-market rules in subsection 94.2(4) is generally considered not to be capital property (except where subsection 94.2(20) applies), to deal with the situation where it may become at some later time capital property or where it is capital property to which subsection 94.2(20) applied. Subsection 52(1) should not apply to cause a "bump" in the cost of a property in respect of income or gains recognized under subsection 94.2(4) because section 94.2 contains its own rules for making adjustments in respect of such income or gains. For more detail, see the commentary on subsections 94.2(12), (13) and (21), and the definition "deferral amount" in subsection 94.1(1).

For more information on the definitions "participating interest" and "foreign investment entity" and section 94.2, see the commentary on those provisions.

This amendment applies to taxation years that begin after 2002.

Clause 6

Adjustments to Cost Base

ITA
53

Section 53 of the Act sets out rules for determining the adjusted cost base (ACB) of property. Certain adjustments are made under this section. Subsection 53(1) provides for additions in computing the ACB of a property, and subsection 53(2) for deductions in computing the ACB of a property.

ITA
53(1)(d.1)

Paragraph 53(1)(d.1) of the Act, applied together with existing paragraph 94(5)(a), provides for an addition in computing the adjusted cost base (ACB) to a taxpayer of the taxpayer's capital interest in a trust to which existing paragraph 94(1)(d) applies. Paragraph 53(1)(d.1) is amended to ensure that historical ACB additions are maintained, notwithstanding the replacement of the rules in existing section 94.

This amendment applies to taxation years that begin after 2002.

It also applies to taxation years of a taxpayer that begin

• after 2000 if a trust, in which the taxpayer had a capital interest at any time in 2001, makes a valid election under the coming-into-force provision for new section 94, and

• after 2001 if a trust, in which the taxpayer had a capital interest at any time in 2002, makes a valid election under the coming-into-force provision for new section 94.

ITA
53(1)(m) and (m.1)

Paragraph 53(1)(m) of the Act provides for an addition in computing the ACB to a taxpayer of "offshore investment fund property" to which existing section 94.1 applies. Paragraph 53(1)(m) is amended to ensure that the historical ACB additions are maintained, notwithstanding the replacement of the rules in existing section 94.1.

Paragraph 53(1)(m) is also amended to provide for an ACB addition in computing the ACB to a taxpayer of a property in respect of which new subsection 94.1(4) has applied to include in respect of the property an amount in computing the taxpayer's income for a taxation year. For more information, see the commentary on section 94.1.

Paragraph 53(1)(m.1) is introduced to provide for the ACB additions contemplated by new subsections 94.2(12) and 94.3(5). For more information, see the commentary on those subsections.

These amendments apply to taxation years that begin after 2002.

ITA
53(2)(b.1)

Paragraph 53(2)(b.1) of the Act, applied together with existing paragraph 94(5)(b), provides for a deduction in computing the ACB to a taxpayer of the taxpayer's capital interest in a trust to which existing paragraph 94(1)(d) applies. Paragraph 53(1)(b.1) is amended to ensure that historical ACB deductions are maintained, notwithstanding the replacement of the rules in existing section 94.

This amendment applies to taxation years that begin after 2002. It also applies to taxation years of a taxpayer that begin

• after 2000 if a trust, in which the taxpayer had a capital interest at any time in 2001, makes a valid election under the coming-into-force provision for new section 94, and

• after 2001 if a trust, in which the taxpayer had a capital interest at any time in 2002, makes a valid election under the coming-into-force provision for new section 94.

ITA
53(2)(w)

Paragraph 53(2)(w) of the Act is introduced to provide for the ACB reductions contemplated by new subsections 94.2(12), 94.3(5) and 94.4(2). For more information, see the commentary on those subsections.

New paragraph 53(2)(w) applies to taxation years that begin after 2002.

Clause 7

Death of a Taxpayer

ITA
70(3.1)

Under subsection 70(2) of the Act, the value of certain "rights or things" owned by an individual at the time of the individual's death is required to be included in the individual's income for the year of death. Subsection 70(3) provides that this rule does not apply in connection with "rights or things" transferred to beneficiaries of the deceased within a specified period of time. Subsection 70(3.1) provides that certain property does not constitute a "right or thing" for this purpose.

Subsection 70(3.1) is amended so that a "right or thing" does not include property in respect of which new subsection 94.2(3) applied (and subsection 94.2(20) does not apply) for the individual's taxation year in which the individual dies. New subsection 94.2(3) sets out the conditions for the application of the mark-to-market taxation regime under section 94.2 for participating interests in foreign investment entities.

This amendment applies to taxation years that begin after 2002.

ITA
70(5.2)

Subsection 70(5.2) of the Act provides rules with respect to the disposition of resource properties and land inventories on the death of an individual.

Subsection 70(5.2) is amended so that it also applies to property in respect of which new subsection 94.2(3) applied (and subsection 94.2(20) does not apply) for the individual's taxation year in which the individual dies. With respect to such property, amended paragraph 70(5.2)(a) provides for a deemed disposition, immediately before the death of the individual, for proceeds of disposition equal to the fair market value of the property at that time. New subsection 94.2(3) sets out the conditions for the application of the mark-to-market taxation regime under section 94.2 for participating interests in foreign investment entities.

In the case of a property in respect of which subsection 94.2(3) applied (and subsection 94.2(20) does not apply) for the individual's taxation year in which the individual dies, the proceeds of disposition are included in the value of A in the mark-to-market formula for the taxation year in respect of the property. This formula applies in computing the deceased's income under subsection 94.2(4) for the taxation year of death. The deceased is treated as not having held the interest after death.

Paragraph 70(5.2)(b) is amended to provide that properties in respect of which a deemed disposition occurs under paragraph 70(5.2)(a) are deemed to have been acquired, by the person who as a consequence of the individual's death acquires the property, at a cost equal to that fair market value.

Where certain resource properties and land inventories held by an individual immediately before death are deemed, under paragraph 70(5.2)(a) and (b), to have been disposed of by the individual and acquired at a particular cost by another person, new paragraph 70(5.2)(c) sets out the conditions under which it will apply, instead of 70(5.2)(a) and (b), to determine the proceeds of disposition and cost of acquisition resulting from that deemed disposition and that acquisition. In particular, where the conditions in paragraph (c) are met, subparagraph 70(5.2)(c)(i) applies to determine the individual's proceeds from the deemed disposition under paragraph (a) of a land inventory or resource property. In turn, subparagraph 70(5.2)(c)(ii) deems the land inventory or resource property to have been acquired at the time of the individual's death at a cost equal to the amount determined under subparagraph (i) in respect of the deemed disposition of the property under paragraph 70(5.2)(a).

This amendment applies to taxation years that begin after 2002.

Clause 8

Inter Vivos

Transfers by Individuals

ITA
73(1)

Subsection 73(1) of the Act generally provides for a tax-deferred disposition of capital property by an individual (other than a trust) where it is transferred by the individual in circumstances where subsection 73(1.01) applies and a number of other conditions are met.

Subsection 73(1) is amended so that it does not apply to a transfer of property that is a specified participating interest. The concept of a specified participating interest is generally relevant in the context of the foreign investment entity rules in sections 94.1 to 94.4. For more information on the definition "specified participating interest" in subsection 248(1), see the commentary on that definition.

This amendment applies to transfers that occur in taxation years that begin after 2002.

Clause 9

Trusts - Attribution

ITA
75(2) and (3)

Subsection 75(2) of the Act generally provides for the attribution of income derived from certain trust property to a person resident in Canada where the property was received by the trust from the person and can revert to the person (or pass to other persons determined by that person). Subsection 75(3) exempts certain trusts from this attribution rule.

Subsection 75(2) is amended to ensure that, if the person to whom income from a particular property would otherwise be attributed under that subsection is an otherwise non-resident trust that is deemed by new subsection 94(3) to be resident in Canada, the income from that property will not be attributed back to the person.

Amended subsection 75(2) generally applies to trust taxation years that begin after 2000.

Subsection 75(3) is amended by adding new paragraph 75(3)(c.2). New paragraph 75(3)(c.2) ensures that subsection 75(2) does not apply to trusts in respect of which the contributors are recent immigrants to Canada (i.e., resident in Canada for not more than 60 months). The exception is consistent with similar 60-month exemptions in:

• section 94 (see subsection 94(3) and the definitions "connected contributor" and "resident contributor" in subsection 94(1)),

• section 94.1 (see subsection 94.1(3) and the definition "exempt taxpayer" in subsection 94.1(1)), and

• section 94.2 (see subparagraph 94.2(11)(c)(i)).

New paragraph 75(3)(c.2) applies to trust taxation years that begin after 2000 except that, for trust taxation years that begin in 2001 or 2002, paragraph 75(3)(c.2) applies with reference to subsection 94(1) as it reads in its application to taxation years that begin after 2002.

Clause 10

Definition of "Eligible Property"

ITA
85(1.11)

Subsection 85(1.1) of the Act describes the types of property (referred to as "eligible property") that may be transferred to a corporation under subsection 85(1). Subsection 85(1.11) provides that certain foreign resource property (or an interest in a partnership that derives all or part of its value from one or more foreign resource properties) is not an "eligible property" of a taxpayer in respect of a transfer to a corporation.

Subsection 85(1.11) is amended to provide that a specified participating interest is not an eligible property of a taxpayer in respect of a transfer to a corporation. The concept of a specified participating interest is generally relevant in the context of the foreign investment entity rules in sections 94.1 to 94.4. For more information on the definition "specified participating interest" in subsection 248(1), see the commentary on that definition.

This amendment applies to taxation years that begin after 2002.

Clause 11

Share-for-Share Exchange

ITA
85.1(4) and (6)

Subsection 85.1(3) of the Act permits a taxpayer to transfer, on a tax-deferred "rollover" basis, the shares of a foreign affiliate of the taxpayer to another foreign affiliate of the taxpayer. Subsection 85.1(5) provides a similar rollover for shareholders who exchange shares of a foreign corporation for shares of another corporation. Subsections 85.1(4) and (6), respectively, identify circumstances in which subsection 85.1(3) or (5) will not apply.

Subsection 85.1(4) is amended to provide that subsection 85.1(3) does not apply to a disposition at any time by a taxpayer of a property that is a specified participating interest. Subsection 85.1(6) is similarly amended so that subsection 85.1(5) does not apply to an exchanged share that is, immediately before the exchange, a specified participating interest. The concept of a specified participating interest is generally relevant in the context of the foreign investment entity rules in sections 94.1 to 94.4. For more information on the definition "specified participating interest" in subsection 248(1), see the commentary on that definition.

These amendments apply to dispositions and exchanges that occur in taxation years that begin after 2002.

Clause 12

Share-for-Share Exchange - Reorganization of Capital

ITA
86(3)

Subsection 86(1) applies where a corporation reorganizes its capital structure by issuing shares to a taxpayer as full or partial consideration for the surrender of all of the taxpayer's shares of the capital stock of the corporation. Where this is the case, the cost of the new shares is determined with reference to the adjusted cost base of the surrendered shares. Subsection 86(3) provides that subsection 86(1) does not apply in any case where subsection 85(1) or (2) applies.

Subsection 86(3) is amended to provide that subsection 86(1) also does not apply to any disposition of property that is, immediately before the disposition, a specified participating interest. The concept of a specified participating interest is generally relevant in the context of the foreign investment entity rules in sections 94.1 to 94.4. For more information on the definition "specified participating interest" in subsection 248(1), see the commentary on that definition.

This amendment applies to

dispositions that occur in taxation years that begin after 2002.

Clause 13

Amalgamations - Non-resident Trusts and Foreign Investment Entities

ITA
87(2)(j.95)

Section 87 of the Act sets out rules that apply on the amalgamation of two or more taxable Canadian corporations. The amalgamated corporation is generally treated as a continuation of the predecessor corporations for the purposes of the Act.

New paragraph 87(2)(j.95) provides that, where there has been an amalgamation of two or more taxable Canadian corporations, the amalgamated corporation is deemed to be a continuation of its predecessor corporations for the purposes of sections 94 to 94.4, which relate to foreign trusts and foreign investment entities. Thus, for example, an amalgamated corporation will be considered to be a "contributor" (as defined in subsection 94(1)) to a trust if any predecessor corporation was a contributor to the trust. In addition, the new corporation's "deferral amount" (as defined in subsection 94.2(1)) in respect of an interest in a foreign investment entity will be determined in the same manner as a predecessor's "deferral amount" in respect of the same interest.

Because of the operation of paragraph 88(1)(e.2), new paragraph 87(2)(j.95) also applies to windings-up to which section 88 applies.

This amendment applies to taxation years that begin after 2000.

Clause 14

Amounts to be Included in Respect of

Share of a Foreign Affiliate

ITA
91

Section 91 of the Act sets out rules for determining amounts that a taxpayer resident in Canada is to include in computing its income for a particular year as income from a share of a controlled foreign affiliate of the taxpayer.

ITA
91(1)

Subsection 91(1) of the Act provides that a taxpayer that is resident in Canada must include in computing income an amount in respect of each share owned by the taxpayer of the capital stock of a controlled foreign affiliate of the taxpayer.

Subsection 91(1) is amended so that it does not result in additional income for a taxpayer arising because of the ownership by the taxpayer (or by a controlled foreign affiliate of the taxpayer) of shares that are participating interests in a "tracking entity" to which the imputed income regime under section 94.1 or the mark-to-market regime under section 94.2 applies by reason of the application of subsection 94.2(9). The shares of a taxpayer in the capital stock of a corporation that is a controlled foreign affiliate of the taxpayer will generally be treated as "exempt interests" (as defined in new subsection 94.1(1)), and therefore not subject to the income inclusions under subsections 94.1(4) or 94.2(4) of the Act. However, if subsection 94.2(9) applies in respect of those shares (in particular, note that paragraph 94.2(9)(b) does not exclude the application of subsection 94.2(9) to an exempt interest that is an interest in a controlled foreign affiliate) either of subsections 94.1(4) or 94.2(4) will apply generally to require an amount to be included in computing the income of the taxpayer. Because of subparagraph 94.3(2)(b)(i), the accrual regime in section 94.3 will not apply in respect of an interest to which subsection 94.2(9) applies.

For more details on the application of sections 94.1 to 94.4, see the commentary on those provisions.

This amendment applies to taxation years that begin after 2002.

ITA
91(4)

Subsection 91(4) of the Act provides for a deduction in computing the income of a taxpayer resident in Canada. The deduction is available where the taxpayer has included an amount under subsection 91(1) in computing income in respect of a share of the capital stock of a controlled foreign affiliate of the taxpayer. The deduction is generally determined with reference to foreign taxes payable by the affiliate and a "relevant tax factor". The "relevant tax factor" for a resident taxpayer is designed to permit a deduction for the resident taxpayer that will result in tax relief that is a proxy for a foreign tax credit in respect of foreign taxes payable by a controlled foreign affiliate of the resident taxpayer.

Subsection 91(4) is amended to explicitly link the "relevant tax factor" to the resident taxpayer and the taxation year for which the deduction under subsection 91(4) is claimed. For more detail on the definition "relevant tax factor" in subsection 95(1), see the commentary on that provision.

This amendment applies to the 2002 and subsequent taxation years.

Clause 15

Non-resident Trusts

ITA
94

OVERVIEW

Existing Rules

Section 94 of the Act sets out rules that tax the passive income earned by certain non-resident trusts. Section 94 generally applies if a person resident in Canada has transferred or loaned property to a non-resident trust that has one or more beneficiaries that are resident in Canada.

Section 94 uses two different methods to impose tax, depending on whether the trust is a discretionary trust. A discretionary trust is a trust under which a person has a discretionary power to determine the amount of the income or capital of the trust that one or more beneficiaries will receive.

If the non-resident trust is a discretionary trust, paragraph 94(1)(c) deems the trust to be resident in Canada for the purposes of Part I of the Act and deems its income for tax purposes to be the total of its Canadian source income and its foreign accrual property income, if any. Each beneficiary is jointly and severally liable to pay the Canadian tax of the trust. However, the liability can be enforced against a particular beneficiary only to the extent that the beneficiary has received a distribution from the trust or proceeds from the sale of an interest in the trust.

If the non-resident trust is not a discretionary trust, paragraph 94(1)(d) provides that it is to be treated in much the same manner that a non-resident corporation is treated. If a Canadian resident beneficiary holds an interest in the trust with a fair market value equal to 10% or more of the total fair market value of all beneficial interests in the trust, the trust is deemed to be a controlled foreign affiliate of the beneficiary. Consequently, the foreign accrual property income rules apply to the trust and the beneficiary, requiring the beneficiary to include a portion of the foreign accrual property income of the trust in income. On the other hand, beneficiaries whose beneficial interests are less than 10% of the total fair market value of all interests in the trust may be subject to tax under the offshore investment fund rules in section 94.1. If section 94.1 does not apply, such beneficiaries are taxed only if trust income becomes payable to them in the year in which it arises.

New Rules

New section 94 of the Act takes a different approach to the taxation of non-resident trusts (NRTs). In general, if a Canadian resident contributes property to a NRT, the contributor, the NRT and certain Canadian resident beneficiaries of the trust may all become jointly and severally, or solidarily, liable to pay Canadian tax on the world-wide income of the trust. (The English-language expression "jointly and severally" no longer exists in the civil law of the province of Quebec and has been replaced in that civil law with the expression "solidarily". In the English-language version of section 94, the expression "solidarily" is added to the expression "jointly and severally", which latter expression is maintained for common-law purposes. The French-language version of new section 94 uses only the expression "solidaire" as this expression is appropriate for both the civil and common-law. These changes ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces.)

Except as indicated otherwise, the amendments to section 94 apply to trust taxation years that begin after 2002. In addition,

• a trust created in 2001 may elect in writing (by filing the election with the Minister on or before the trust's filing-due date for the trust's taxation year in which the amending legislation is assented to) to have new section 94 of the Act apply to its taxation years that begin in 2001 and 2002, and

• a trust created in 2002 may elect in writing (by filing the election with the Minister on or before the trust's filing-due date for the trust's taxation year in which the amending legislation is assented to) to have new section 94 of the Act apply to its taxation years that begin in 2002.

The table below briefly summarizes section 94 and related rules.

Issue	Summary	References
1. Which trusts are subject to the new NRT rules?	A. In general, a trust (other than an exempt foreign trust) will be subject to tax for a taxation year as a trust resident in Canada if a contribution was made to the trust by an entity (other than a recent immigrant to Canada) that is resident in Canada at a specified time (generally, the end of the year).	S. 94(3) "entity" - s. 94(1) "exempt foreign trust" - s. 94(1) "contribution" - s. 94(1) and (2) "resident contributor" - s. 94(1) "specified time" - s. 94(1)
	B. In addition, a trust (other than an exempt foreign trust) will generally be subject to Canadian tax for a taxation year if there is a resident beneficiary under the trust. More specifically if: the contribution was made by an entity when the entity was resident in Canada (or generally within a 60-month period before the entity became resident in Canada or within a 60-month period after the entity ceased to be resident in Canada),	S. 94(3) and (10) "beneficiary" - s. 94(1) "contribution" - s. 94(1) and (2) "connected contributor" - s. 94(1) "entity" - s. 94(1) "non-resident time" - 94(1) "resident beneficiary" - s. 94(1) "specified charity" - s. 94(1) "specified time" - s. 94(1) "testamentary beneficiary" - s. 94(1)
	where the contributing entity is an individual (other than a trust), at the specified time the individual had been resident in Canada for more than 60 months, and at the specified time there is an entity (other than a specified charity or testamentary beneficiary) that is resident in Canada and is a beneficiary under the trust.
2. Who is responsible for the tax payable by an NRT?	The trust is required to pay tax. If it fails to do so, each contributor referred to in 1(A) and/or each beneficiary referred to in 1(B) is jointly and severally or solidarily liable with the trust for the tax. However, the amount recoverable from an entity that is simply a beneficiary is limited to the beneficiary's recovery limit. Relief is also available in some cases for a contributor whose contribution to the trust is insignificant relative to other contributions made to the trust.	Jointly and severally, or solidarily, liable: paragraph 94(3)(d) Limit to amount recoverable - 94(7) Recovery limit - 94(8) Determination of fair market value - 94(9) Definitions - 94(1)
3. Where the NRT rules apply to a trust for a taxation year, how will the trust's tax liabilities be calculated?	A. Canadian rules generally apply to the trust as if the trust were resident in Canada throughout the year for the purpose of computing the trust's income.	s. 94(3)
	B. Explicit rule treats the trust as becoming resident in Canada, with resulting adjustment to cost amount of property.	s. 94(3)(c); 94(4)(d), 128.1(1)
	C. Parts XII.2 and XIII do not apply to the trust. Explicit exemption from Part XIII tax on amounts distributed to the trust, although payer must still withhold.	s. 94(3)(a)(vii) and (viii) and (4)(c) and 215 and 216(4.1)
	D. Flow-through of income to resident and non-resident beneficiaries permitted, subject to special rules in the event that Canadian-source income is distributed to non-residents.	s. 94(3)(a)(viii) and 104(7.01) - special rules

Definitions

ITA
94(1)

New subsection 94(1) of the Act defines a number of expressions that apply for the purpose of section 94.

"arm's length transfer"

A loan or transfer of property by an "entity" in respect of a trust will generally not be considered a "contribution" to the trust where the loan or transfer is an "arm's length transfer". In these circumstances, the transferor entity will not, because of that loan or transfer, be considered to be a "contributor" to the trust. Accordingly, subsection 94(3) does not apply to a non-resident trust as a consequence only of an "arm's length transfer" in respect of the trust. (For more information on the definitions "contribution", "contributor" and "entity" in subsection 94(1), see the commentary on those definitions.)

The definition "arm's length transfer" also is relevant in applying the rules in new paragraphs 94(2)(a) and (c). Under those rules, a loan or transfer of property made to an entity other than a particular trust may, in specified circumstances, result in a transfer of property being considered to have been made to the particular trust. (For more information, see the commentary on new subsection 94(2).)

If property transferred or loaned is "restricted property", the transfer or loan will not be an arm's length transfer. (For more information on the definition "restricted property", see the commentary on that definition.)

Under paragraph (a) of the definition, a transfer or loan will be an arm's length transfer only if it is reasonable to conclude that none of the reasons (determined by reference to all the circumstances including the terms of a trust, an intention, the laws of a country or the existence of an agreement, a memorandum, a letter of wishes or any other arrangement) for the transfer is the acquisition at any time by any entity of an interest as a beneficiary under a non-resident trust.

Under subparagraphs (b)(i) and (ii) of the definition, an arm's length transfer includes, in general terms, an arm's length return on investment (conferred by the entity in which the investment is made) and certain payments made by a corporation on a reduction of the paid up capital in respect of shares of a class of the corporation's capital stock.

Under subparagraph (b)(iii) of the definition, an arm's length transfer includes a transfer to a trust by a "specified charity" (as defined in new subsection 94(1)) in respect of the trust that is made by the specified charity for the purpose of refunding in whole or in part a gift previously made to the specified charity entity by the trust. For more information on the definition "specified charity", see the commentary on that definition.

Under subparagraph (b)(iv) of the definition, an arm's length transfer includes a transfer in exchange for which, the recipient transfers or loans property (other than a restricted property) to the transferor, or becomes obligated to so transfer or loan such property, and for which it is reasonable to conclude

• having regard only to the transfer and the exchange that the transferor would have been willing to make the transfer if the transferor dealt at arm's length with the recipient, and

• that the terms and conditions, and circumstances, under which the transfer was made would have been acceptable to the transferor if the transferor dealt at arm's length with the recipient,

Under subparagraph (b)(v) of the definition, an arm's length transfer includes a transfer that is made in satisfaction of an obligation that arose because of a transfer to which subparagraph (b)(iv) applied, if

• the transfer is not a transfer described in paragraph 94(2)(g),

• the transferor would have been willing to make the transfer if the transferor dealt at arm's length with the recipient, and

• the terms and conditions, and circumstances, under which the transfer was made would have been acceptable to the transferor if the transferor dealt at arm's length with the recipient.

Under subparagraph (b)(vi) of the definition, an arm's length transfer includes a transfer that is a payment of an amount owing by the transferor under a written agreement the terms and conditions of which, when entered into, were terms and conditions that, having regard only to the amount owing and the agreement, persons dealing at arm's length would have entered into, if the transfer is not a transfer described in paragraph 94(2)(g).

Under subparagraph (b)(vii) of the definition, an arm's length transfer includes a transfer that is a payment made before 2002 to a trust (or to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, together referred to in this subparagraph as "the specified person or partnership") in repayment of or otherwise in respect of a particular loan made by the trust (or by the specified person or partnership, as the case may be) to the transferor.

Finally, under subparagraph (b)(viii) of the definition, an arm's length transfer includes a transfer that is a payment made after 2001 to a trust (or to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, together referred to in this subparagraph as "the specified person or partnership") in repayment of or otherwise in respect of a particular loan made by the trust (or by the specified person or partnership, as the case may be) to the transferor in circumstances where either

• they would have been willing to enter the particular loan if they dealt at arm's length with each other and the payment is not a transfer described in paragraph 94(2)(g), or

• the payment is made before 2005 in accordance with fixed repayment terms agreed to before June 23, 2000.

The definition "arm's length transfer" generally applies to trust taxation years that begin after 2002. However, where a trust elects, by notifying the Minister in writing on or before its filing-due date for its taxation year that includes the day on which this Act is assented to, the definition "arm's length transfer" will be read without reference to a loan or transfer of property that is made before 2003 and identified in the election. This electing provision recognizes that the definition "arm's length transfer" in the new rules does not have an equivalent under existing subsection 94(1) of the Act. In particular, a non-resident trust now considered resident by reason of existing subsection 94(1) might not be described in new subsection 94(3) and would no longer be considered resident, which would result in the change in residency rules in subsection 128.1(4) applying. The election, which is found in the coming-into-force provision of the amending legislation, effectively permits a trust to continue to be deemed resident.

"beneficiary"

Under paragraph (a) of the new definition "beneficiary" in subsection 94(1), a beneficiary under a trust includes an entity beneficially interested in the trust.

Under paragraph (b) of that definition, a beneficiary under a trust also includes an entity that would be beneficially interested in the trust if

• the entity were a person, and

• the reference in subparagraph 248(25)(b)(ii) to

For the purposes of the Act, the expression "beneficially interested" has the meaning assigned by subsection 248(25) of the Act.

"closely-held corporation"

The definition "closely-held corporation" is relevant in applying subparagraph (b)(i) of the definition "arm's length transfer" and the definition "restricted property". (For more information on the definitions " arm's length transfer " and " restricted property " in subsection 94(1), see the commentary on those definitions.)

A closely-held corporation at any time, means a corporation, other than a corporation in respect of which

• there is at least one class of shares of its capital stock that class is not a specified class (within the meaning assigned by subsection 256(1.1),

• it is reasonable conclude that at that time the shares of those classes (other than such a specified class) are held by at least 150 entities each of whom holds shares that have a total fair market value of at least $500, and

• it is reasonable conclude that the total number of issued and outstanding shares of a class (other than such a specified class) held by a particular entity or by any other entity with whom the particular entity does not deal at arm's length is not more than 10% of the total number of the issued and outstanding shares of that class.

Subsection 94(16) is an anti-avoidance provision that applies in determining whether a corporation is a closely-held corporation at any time. For more detail, see the commentary on that provision.

"connected contributor"

The definition "connected contributor" is relevant in determining whether a beneficiary is, at a particular time, a "resident beneficiary" (as defined in new subsection 94(1)) under a non-resident trust. Under new paragraph 94(3)(d) of the Act, such a resident beneficiary can, to an extent, be liable for the trust's income tax. For more information, see the commentary on subsections 94(3) and (7) to (10), subparagraph 152(4)(b)(vi) and subsections 160(2.1) and (3).

A connected contributor at a particular time is any entity, including an entity that has ceased to exist, that is a "contributor" (as defined in new subsection 94(1)) to the trust at that time, other than

• an individual who was resident in Canada for a period of, or periods the total of which is, not more than 60 months (but not including a trust or an individual who before that time was never non-resident), or

• an entity that is a contributor only because of one or more transactions that occurred at a "non-resident time" (as defined in new subsection 94(1)) of the entity.

For more information on the definitions "contributor", "resident beneficiary" and "non-resident time" in subsection 94(1), see the commentary on those definitions.

In the context of the definition "connected contributor", reference should also be made to new paragraphs 94(2)(a) to (m) (which extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94). Reference should also be made to new subsection 94(10), which applies where a contributor becomes resident in Canada within 60 months after making a contribution to a trust.

"contribution"

Where a "contribution" is made at or before a particular time to a non-resident trust by an entity, that entity will be considered to be a "contributor" at the particular time and, in certain cases, will be jointly and severally or solidarily liable under subsection 94(3) for the trust's income taxes. (For more detail on the expression "solidarily ", please refer to the introductory commentary above on new section 94.) For more information on subsection 94(3), see the commentary on that subsection.

Under paragraph (a) of the definition, a "contribution" to a trust by a particular entity means a loan or transfer of property (in this commentary referred to as a "transfer") by the entity to the trust (other than an "arm's length transfer", as defined in new subsection 94(1)).

Under paragraphs (b) and (c) of the definition "contribution", a contribution is also considered to have been made by a particular entity where

• the particular entity makes a particular transfer (other than an "arm's length transfer") as part of a series of transactions or events that includes another transfer (other than an arm's length transfer), to the trust, by another entity; or

• the particular entity becomes obligated to make a particular transfer (other than a transfer that would, if it were made, be an "arm's length transfer") as part of a series of transactions or events that includes another transfer (other than an arm's length transfer), to the trust, by another entity.

In these circumstances, the other transfer is considered to be a contribution to the trust by the particular entity only to the extent that the other transfer can reasonably be considered to have been made in respect of the particular transfer or the particular entity's obligation to make the particular transfer, as the case may be. In either case, a contribution is considered to be made at the time of the other transfer.

There are a number of rules that have the effect of applying the definition "contribution" more broadly than would otherwise be the case. See the commentary on new paragraphs 94(2)(a) to (m) (which extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

The definition "contribution" applies to all loans and transfers, irrespective of when made.

"contributor"

A "contributor" to a trust at any time means an "entity" (as defined in new subsection 94(1)), including an entity that has ceased to exist, that at or before that time has made a "contribution" (as defined in new subsection 94(1)) to the trust. The definition "contributor" is significant primarily for the purposes of the definitions "resident contributor" and "connected contributor" in new subsection 94(1). For more information, see the commentary on those definitions.

Reference should be made in this context to new paragraphs 94(2)(a) to (m) (which extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

"eligible non-resident trust"

An "eligible non-resident trust" can qualify as an exempt foreign trust under paragraph (h) of the definition "exempt foreign trust" where it meets the conditions imposed by that paragraph.

An eligible non-resident trust at any time means a trust other than a trust that

• is created or maintained for charitable purposes,

• is governed by an employee benefit plan,

• is described in paragraph (a.1) of the definition "trust" in subsection 108(1),

• is governed by a salary deferral arrangement,

• is operated for the purpose of administering or providing superannuation, pension, retirement or employee benefits,

• was ever a personal trust, or

• has elected in writing filed with the Minister in a timely fashion that the definition "exempt foreign trust" not apply to it.

"entity"

The expression "entity" is defined to include an association, a corporation, a fund, a natural person, a joint venture, an organization, a partnership, a syndicate and a trust.

"exempt foreign trust"

An "exempt foreign trust" includes a number of different types of non-resident trusts that are exempt from the application of new subsection 94(3). The expression refers to the following types of non-resident trusts:

Paragraph (h) is intended to apply to non-resident investment trusts that are legitimately commercial. Such a trust is intended to be treated as a foreign investment entity under sections 94.1 to 94.4 of the Act. A Canadian resident investor (other than an "exempt taxpayer" within the meaning assigned by subsection 94.1(1)) in the trust would be expected to be a taxpayer to whom subsection 94.1(3) or 94.2(9) applies for a taxation year of the investor in respect of their investment in the trust.

"exempt service"

The definition "exempt service" is relevant to new paragraph 94(2)(f), which deems the provision of certain services (other than exempt services) to be a transfer of property.

An exempt service means a service rendered at any time by an entity (the "service provider") to, for or on behalf of, another entity (a "recipient") if either

• the recipient is at that time a trust and the service relates to the administration of the trust, or

• the following conditions apply in respect of the service, namely

"exempt taxpayer"

The definition "exempt taxpayer" is relevant in determining whether a taxpayer is a "specified contributor" to a trust.

Except as indicated below, tax-exempt persons to which subsection 149(1) applies are generally exempt taxpayers. However, retirement compensation arrangements and qualifying environmental trusts for which alternative income tax rules are provided under Parts XI.3 and XII.4, and insurers to which paragraph 149(1)(t) applies, are not exempt taxpayers.

An exempt taxpayer also includes a Canadian resident pooled fund trust under which the only beneficiaries (determined without reference to subsection 248(25) of the Act) are the tax-exempt persons described above that would qualify as exempt taxpayers with respect to another entity if they held their interests directly in that other entity. However, such a pooled fund trust will qualify as an exempt taxpayer only if all of the interests in the trust are "specified fixed interests".

"non-resident time"

The definition "non-resident time" is relevant in determining whether a contributor to a trust is a "connected contributor" and whether the "look-through" rule in paragraph 94(2)(l) applies in determining whether an entity has made a contribution (i.e., is a contributor).

The "non-resident time" of an entity in respect of a particular time means a time (referred to in this commentary as the "contribution time") at which the entity made a contribution to a trust, that is before the particular time and at which the entity was non-resident, provided that the entity was non-resident (or not in existence) throughout a specified period.

As indicated into the coming-into-force provision for new section 94 of the Act, where the contribution time occurs before June 23, 2000, the specified period is the period that begins 18 months before the end of the trust's taxation year that includes the contribution time and ends at the earliest of

• 60 months after the contribution time;

• where the entity is an individual, the date of the individual's death; and

• the particular time.

Where the contribution time occurs after June 22, 2000 and the trust arose on and as a consequence of the death of an individual, the specified period is the period that begins 18 months before the contribution time and ends at the earliest of

• 60 months after the contribution time;

• where the entity is an individual, the date of the individual's death; and

• the particular time.

Where the contribution time occurs after June 22, 2000 and the trust did not arise on and as a consequence of the death of an individual, the specified period is the period that begins 60 months before the contribution time and ends at the earliest of

• 60 months after the contribution time;

• where the entity is an individual, the date of the individual's death; and

• the particular time.

The measurement of the specified period by reference to any particular time is to ensure that the contributing entity and the trust may treat the contribution time as a "non-resident time" for the purposes of applying subsection 94(3) at a "specified time" in respect of the trust for a taxation year of the trust (generally, the end of that taxation year) if at the end of that particular year the contributor still has not become resident in Canada within the 60-month period after the contribution time.

However, new subsection 94(10) ensures that such a contributor will, for the purposes of the definition "connected contributor", be considered to have made the contribution at a time other than a "non-resident time" if the contributor becomes resident in Canada within the 60-month period after the contribution time. As a result, at each "specified time" in respect of the trust for taxation year of the trust (generally, the end of that taxation year) following the contribution, there would be a connected contributor to the trust and, if there were a resident beneficiary under the trust, subsection 94(3) would also apply in respect of those years.

Amended subparagraph 152(4)(b)(vi) of the Act ensures that a reassessment of a taxpayer arising out of the application of subsection 94(10) may be undertaken by the Canada Customs and Revenue Agency within 3 years after the end of the taxpayer's normal reassessment period for the taxpayer's relevant taxation year.

For more information on new subsection 94(10) and amended subparagraph 152(4)(b)(vi), see the commentary on those provisions.

"promoter"

The definition "promoter" is relevant in applying new paragraph 94(2)(s), which provides that a transfer to a trust will not be considered a contribution where certain conditions, described in that paragraph, are met. For this purpose a promoter means an entity that establishes, organizes or substantially reorganizes the undertakings of the trust. For more information on paragraph 94(2)(s), see the commentary on that paragraph.

"resident beneficiary"

Under new subsection 94(3), a particular trust is generally treated as resident in Canada for a particular taxation year of the trust if there is a "resident beneficiary" under the particular trust at a "specified time" (generally, the end of the particular year). Under new paragraph 94(3)(d), each "resident beneficiary" can be jointly and severally or solidarily liable with the particular trust for the particular trust's income tax liabilities under the Act for the particular year. (For further information with respect to the expression "solidarily ", please refer to the introductory commentary on new section 94.) See also the commentary on subsection 94(3).

A "resident beneficiary" at a particular time under a trust is an entity (other than an entity that is at that time a "specified charity" or a "testamentary beneficiary" in respect of the trust) that, at that time, is a beneficiary under the trust, if, at that time,

• the entity is resident in Canada; and

• there is a "connected contributor" to the trust.

The expressions "connected contributor", "specified charity" and "testamentary beneficiary" are defined in new subsection 94(1). For further information, see the commentary on those definitions.

"resident contributor"

Under new subsection 94(3), a trust is generally treated as resident in Canada for a particular taxation year of the trust if there is a "resident contributor" to the trust at a "specified time" in respect of the trust for the particular taxation year (generally, the end of the particular year). Under new paragraph 94(3)(d), a "resident contributor" can be jointly and severally or solidarily liable with the trust for the trust's income tax liabilities under the Act for the particular year. (For further information with respect to the expression "solidarily ", please refer to the introductory commentary above on new section 94.)

A "resident contributor" at any time means an entity that is, at that time, resident in Canada and a "contributor" (as defined in new subsection 94(1)) to the trust. However, an exemption from treatment as a resident contributor is provided for a contributor who is:

• an individual who was resident in Canada for a period of, or periods the total of which is, not more than 60 months (but not including a trust or an individual who before that time was never non-resident); and

• an individual, if the trust is an inter vivos trust that was created before 1960 by a person who was non-resident when the trust was created and the individual made no contribution after 1959 to the trust.

In the context of this definition, reference should also be made to new paragraphs 94(2)(a) to (m) (which extend the circumstances in which a transfer is considered to occur for the purposes of section 94), new paragraphs 94(2)(n) to (q) and subsections 94(11) to (13) (which generally extend the circumstances in which a contribution is considered to be made for the purposes of section 94) and paragraphs 94(2)(r) to (u) (which generally narrow the circumstances in which a contribution is considered to be made for the purposes of section 94).

"restricted property"

The expression "restricted property" is relevant in applying a number of provisions in respect of non-resident trusts, including the definitions in subsection 94(1) of "arm's length transfer" and "exempt foreign trust". The definition "restricted property" is intended to serve as an anti-avoidance provision.

More specifically, restricted property means

• under paragraph (a) of the definition, a particular share (or a right to acquire a share) of the capital stock of a particular closely-held corporation if the particular share (or right), or a property for which the particular share (or right) was substituted, was at any time acquired as part of a transaction or series of transactions under which a specified share of the capital stock of a closely-held corporation was acquired by any entity in exchange for, as consideration for, or upon conversion of any property;

• under paragraph (b) of the definition, an indebtedness (or a right to acquire indebtedness) owing by another entity if

• under paragraph (c) of the definition, any property the fair market value of which is derived in whole or in part, directly or indirectly, from a particular share, indebtedness or right described in paragraph (a) or (b)of the definition.

New subsection 94(14) may apply in some circumstances to suspend a property's characterization as restricted property. For more details, see the commentary on that provision.

"specified charity"

The expression "specified charity" is used in the definitions "arm's length transfer" and "resident beneficiary" in new subsection 94(1). An arm's length transfer includes a refund, from a specified charity in respect of a trust to the trust, of a gift previously made by the trust to the charity. A resident beneficiary under a trust does not include a specified charity. For more information, see the commentary on those definitions.

A specified charity in respect of a trust at any particular time means a person (in this commentary referred to as a "charity") that at that time is described in any of paragraphs (a) to (e) and (g.1) of the definition "total charitable gifts" in subsection 118.1(1). However, a specified charity does not include:

• a charity that does not, at a particular time, deal at arm's length with a "specified entity" in respect of the trust; or

• a charity that did not, at any "specified prior time" in respect of the charity, deal at arm's length with a specified entity in respect of the trust.

For this purpose, a "specified prior time" in respect of a charity is defined in paragraph (c) of the definition "specified charity" as meaning any time, before the particular time, at which

• an amount was payable to the charity as a beneficiary under the trust,

• an amount was received by the charity on the disposition of the charity's interest in the trust, or

• a benefit was received or enjoyed by the charity from or under the trust.

Paragraph (d) of the definition "specified charity" defines a "specified entity" in respect of a trust at any time to mean

• an entity that is at that time beneficially interested in the trust, a contributor to the trust, a person related to a contributor to the trust, a trustee of the trust, an entity that could reasonably be considered to have influence over the operation of the trust or the enforcement of its terms, or an entity that could reasonably be considered to have influence over the selection or appointment of an entity referred to above, or

• any group at least one of the members of which is described immediately above.

"specified contributor"

The expression "specified contributor" is used in paragraph 94(2)(r) and paragraph (h) of the definition "exempt foreign trust" in new subsection 94(1).

Paragraph (h) of the definition "exempt foreign trust" is intended to ensure that investors in commercial investment trusts are subject to the regime for foreign investment entities in new sections 94.1 to 94.4 of the Act. Where an investor in such a commercial investment trust sells or has redeemed a beneficial interest in the trust, paragraph 94(2)(r) may apply to ensure that the acquisition of that interest will, after the sale or redemption, not be treated as a contribution to the trust.

For taxation years in respect of which new section 94 applies to a trust, the definition is relevant in applying both paragraph 94(2)(r) and the definition "exempt foreign trust". For earlier taxation years, the definition "specified contributor" will generally only be relevant in determining whether an investor in the trust has ceased to be a contributor to the trust because of paragraph 94(2)(r).

An entity can only qualify as a specified contributor to a trust at any time if, at that time, it is both a beneficiary under, and a contributor to, the trust.

If this condition is met and that time is both before February 17, 1999 and immediately before a sale or redemption of the entity's interest as a beneficiary under the trust, then the entity will be a specified contributor in respect of that interest for the purpose of applying paragraph 94(2)(r) to that sale or redemption. If paragraph 94(2)(r) applies, then in applying section 94 to the entity after the sale or redemption, the entity is treated as not having made any contribution to the trust in respect of its acquisition of that interest.

For a particular entity that is a beneficiary under a trust at a particular time that is after February 16, 1999, the particular entity will be a specified contributor to the trust at the particular time only if

• it is, at the particular time, a contributor to the trust;

• at all times that it is a beneficiary under the trust, its interest as a beneficiary is a "specified fixed interest" (as defined in subsection 94(1)) in the trust;

• it identifies, in a timely fashion, the trust in prescribed form or a copy of the terms of the trust that apply at the particular time have been filed, in a timely fashion, with the Minister by or on behalf of the trust; and

• where the particular entity is not an "exempt taxpayer" (as defined in subsection 94(1)), it is reasonable to conclude, in respect of any contribution made by it to the trust after February 16, 1999 and on before the particular time, that

Where the particular entity qualifies at any time as a specified contributor, the sale or redemption, immediately after that time, of its interest as a beneficiary under the trust may result, as described above, in the application of paragraph 94(2)(r). In addition, if the particular entity is a resident contributor to a non-resident commercial investment trust, that was seeking to meet, at that time, the requirements of paragraph (h) of the definition "exempt foreign trust", the particular entity's contributions to the trust would not alone cause the trust to fail to meet those requirements (ignoring subsection 94(16) of the Act).

Note, however, that an entity will not qualify as a specified contributor to a trust if at any time after February 16, 1999, the entity (or another entity with which it does not deal at arm's length) contributes restricted property to the trust. As a result, even if the contribution of restricted property were in consideration for the acquisition of an interest as a beneficiary under the trust, paragraph 94(2)(r) would not apply, to expunge the contribution, upon the sale or redemption of the interest in the trust. Moreover, the entity's status as a resident contributor to the trust may jeopardize the trust's ability to qualify as an exempt foreign trust.

"specified controlled foreign affiliate"

A "specified controlled foreign affiliate" of a particular entity at any time means an entity that would, at that time, be a controlled foreign affiliate of the particular entity if the particular entity were resident in Canada at that time. The definition is used for the purpose of the definition "specified party".

"specified fixed interest"

The expression "specified fixed interest" is relevant in applying paragraph (b) of the definitions "exempt taxpayer" in subsections 94(1) and 94.1(1), paragraph (h) of the definition "exempt foreign trust" in subsection 94(1), and paragraphs 94(2)(q) and (r). These provisions are intended to apply only to commercial investment trusts.

A specified fixed interest at any time of an entity in a trust means a capital interest (as defined in subsection 108(1) of the Act) of the entity in the trust, if

• the interest includes, at that time, a right of the entity as a beneficiary under the trust to receive, at or after that time and directly from the trust, income or capital of the trust;

• the interest was issued by the trust;

• no right of the entity as a beneficiary under the trust to income or capital of the trust may cease, other than because of a specified transaction or event, to be a right of the entity; and

• the trust has never been a personal trust.

The specified transaction or event as a result of which a right of the entity to income or capital of the trust may cease to be the entity's without jeopardizing the interest's status as a specified fixed interest is one under which the entity (or the entity's legal representatives) is entitled to receive an amount equal to the fair market value of the right immediately before the right ceased to be a right of the entity (or the entity's legal representatives). These are intended to include a redemption or sale of the interest at any time, and a payment, in respect of the interest, described in paragraph (h) or (i) of the definition "disposition" in subsection 248(1). Further, the ability of the entity to make a gift of that interest will not cause the interest to lose its status as a specified fixed interest.

"specified party"

New subsection 94(8) of the Act provides a rule for calculating an entity's recovery limit for the purpose of determining under subsection 94(7) of the Act the extent of an entity's limitation on liability arising under a provision referred to in new paragraph 94(3)(d). A "specified party" in respect of a particular entity at any time means an entity that is at that time:

• under paragraph (a) of the definition, an individual who is a spouse or common-law partner of the particular entity;

• under paragraph (b) of the definition, a "specified controlled foreign affiliate" (as described in the commentary immediately above) of the particular entity, or of a spouse or common-law partner of the particular entity;

• under paragraph (c) of the definition, an entity for which it is reasonable to conclude that the benefit referred to in subparagraph 94(8)(a)(iii) of the Act (i.e., a benefit received or enjoyed under a trust) was conferred either

• under paragraph (d) of the definition, a corporation in which the particular entity is a shareholder, if the corporation is or was beneficially interested in a trust, and the particular entity is a beneficiary under the trust solely because of the application of paragraph (b) of the definition "beneficiary" in subsection 94(1) to the particular entity in respect of the corporation.

"specified property"

New subsection 94(9) of the Act can affect the calculation of the amount of a "contribution" (as defined in new subsection 94(1)) to a trust of "specified property". For this purpose, "specified property" means:

• a share of the capital stock of a corporation, an interest as a beneficiary under a trust, an interest in a partnership, or an interest in any other entity;

• a right to acquire any of the above; or

• any other property deriving its value primarily from property described above.

"specified share"

A specified share means a share of the capital stock of a corporation other than a share that is prescribed for the purpose of paragraph 110(1)(d). This expression is relevant to the definition "restricted property" in subsection 94(1). For more information, see the commentary on the definition "restricted property".

"specified time"

A specified time, in respect of a trust for a taxation year of the trust, means

• if the trust exists at the end of the taxation year, the time that is the end of that taxation year; and

• if the trust ceases to exist after Announcement Date, the time, in that taxation year that is immediately before the time at which the trust ceases to exist.

This expression is relevant in determining whether paragraph 94(3)(a) applies to deem the trust to be resident in Canada, for the taxation year, for a number of purposes. It also applies in respect of subsections 94(7) and (10). For more detail, see the commentary on those provisions.

"testamentary beneficiary"

The expression "testamentary beneficiary" is used in the definition "resident beneficiary" in new subsection 94(1). A resident beneficiary under a trust does not include a testamentary beneficiary.

A testamentary beneficiary in respect of a trust at a particular time means an entity that is a beneficiary under the trust solely because of a right of the beneficiary to receive or otherwise obtain the use of any of the trust's income or capital, only on or after the death after that time of a specified individual. For this purpose a specified individual is an individual who is, at that time, alive and a contributor to the trust, an individual related to a contributor to the trust or an individual who would have been related to a contributor to the trust if every individual who was alive before that time were alive at that time.

"trust"

A definition "trust" is provided for the purpose of applying section 94. The definition clarifies that a reference to a trust in that section includes an estate.

Rules of Application

ITA
94(2)

New subsection 94(2) of the Act sets out a number of rules for use in applying section 94. These rules are primarily relevant for the purposes of determining whether a transaction constitutes a "contribution" (as defined in subsection 94(1)) of property to a trust. These rules are also relevant for the purposes of subsections 94(7) to (9) and the amended reporting rules in subsections 162(10.1) and 163(2.4) and section 233.2.

Paragraphs 94(2)(a) to (m) include rules that deem certain loans or transfers, the granting of options and the provision of services to be transfers of property to an entity. A deemed transfer will be considered to be a contribution to a trust if the transfer falls within the criteria of the definition "contribution" in subsection 94(1). In this regard, it should be noted that a transfer or loan, unless it is deemed to be a contribution under any of paragraphs 94(2)(n) to (q), will not be considered a contribution if it is an "arm's length transfer" (as defined in new subsection 94(1)). In addition, paragraphs 94(2)(r) to (u), may apply to deem certain transfers not to be contributions.

The rules in subsection 94(2) generally apply to taxation years of trusts that begin after 2002, but in some cases relief is provided with regard to transactions or events that occur before June 23, 2000 or October 11, 2002. In addition, trusts created in 2001 and trusts created in 2002 may elect in writing (by filing the election with the Minister of National Revenue on or before the trust's filing-due date for the trust's taxation year in which the amending legislation is assented to) to have new section 94 of the Act apply to its taxation years that begin in 2001 and 2002, as the case may be.

Deemed transfers

Paragraph 94(2)(a) of the Act generally applies to indirect loans or transfers of property to a trust through transfers to other entities. Paragraph (a) deems a transfer of property (other than an "arm's length transfer", as defined in new subsection 94(1) or a transfer to which paragraph 94(2)(c) applies) to be a direct transfer to a trust if the property is transferred from one entity to another and, as a result of the transfer, the fair market value of the property of the trust increases or the liabilities of the trust decrease. Where paragraph (a) applies, paragraph 94(2)(b) deems the fair market value of property deemed transferred under paragraph 94(2)(a) to be the total of all amounts each of which is the absolute value of an increase in the fair market value of the trust property or a decrease in the liabilities of the trust because of the transfer.

Paragraph 94(2)(c) also applies to indirect loans or transfers of property to a trust. Paragraph (c) deems a transfer or loan of property (other than an "arm's length transfer") from an entity to another entity to be a direct transfer to a trust where the trust holds property the fair market value of which is derived from property held by the other entity. Paragraph 94(2)(d) deems the fair market value of property deemed transferred under paragraph 94(2)(c) to be the fair market value of the property actually transferred.

Paragraph 94(2)(e) deems a particular entity that provides a guarantee or other financial assistance to another entity to have transferred property to that other entity. Any property given to the particular entity by the other entity in exchange for the guarantee or other financial assistance is deemed to have been transferred to the particular entity in exchange for the property deemed by subparagraph (e)(i) to have been transferred. Under subparagraph 94(2)(h), the fair market value of the property deemed by subparagraph (e)(i) to have been transferred is deemed to be the fair market value of the assistance.

Paragraph 94(2)(f) applies where any service (other than an exempt service, as defined in subsection 94(1)) is rendered after June 22, 2000 by an entity to, for or on behalf of another entity. In these circumstances, the entity rendering the service is deemed to have transferred property to the other entity. Any property given to the particular entity by the other entity in exchange for the service is deemed to have been transferred to the particular entity in exchange for the property deemed by subparagraph (f)(i) to have been transferred. For more information on the definition "exempt service", see the commentary on that definition.

Under paragraph 94(2)(h), the fair market value of the property deemed under subparagraph 94(2)(f)(i) to have been transferred is deemed to be equal to the fair market value of the services rendered.

For greater certainty, paragraph 94(2)(g) provides that a corporation is considered to transfer shares that it issues. Similar rules, also contained in paragraph 94(2)(g), apply to interests in a trust issued by the trust, interests in a partnership issued by the partnership or interest in an other entity issued by the entity, as well as to debt issued to an entity by another entity and a right (granted after June 22, 2000 by the entity from which the right was acquired) to acquire or to be loaned property.

As noted above, paragraph 94(2)(h) is relevant to determining the fair market value of property deemed under subparagraphs 94(2)(e)(i) and (f)(i) to have been transferred.

Paragraph 94(2)(i) deems an entity to have become obligated at a particular time to transfer property to another entity where the entity becomes obligated to do an act (e.g., the rendering of a service) that would constitute the transfer of a property to another entity if the act were to occur. This rule is generally relevant for the purposes of paragraph (c) of the definition "contribution" in subsection 94(1).

Paragraph 94(2)(j) applies, for the purpose of applying at any time the definition "non-resident time" in subsection (1), if a trust acquires property of an individual as a consequence of the death of the individual. In these circumstances, paragraph 94(2)(j) deems the individual to have transferred the property to the trust immediately before the individual's death.

Paragraph 94(2)(k) applies where a particular entity loans or transfers property to another entity at the direction of or with the acquiescence of a second entity (the "specified entity"). In these circumstances, if it reasonable to conclude that one of the reasons for the transfer is to avoid or minimize a liability of any entity under Part I of the Act that arose, or that would otherwise have arisen, because of the application of subsection (3), the transfer is deemed to be a transfer made jointly by the particular entity and the specified entity.

Paragraph 94(2)(l) also applies where a particular entity loans or transfers property to another entity at the direction of or with the acquiescence of a specified entity. In these circumstances, the transfer is deemed to be a transfer made jointly by the particular entity and the specified entity if

• the transfer is made at a time that is not, or would not be, if the transfer or loan were a contribution of the specified entity, a "non-resident time" (as defined in new subsection 94(1)) of the specified entity, and

• either

The expression "controlled foreign affiliate" is defined in subsection 248(1) of the Act as having the meaning given in subsection 95(1).

Paragraph 94(2)(m) deems a particular entity to have transferred, at a particular time, a particular property or particular part of it, as the case may be, to a second entity if

• the particular property is a share of the capital stock of a corporation held at the particular time by the particular entity, and as consideration for the disposition at or before the particular time of the share, the particular entity received at the particular time (or became entitled at the particular time to receive) from the corporation a share of the capital stock of the corporation, or

• the particular property (or property for which the particular property is substituted property) was acquired, before the particular time, from the second entity by any entity, in circumstances that are described by any of subparagraphs 94(g)(i) to (vi) (generally, the issuance by the second entity of a financial instrument) and at the particular time,

Deemed contributions

Paragraph 94(2)(n) applies where a particular trust makes a contribution to another trust. If this is the case, the contribution is deemed to have been made jointly by the particular trust and each other entity that is a contributor to the particular trust.

Paragraph 94(2)(o) applies where a partnership makes a contribution to a trust. Where this is the case, the contribution is deemed to have been made jointly by the partnership and by each entity that is a partnership member (other than a limited partner) at the time of the contribution. However, if a partnership has contributed to a trust, a limited partner of the partnership may also be considered to have made a contribution to the trust in respect of a transfer or loan made by the limited partner or another entity if any of the rules in subsection 94(2) so provide.

Paragraph 94(2)(p) provides, subject to paragraph 94(2)(o) and subsection 94(9), that the amount of a contribution to a trust at the time it was made is deemed to be the fair market value at that time of the property that was the subject of the contribution. The rule is useful for the purposes of new paragraph 94(2)(u), subsections 94(7) and (8), as well as the reporting penalty provisions in amended subsections 162(10.1) and 163(2.4). The rule is relevant because a contribution is defined by reference to a loan or transfer, rather than by reference to the property that was the subject of the transfer or loan.

Paragraphs 94(2)(q) and (r) apply to dealings in a "specified fixed interest" (as defined in new subsection 94(1)) in a trust and in a right, issued by the trust, to acquire such an interest. The rules for specified fixed interests apply in respect of commercial investment trusts. For more detail, see the commentary on the definitions "specified fixed interest" and "specified contributor" in subsection 94(1) and on paragraph (h) of the definition "exempt foreign trust" in subsection 94(1).

Paragraph 94(2)(q) deems an entity, that at any time acquires a specified fixed interest in a trust (or a right, issued by the trust, to acquire such an interest) from another entity (other than the trust), to have made a contribution to the trust at that time. The amount of the contribution is deemed to be the fair market value at that time of the specified fixed interest.

Transfers deemed not to be contributions

Paragraph 94(2)(r) generally applies where a particular entity has made a contribution (e.g., because of paragraph 94(2)(q)) to a trust because of acquiring a specified fixed interest in the trust or a right to acquire such an interest, or has acquired a specified fixed interest in a trust as a consequence of making a contribution to the trust, and at a later time the interest or right, as the case may be, is transferred, for arm's length consideration, to another entity (i.e., upon a sale of the interest or right, of if the other entity is the trust that issued the interest or right, upon a redemption of the interest or right). In these circumstances, the particular entity is deemed, for the purpose of applying section 94 at any time after the later time, not to have made the contribution in respect of the specified fixed interest, or right, that is the subject of the sale if immediately before the later time (i.e., the time of the sale or redemption) the particular entity is specified contributor to the trust.

Paragraph 94(2)(s), in very general terms, provides that a transfer of property to a trust by a particular entity that is a manager or promoter of the trust, in exchange for an interest as a beneficiary under the trust, will not be considered a contribution of the particular entity to the trust while the beneficial interest is acquired and held by the particular entity because of a requirement imposed under securities laws. Paragraph 94(2)(s) will be relevant in the relatively rare circumstance that a commercial investment trust cannot rely on the exemption for exempt foreign trusts in order to avoid the application of subsection 94(3). Paragraph 94(2)(s) will apply in determining under that subsection whether the trust has a resident contributor or connected contributor (i.e., and hence, a resident beneficiary).

More specifically, under paragraph 94(2)(s), a transfer to a trust by a particular entity is deemed not to be, at a particular time, a contribution to the trust if

• the particular entity has transferred, at or before the particular time and in the ordinary course of business of the particular entity, property to the trust,

• the transfer is not an arm's length transfer, but would be an arm's length transfer if the definition "arm's length transfer" in subsection 94(1) were read without reference to paragraph (a), and subparagraphs (b)(i) to (iii) and (v) to (viii), of that definition,

• it is reasonable to conclude that the particular entity was the only entity that acquired, in respect of the transfer, an interest as a beneficiary under the trust,

• the particular entity was required, under the securities law of a country or of a political subdivision of the country in respect of the issuance of beneficial interests by the trust, to acquire the interest because of the particular entity's status at the time of the transfer as a manager or promoter (as defined in subsection 94(1)) of the trust,

• at the particular time the trust is not an exempt foreign trust, but would be at that time an exempt foreign trust if it had not made an election under paragraph (h) of the definition "exempt foreign trust", and

• the particular time is before the earliest of

Paragraph 94(2)(t) generally expunges a contribution of shares or indebtedness of a Canadian corporation from the corporation to a trust if the corporation issued (in circumstances described in subparagraph 94(2)(g)(i) or (v)) the shares or the debt to the trust (or to another entity in circumstances that resulted in the Canadian corporation being deemed by paragraph 94(2)(c) to have transferred particular property to the trust) and the trust or an other entity later sells the shares or indebtedness in circumstances in which the parties to the sale deal with each other on an arm's length basis.

However, the application of 94(2)(t) will not effect the application of 94(2)(c) or (g) in respect of the original transfer by the corporation to the trust or the other entity: such transfers will continue to be treated as transfers under section 94. In addition, the application of 94(2)(t) will not expunge the status as a contribution to the trust of a transfer made by an entity and involving the corporation (e.g., an entity that transferred property to the corporation, and hence the trust, because of the application of paragraph 94(2)(c) and (m)).

More specifically, a transfer, by a Canadian corporation of particular property (i.e., a share or debt), that is at a particular time a contribution by the Canadian corporation to a trust, is deemed not to be, after the particular time, a contribution by the Canadian corporation to the trust if

• either the trust acquired the particular property before the particular time from the Canadian corporation in circumstances described in subparagraph 94(2)(g)(i) or (v), or another entity acquired property before the particular time from the Canadian corporation in circumstances described in subparagraph 94(2)(g)(i) or (v) and because of that acquisition the Canadian corporation was deemed by paragraph 94(2)(c) to have transferred the particular property to the trust;

• as a result of a transfer (i.e., a sale of, or a redemption by the Canadian corporation of, the issued shares or debt) at the particular time by any entity (referred to in this paragraph as the "seller") to another entity (referred to in this paragraph as the "purchaser") the trust ceases to hold property that is shares of the capital stock of, or debt issued by, the Canadian corporation or the trust ceases to hold property that is property the fair market value of which is derived in whole or in part, directly or indirectly, from shares of the capital stock of, or debt issued by, the Canadian corporation;

• the purchaser deals at arm's length immediately before the particular time with the Canadian corporation, the trust and the seller;

• in exchange for the sale, the purchaser transfers or becomes obligated to transfer property (which property is referred to in this paragraph as the "consideration"), to the seller; and

• it is reasonable to conclude

Paragraph 94(2)(u) applies to a transfer, before October 11, 2002, to a personal trust by an individual (other than a trust) of particular property. Where the conditions in subparagraphs 94(2)(u)(i) and (ii) are met, the transfer of the particular property is deemed not to be a contribution of the particular property by the individual to the trust. Paragraph 94(2)(u) is intended to provide relief to individuals that have transferred a relatively small amount of property to a trust (e.g., the initial settlement of a coin on the trust) where the individual can reasonably be considered not to have been involved with the use of the trust as part of what is commonly referred to as an estate freeze (i.e., see the condition in clause 94(2)(u)(ii)(A) that the trust never have acquired from the individual restricted property).

The conditions in subparagraphs 94(2)(u)(i) and (ii) are that

• the individual identifies the trust in prescribed form filed with the Minister on or before the individual's filing-due date for the individual's 2003 taxation year (or a later date that is acceptable to the Minister), and

• the Minister is satisfied that

The examples below illustrate the operation of subsection 94(2) and the definition "contribution" in subsection 94(1).

Example 1

Donald is a long-term resident of Canada. In 2003, Donald pays higher than fair market value consideration for a property acquired from a corporation. A non-resident trust holds shares in the corporation. The fair market value of those shares increases because of the transaction.

Results

1. Under paragraph 94(2)(a), Donald is considered to have transferred property to the trust in these circumstances. The exception for arm's length transfers does not apply.

2. As a consequence, Donald is considered to have made a contribution to the trust, which results in Donald being a contributor and a resident contributor to the trust.

Example 2

1. Lucie, a long-term resident of Canada, transfers property to Canco on condition that Canco direct Canco's wholly-owned foreign subsidiary (Foreignco-1) to transfer properties to another corporation (Foreignco-2) for consideration that is less than fair market value.

2. Shares of the capital stock of Foreignco-2 are held by a non-resident trust.

3. The fair market value of the Foreignco-2 shares increases as a result of the increase in the fair market value of the property owned by Foreignco-2.

Results

1. The transfers to Canco and to Foreignco-2 are part of the same series of transactions.

2. Because of paragraph 94(2)(a), the transfer to Foreignco-2 is considered to be a transfer by Foreignco-1 to the trust. Because of paragraph 94(2)(l), the transfer by Foreignco-1 to the trust is considered to be jointly made by Foreignco-1 and Canco. (This would also be the result under paragraph 94(2)(k), if it was intended to avoid or minimize a liability under Part I.) The exception for arm's length transfers does not apply.

3. Canco is considered to have made a contribution to the non-resident trust because of paragraph (a) of the definition "contribution" in new subsection 94(1). Lucie is considered to have made a contribution to the trust under paragraph (b) of that definition. Both Lucie and Canco are therefore contributors and resident contributors to the trust.

4. Foreignco-1 is also a "contributor" to the trust, but this does not have any practical consequences because Foreignco-1 is non-resident.

Liabilities of Non-resident Trusts and Others

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94(3)

New subsection 94(3) of the Act applies to a non-resident trust (other than an "exempt foreign trust", as defined in subsection 94(1)) for a taxation year where, at a "specified time" in respect of the trust for the taxation year (generally, the end of the taxation year), there is a "resident contributor" to the trust or a "resident beneficiary" under the trust. All of these expressions are explained in detail in the commentary on new subsection 94(1).

Where subsection 94(3) applies to a non-resident trust for a taxation year, the trust is deemed to be resident in Canada throughout the year for the purposes specified in paragraph 94(3)(a). Except to the extent otherwise provided by subsection 94(4), a trust is deemed to be resident in Canada for a taxation year under subsection 94(3):

• for the purposes of applying sections 2, computing the trust's income for the year and computing the trust's liability for tax under Part I - with the result that the trust is subject to tax under that Part on its world-wide income for the year (including, for example, its income determined as a result of deemed dispositions under subsections 104(4) to (5.2) or 128.1(4));

• for the purpose of applying clause 53(2)(h)(i.1)(B) - with the result that the adjusted cost base to a beneficiary of the beneficiary's interest in a trust to which this clause applies is computed in the same way as for interests in trusts resident in Canada;

• for the purpose of applying the definition "non-resident entity" in subsection 94.1(1) - with the result that a beneficiary's interest in the trust is not treated as an interest of a beneficiary in a foreign investment entity for the purposes of new sections 94.1 and 94.2;

• for the purposes of applying subsections 104(13.1) to (29), 107(2.1), (2.002) and (5) and section 115 - with the result that the tax treatment of beneficiaries under the trust generally accords with the tax treatment available to beneficiaries under trusts that are resident in Canada;

• for the purposes of determining the obligation of the trust to file a return under sections 233.3 and 233.4 - with the result that the trust is required to file information returns under sections 233.3 (information return on foreign property holdings the total cost of which exceeds $100,000) and 233.4 (information return on foreign affiliates);

• for the purpose of determining the liability of the trust for tax under Part XIII - with the result that the trust is exempt from Part XIII tax on amounts paid or credited to it;

• for the purpose of determining the liability of a non-resident person for tax under Part XIII on amounts paid or credited by the trust to the non-resident person (other than amounts referred to in paragraph 104(7.01)(b) in respect of the trust for the taxation year that are paid or credited to the non-resident person); and

• for the purpose of determining the rights and obligations of the trust under sections 150 to 180 - with the result that various administrative provisions in the Act apply in the same way as to other trusts resident in Canada. (These provisions include those with regard to the filing of returns, assessments, tax payments, arrears interest, refund interest, instalment interest, penalties, refunds and appeals.)

A trust to which subsection 94(3) applies is deemed to be resident in Canada throughout the year for the above purposes, including the computation of its income and its taxable income and section 2 of the Act. Section 2 of the Act imposes on every person resident in Canada at any time in a taxation year an obligation to pay an income tax on that person's taxable income for the year.

Under paragraph 1 of the resident article in Canada's income tax treaties, a reference in such a treaty to a "resident of a Contracting State" means any person who, under the law of that State, is liable to taxation in that State by reason of the person's domicile, residence, place of management or any other criterion of a similar nature. A person, in this context, would generally include a trust because of the definition "person" in Canada's income tax treaties. Because a trust to which subsection 94(3) applies is deemed to be resident of Canada and is liable to tax in Canada on its worldwide income, it will be considered a resident of Canada under paragraph 1 of the resident article in Canada's income tax treaties, whether it is also considered to be resident, under the applicable treaty, in another country or not.

A trust that is also resident of the other contracting state under a particular treaty would be a dual resident under the treaty. In the event of dual residency under an income tax treaty, the tie-breaker rules in the resident article applicable to individuals would not apply. The Canada Customs and Revenue Agency has expressed the view that in this context, the term "individual" is to be interpreted to mean natural person and not a trust. The Agency has indicated that this interpretation would generally prevail across most if not all of Canada's income tax treaties if the definition "person" in the particular treaty under consideration makes reference to both an "individual" and a "trust". Even if a trust were considered an individual for the purpose of an income tax treaty, it is clear from the context of the tie-breaker rule applicable to individuals that it is intended to apply only to natural persons. This is because expressions such as "personal home", "centre of vital interest" and "habitual abode" used in the tie-breaker rules have meaning only in reference to natural persons and would not be of use in clarifying the residence of a trust for the purpose of a treaty.

In general, therefore, under the income tax treaty the competent authorities of each contracting state would have to enter into an agreement to determine in which state the trust would be resident for the purpose of the particular treaty. In the absence of such an agreement Canada would exercise its first right to tax. Canada would grant foreign tax credits for the other State's income taxes paid by the trust.

In this regard, paragraph 94(3)(b) applies for the purposes of applying subsections 20(11) and (12) and section 126 in respect of the trust. Paragraph 94(3)(b) allows a trust to elect for the special rules in that paragraph to apply in determining the trust's eligibility for a foreign tax credit. If the trust elects for a taxation year,

• the trust's income for the taxation year (other than the portion of the income that is from sources inside Canada or that is from a source, outside Canada, that is a business carried on by the trust outside Canada) is deemed, for the purposes of subsections 20(11) and (12) and section 126,

• in determining the income or profits tax paid by the trust for the taxation year to the government of the particular country the trust can pool the total of all amounts each of which is the amount of an income or profits tax that was paid by the trust for the particular taxation year to the government of a country (other than Canada) and that can reasonably be regarded as a tax paid on the trust's income for the taxation year (other than the portion of the income that is from sources inside Canada or that is from a source, outside Canada, that is a business carried on by the trust outside Canada).

Paragraph 94(3)(b) also provides that in determining the non-business income tax (as defined by subsection 126(7)) paid by the trust for a taxation year to the government of a country other than Canada no amount shall be included to the extent that it can reasonably be regarded as attributable to income from a source in Canada.

Paragraph 94(3)(c) provides that a non-resident trust that becomes subject to subsection 94(3) for a particular taxation year, after not being subject to either new subsection 94(3) or existing paragraph 94(1)(c) for the preceding year is deemed, immediately before the end of the preceding taxation year, to have disposed of each property (other than property described in any of subparagraphs 128.1(1)(b)(i) to (iv)) held by the trust at that time for proceeds of disposition equal to its fair market value at that time. The trust is also deemed to have, at the beginning of the particular taxation year, acquired each of those properties so disposed of at a cost equal to its proceeds of disposition

Note, in this regard, that where paragraph 94(3)(c) applies to the trust in the particular taxation year to cause a disposition of trust property in the preceding taxation year, new paragraph 128.1(1.1)(b) provides that paragraph 128.1(1)(b) will not apply in the preceding taxation year.

Paragraphs 94(3)(c) and 128.1(1.1)(b) together are intended to ensure - in a manner similar to that for taxpayers that migrate to Canada - that certain gains or losses that accrued on certain property of the trust while the trust was non-resident are not subject to taxation in Canada.

Paragraph 94(3)(c) also complements the rule in subsection 94(6), which applies where a non-resident trust ceases to be an "exempt foreign trust" (as defined in subsection 94(1)). In this case, subsection 94(6) establishes the beginning of a new "stub" taxation year. If subsection 94(3) applies for that "stub" year, paragraph 94(3)(c) would be applicable with regard to the properties held by the trust at the beginning of that "stub" year.

Example 1

A trust is created in 2003. The trust is not at any time an exempt foreign trust. At the end of its 2003 taxation year, the trust is non-resident and there are no resident contributors to the trust and no resident beneficiaries under the trust.

On February 1, 2004, John makes a contribution to the trust. At the end of the trust's 2004 taxation year, John is a resident contributor to the trust, and the trust is non-resident.

On July 1, 2005 the sole trustee of the trust moves to Canada, becomes resident in Canada at that time and remains resident in Canada throughout the remainder of the year. Immediately before the trustee became resident in Canada, the trustee was non-resident and John remained a resident contributor to the trust.

Results

Trust's 2003 Taxation Year

1. Subsection 94(3) does not apply to deem the trust to be resident in Canada in computing its income for its 2003 taxation year.

Trust's 2004 Taxation Year

2. Paragraph 94(3)(a) applies to deem the trust to be resident in Canada, throughout its 2004 taxation year, for a number of purposes, including computing of its income. Because the trust was non-resident throughout its 2003 taxation year, paragraph 94(3)(c) also applies to deem the trust to have disposed of its property (other than certain properties described in subparagraphs 128.1(1)(b)(i) to (iv)) for fair market value proceeds immediately before the end of its last 2003 taxation year and to have reacquired those properties at a cost equal to that fair market value at the beginning of the 2004 taxation year. A related rule in paragraph 128.1(1.1)(b) suspends the application of the deemed disposition and re-acquisition rules in paragraph 128.1(1)(b) that would otherwise apply in that last 2003 taxation year because of the trust becoming resident in Canada at the beginning of the 2004 taxation year.

Trust's 2005 Taxation Year

3. Because the trustee of the trust becomes resident in Canada on July 1, 2005, paragraph 128.1(1)(a) will apply to deem the trust to have a taxation year-end immediately before the change of residency. At the end of this first 2005 taxation year of the trust, paragraph 94(3)(a) applies to deem the trust to be resident in Canada, throughout that first 2005 taxation year, for a number of purposes, including the computing of its income. However, paragraph 94(3)(c) will not apply because the trust was resident in Canada (i.e. because of the application of paragraph 94(3)(a) to the trust's 2004 taxation year) throughout the year preceding the 2005 taxation year.

4. Paragraph 128.1(1)(a) also applies to deem the trust to have a new taxation year at the time the trustee becomes resident in Canada on July 1, 2005. Because the trust is resident in Canada at the end of this second 2005 taxation year, paragraph 94(3)(a) does not apply to deem the trust to be resident in Canada in computing its income for that year.

5. As the trust is resident in Canada immediately after the end of its first 2005 taxation year (i.e., the 2005 taxation year discussed in #3 above), paragraph 128.1(1.1)(a) suspends the application of the deemed disposition and re-acquisition rules in paragraphs 128.1(1)(b) and (c) that would otherwise apply in respect of the end of that first 2005 taxation year because of the trust becoming resident in Canada on July 1, 2005. This ensures that the trust does not realize at that end of that first 2005 taxation year any accrued gains or losses of the trust solely because the basis of the trust's residency in Canada changes.

6. Note that where subsection 128.1(1.1) applies to a trust, it suspends only the application of paragraph 128.1(1)(b) (as a result paragraph 128.1(1)(c) also has no application) to the trust. If the trust becomes resident in Canada, it would continue to be subject to paragraph 128.1(1)(a). Also note that paragraph 94(4)(d) ensures that the application of paragraph 94(3)(a) to the trust will not affect the determination of the trust as having changed residence for the purposes of subsection 128.1(1).

Paragraph 94(3)(d) imposes liabilities for a taxation year on entities who are "resident contributors" or "resident beneficiaries". Where subsection 94(3) applies to a trust for a taxation year, each of these entities is jointly and severally, or solidarily, liable with the trust in respect of the trust's obligations under sections 150 to 180. Typically, the most significant obligation in this context is the obligation to pay tax instalments pursuant to section 156. However, the extent of the liability imposed by paragraph 94(3)(d) is limited by new subsection 94(7). For more information, see the commentary on subsections 94(7) to (9).

The expression "solidarily liable" is added to ensure that the Act appropriately reflects both the civil law of the province of Quebec and the law of other provinces.

Paragraph 94(3)(e) imposes liabilities for a taxation year on each entity that is a beneficiary under the trust and was a person from whom an amount would be recoverable at the end of 2002 under subsection 94(2) (as it read in its application to taxation years that began before 2003) in respect of the trust if the entity had received before 2003 amounts described under paragraphs 94(2)(a) or (b) in respect of the trust (as those paragraphs read in their application to taxation years that began before 2003). Where subsection 94(3) applies to the trust for a taxation year, each of these entities is, to the extent of the entity's recovery limit for the year, jointly and severally, or solidarily, liable with the trust in respect of the trust's obligations under sections 150 to 180.

Note that subsection 94(3) generally does not result in the creation of any obligations for a trust that is subject to subsection 94(3) to withhold tax on distributions to non-resident beneficiaries under Part XIII or to pay any tax under Part XII.2. As noted above, one of the effects of subsection 94(3) is that the trust is not liable for such tax in connection with distributions of Canadian-source income to the non-resident beneficiaries in their capacities as beneficiaries.

Instead, the rules in new subsection 104(7.01) are designed so that there will be a reasonable level of Part I tax in respect of Canadian-source income received by the trust in the event the trust also distributes that income to non-resident beneficiaries in their capacity as beneficiaries. For more information, see the commentary on subsection 104(7.01).

However, in the event that the trust pays or credits an amount to a non-resident and that amount is not referred to in paragraph 104(7.01)(b) in respect of the trust for the taxation year, the non-resident will continue to be liable for any Part XIII tax on the amount.

Excluded Provisions

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94(4)

New subsection 94(4) of the Act provides that the rules in paragraph 94(3)(a) treating non-resident trusts as resident in Canada do not apply for certain limited purposes:

• the definitions "arm's length transfer", "exempt taxpayer" and "exempt foreign trust" in subsection 94(1) - thus ensuring that there is no circularity in applying those definitions due to fact that those definitions impose a requirement that a trust be non-resident;

• subsections 70(6) and 73(1) and paragraph 107.4(1)(c) (other than subparagraph 107.4(1)(c)(i)) and subparagraph (f)(ii) of the definition "disposition" in subsection 248(1) - thus ensuring that rules allowing in some cases for a rollover of property on transfers to a trust generally do not apply to transfers to a trust deemed to be resident in Canada by subsection 94(3);

• paragraph (a) of the definition "mutual fund trust" in subsection 132(6) - a reference that makes it clear that a trust deemed to be resident in Canada by subsection 94(3) will not be treated as a mutual fund trust for any purpose; and

• determining whether, in applying subsection 128.1(1), the trust becomes resident in Canada at a particular time and determining whether, in applying subsection 128.1(4), the trust ceases to be resident in Canada at a particular time - thus ensuring that the deeming of a trust to be resident under paragraph 94(3)(a) does not apply to affect a determination of whether a trust has changed residence at any time (e.g., upon a change of trustees or upon a change of residence of trustees).

Furthermore, except as otherwise permitted under subsection 216(4.1) of the Act, paragraph 94(3)(a) does not relieve a payer of Canadian-source income from the obligation to withhold amounts under section 215 in connection with amounts paid to a trust deemed to be resident in Canada by subsection 94(3). This is so even though such a trust is not liable for Part XIII tax on amounts paid or credited to it, because of the application of subparagraph 94(3)(a)(vii). The trust would be expected to apply for a refund of such tax, which would be given except to the extent that there are any outstanding liabilities of the trust with regard to Part I tax.

Deemed Cessation of Residence

ITA
94(5)

New subsection 94(5) of the Act deems a trust to have ceased to be resident in Canada at the earliest time in a specified period at which there is neither a "resident contributor" to the trust nor a "resident beneficiary" under the trust. For this purpose, the specified period is the period that would (if the Act were read without reference to subsection 128.1(4)) be a taxation year of the trust

• that immediately follows a taxation year of the trust throughout which it was resident in Canada,

• at the beginning of which there was either a resident contributor to the trust or a resident beneficiary under the trust, and

• at the end of which the trust is non-resident.

For more information on the expressions "resident contributor" and "resident beneficiary", as defined in new subsection 94(1), see the commentary on those provisions.

Where subsection 94(5) applies, the cessation of residence in Canada of a trust results in the application of subsection 128.1(4). Under that subsection, a taxation year of the trust is deemed to have ended immediately before the earliest time in the specified period described above. At that deemed taxation year-end, the criteria in subsection 94(3) are satisfied. Accordingly, the trust will be subject to tax under Part I on its worldwide income for that year because it is considered under subsection 94(3) to be resident in Canada throughout that year. Under new paragraph 94(3)(d), each "resident beneficiary" or "resident contributor" at the time of that deemed taxation year end can be jointly and severally, or solidarily, liable with the trust for the trust's income tax liabilities under the Act for that year. (For more detail on the expression "solidarily", please refer to the introductory commentary above on new section 94.)

Becoming or Ceasing to be an Exempt Foreign Trust

ITA
94(6)

New subsection 94(6) of the Act generally provides that, if a trust becomes or ceases to be an "exempt foreign trust" (as defined in new subsection 94(1)) at any time, the trust's taxation year is deemed to have ended immediately before that time, a new "stub" taxation year is deemed to have begun at that time and the trust is deemed not to have established a fiscal period before that time. However, subsection 94(6) does not apply where a trust ceases to be an exempt foreign trust because it becomes resident in Canada.

Subsection 94(3) may apply in respect of the later "stub" taxation year of the trust if the criteria set out in that subsection are satisfied at a "specified time" in respect of the trust for the taxation year (generally, the end of the taxation year). Where this is the case, the trust would be subject to tax under Part I on its world-wide income for that later "stub" year because it would be considered under subsection 94(3) to be resident in Canada for that year.

Limit to Amount Recoverable

ITA
94(7) and (8)

New subsection 94(7) of the Act allows for a limitation of the amount that may be recovered from an entity that would otherwise be jointly, severally, or solidarily, liable for the entire amount of a trust's tax obligations under the Act. Subsection 94(7) applies to an entity (other than an entity that is deemed, by subsection 94(12) or (13), to be a contributor or a resident contributor to the trust) in respect of a particular taxation year of the trust where three conditions are satisfied.

The first condition is satisfied in respect of a particular taxation year of the trust:

• where, under subparagraph 94(7)(a)(i), the entity is jointly and severally, or solidarily, liable with the trust only because the entity was a "resident beneficiary" (as defined in new subsection 94(1)) under the trust at a specified time in respect of the trust for the particular year, or

• where, under subparagraph 94(7)(a)(ii), at a specified time in respect of the trust for, the total amount (determined with reference to paragraph 94(2)(b), (d), (h), (p) and (q) and subsection 94(9)) of contributions made to the trust by the entity (or by another entity not dealing at arm's length with the entity) is not more than the greater of $10,000 and 10% of the total amount of all contributions to the trust.

The second condition, under paragraph 94(7)(b), requires that the entity have filed on a timely basis all information returns required to be filed by the entity in respect of the trust under section 233.2 (or on any later day that is acceptable to the Minister of National Revenue). However, the second condition need not be satisfied if the first condition is satisfied because the total determined under subparagraph 94(7)(a)(ii) (in respect of the entity and all entities not dealing at arm's length with it) is $10,000 or less.

The third condition, under paragraph 94(7)(c), is satisfied in respect of an entity and a particular taxation year of the trust where it is reasonable to conclude that each transaction or event that occurred before the end of the particular year at the direction of, or with the acquiescence of, the entity satisfied the following conditions:

• none of the purposes of the transaction or event was to enable the entity to avoid or minimize any liability under a provision referred to in paragraph 94(3)(d) in respect of the trust, and

• the transaction or event was not part of a series of transactions or events any of the purposes of which was to enable the entity to avoid or minimize any liability under a provision referred to in paragraph 94(3)(d) in respect of the trust.

There are a number of transactions or events, or series of transactions or events, that may result in a failure to satisfy the third condition (e.g., an artificial dilution of an entity's relative contribution to the trust (i.e., below the 10% level); or corporate distributions that have the effect of avoiding or minimizing the impact of the three-year rule described in subsection 94(9)).

Reference should be made in this context to the definition "contribution" in subsection 94(1), as well as to related rules in subsection 94(2).

Where subsection 94(7) applies to an entity in respect of a taxation year of a trust, the amount recoverable at any time from the entity in respect of the year is limited to the person's "recovery limit", determined under subsection 94(8), in respect of the trust and the year.

Under subsection 94(8), the amount of the recovery limit that applies to a particular entity at any particular time is calculated as follows:

• ADD amounts received or receivable after 2000 and before the particular time by the particular entity on the disposition of all or part of the particular entity's interest as a beneficiary under the trust, or by another entity that was, at the time the amount became receivable, a specified party (as defined in subsection 94(1)) in respect of the particular entity on the disposition of all or part of the specified party's interest as a beneficiary under the trust;

• ADD an amount (other than an amount described in the paragraph above) made payable by the trust after 2000 and before the particular time to the particular entity because of the interest of the particular entity as a beneficiary under the trust, or another entity (that was, at the time the amount became payable, a specified party in respect of the particular entity) because of the interest of the specified party as a beneficiary under the trust;

• ADD the fair market value of benefits received or enjoyed, after 2000 and before the particular time, under the trust by the particular entity (or an entity that was, at the time the benefit was received or enjoyed, a specified party in respect of the particular entity), not otherwise taken into account above;

• ADD the maximum amount that would be recoverable from the particular entity at the end of 2002 under subsection 94(2) (as it read in its application to taxation years that began before 2003) if the trust had had tax payable under Part I of the Act at the end of 2002 in excess of the total of the amounts described in respect of the entity under paragraphs 94(2)(a) and (b) (as they read in their application to taxation years that began before 2003), except to the extent that the amount so recoverable is in respect of an amount that is included in the particular entity's recovery limit because of subparagraph 94(8)(a)(i) or (ii);

• ADD the total amount (determined with reference to paragraphs 94(2)(b), (d), (h), (p) and (q) and subsection 94(9)) of contributions made to the trust by the particular entity, to the extent that this amount exceeds the total of the first four amounts;

• SUBTRACT previous recoveries by the Canada Customs and Revenue Agency ("CCRA") under subsection 94(3) (or under subsection 94(1) as it read in its application to taxation years that began before 2003) from the particular entity in respect of the trust and the year or a preceding taxation year of the trust;

• SUBTRACT previous recoveries by the CCRA under subsection 94(3) (or under subsection 94(1) as it read in its application to taxation years that began before 2003) from a specified party in respect of the particular entity in respect of the trust and the year or a preceding taxation year of the trust; and

• SUBTRACT the amount, if any, by which the particular entity's tax payable under this Part for any taxation year in which an amount described in any of subparagraphs 94(8)(a)(i) to (iii) was paid, became payable, was received, became receivable or was enjoyed by the particular entity exceeds the amount that would have been the particular entity's tax payable under this Part for that taxation year if no such amount were paid, became payable, were received, became receivable or were enjoyed by the particular entity in that taxation year.

For more information on subsections 94(11) to (13), or the expression "specified party" as defined in subsection 94(1), see the commentary on those provisions.

Determination of contribution amount

ITA
94(9)

Subsection 94(9) affects the calculation of the amount of a "contribution" (as defined in new subsection 94(1)) to a trust of "specified property" (as defined in new subsection 94(11)) for the purpose of determining whether the "recovery limit" limitation applies to a contributor to the trust and of determining the amount of that recovery limit.

The amount of a contribution to a trust because of a transfer to the trust of specified property is deemed by subsection 94(9) to be the greater of:

• the amount, otherwise determined, at that time of the contribution; and

• the amount that is the greatest fair market value of the specified property (or of substituted property) in the period that begins immediately after that time and ends at the end of the third calendar year after that time.

For more information on the expression "specified property" as defined in new subsection 94(1), see the commentary on that provision.

Subsection 94(9) allows for a reasonable opportunity for recovery of tax by the CCRA in the context of a transaction or series of transactions involving the transfer of specified property. Consider, for example, an estate freeze under which common shares in the capital stock of a corporation are transferred directly or indirectly to a non-resident trust. Because of the difficulties associated with valuing the common shares at the time of the transfer, it is appropriate to provide for a valuation as described above.

In conjunction with new subsection 94(9), subparagraph 152(4)(b)(vi) of the Act is amended to ensure that a reassessment of a taxpayer arising out of the application of subsection 94(9) can be undertaken by the CCRA within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer's relevant taxation year.

Where Contributor Becomes Resident in Canada Within 60 Months after Contributing

ITA
94(10)

New subsection 94(10) of the Act applies to determine whether there is a "connected contributor" (as defined in new subsection 94(1)) to a trust for the purpose of applying the definition "resident beneficiary" (as defined in new subsection 94(1)). Under new paragraph 94(3)(d) of the Act, a resident beneficiary can, to an extent, be liable for the trust's income tax under Part I of the Act. For more information, see the commentary on those definitions and subsections 94(3) and (7) to (9).

A "contribution" (as defined in new subsection 94(1)) to a trust by a contributor is considered to have been made at a time other than a "non-resident time" (as defined in subsection 94(1)) if the contributor becomes resident in Canada at any time within the period (referred to in this commentary as the "60-month post period") 60 months after the time of the contribution. However, to facilitate the administration of the definition "non-resident time", paragraph (b) of the definition "connected contributor" and subsection 94(3), the definition "non-resident time" is drafted so that such a contributor and the trust may, subject to subsection 94(10), treat the time of the contribution as a non-resident time for the purposes of applying the definition "connected contributor" and subsection 94(3) at a "specified time" (as defined in new subsection 94(1)) in respect of the trust for any particular trust taxation year if at the specified time the contributor still has not become resident in Canada within the 60-month post period.

Subsection 94(10) deems (for the purpose of applying the definition "connected contributor" at each specified time, in respect of a trust for a taxation year of the trust, that is before the particular time at which the contributor becomes resident in Canada within the 60-month post period) the contribution to have been made at a time other than a "non-resident time" of the contributor if:

• in applying the definition "non-resident time" as of each of those specified times, the particular contribution was made at a non-resident time of the contributor; and

• in applying the definition "non-resident time" at the particular time, the contribution is made at a time other than a non-resident time of the contributor.

Where subsection 94(10) applies, the contributor will be considered a "connected contributor" to the trust and, if, as a result, there was a "resident beneficiary" at a specified time in the relevant prior taxation year of the trust, the trust and the resident beneficiary would, because of subsection 94(3), generally be jointly and severally, or solidarily, liable for Part I tax on the trust's income for the year. (For more details on the expression "solidarily", please refer to the introductory commentary above on new section 94.)

Subparagraph 152(4)(b)(vi) of the Act is amended to ensure that a reassessment of a taxpayer arising out of the application of subsection 94(10) can be undertaken by the Canada Customs and Revenue Agency within 3 years after the normal reassessment period of the taxpayer in respect of the taxpayer's relevant taxation year.

Deemed Contributor or Resident

Contributor

ITA
94(11) to (13)

Subsections 94(11) to (13) of the Act provide a set of related anti-avoidance rules that apply where it is reasonable to conclude that one of the reasons for a loan or transfer of property from a trust (the "original trust"), that is deemed under paragraph 94(3)(a) to be resident in Canada (or was deemed resident because of subsection (1) as it read in its application to taxation years that began before 2003 or would have been so deemed under either of those provisions if they had applied without regard to the period of time in which a contributor to the trust was resident in Canada), to another trust (the "transferee trust") is to avoid or minimize the liability, of any entity under Part I of the Act, that arose, or that would otherwise have arisen, because of the application of subsection (3) (or because of subsection (1) as it read in its application to taxation years that began before 2003).

Where such a loan or transfer is made at a particular time, the original trust is deemed, under subsection 94(12), to be a resident contributor to the transferee trust for the purpose of applying this section in respect of the transferee trust.

Where such a loan or transfer is made at a particular time, an entity that is at that time a contributor to the original trust is deemed, under subsection 94(13), to be a contributor to the transferee trust and a connected contributor to the transferee trust (if at that time the entity is also a connected contributor to the original trust). For more information on the definitions "contributor" and "connected contributor" in subsection 94(1), see the commentary on those definitions.

Subsection 94(7) of the Act, generally provides that the liability of a "resident contributor" is limited by that contributor's recovery limit, as determined by reference to subsections 94(7) to (9). However, subsection 94(7) does not apply to an entity that is deemed, by subsection 94(12) or (13), to be a contributor or a resident contributor to the trust. For more information on the definition "resident contributor" or subsections 94(3) and (7) to (9), see the commentary on those provisions.

Restricted Property

ITA
94(14)

Subsection 94(14) of the Act provides that a particular property (identified in prescribed form filed with the Minister of National Revenue in a timely manner by (or on behalf of) an entity) that is at any time held, loaned or transferred by the entity will not be treated as restricted property held, loaned or transferred at that time by the entity if the Minister is satisfied that the particular property (or property for which the particular property is substituted property) was not at any time acquired, held, loaned or transferred by the entity (or any entity with whom the entity does not at any time deal at arm's length) as part of a transaction or series of transactions or events a purpose of which was to permit any change in the value of the property of a corporation (that is, at any time, a closely-held corporation) to accrue to the particular property.

Subsection 94(14) is intended to provide relief only to the extent that the Minister is satisfied that an entity's holding, acquisition or transferring of a property that is otherwise restricted property was in no way part of a transaction (or series of transactions or events) designed in any way to permit the value of the property to be attributable in any way to a change in value of property of a corporation that at any time is a closely-held corporation.

For more details on the definitions "restricted property" and closely-held corporation", see the commentary on those provisions.

Arm's Length Dealing

ITA
94(15)

Subsection 94(15) of the Act ensures that the rules in section 251 are applicable in determining whether entities deal at arm's length with each other. The subsection provides that for the purposes of section 94, when determining whether a particular entity and another entity deal, at any time, with each other at arm's length, a reference in section 251 to the word "person" is to be read as a reference to the expression "entity" (as defined in subsection 94(1)).

Anti-Avoidance - 150 Entities

ITA
94(16)

Subsection 94(16) is an anti-avoidance provision that is relevant to the application of the definition "closely-held corporation" and paragraph (h) of the definition "exempt foreign trust" in subsection 94(1). These definitions, respectively, provide for different results based, in part, on the condition that there be at a particular time at least 150 beneficiaries under a trust or 150 shareholders of the capital stock of a corporation.

Subsection 94(16) provides that, if it can reasonably be considered that one of the main reasons that an entity is at any time a shareholder of a corporation or holds a capital interest in a trust is to cause the corporation or trust to satisfy the applicable condition, the corporation or the trust, as the case may be, is deemed not to have satisfied at that time that condition. Where subsection 94(16) applies in respect of a particular time and in respect of the corporation or trust, in the case of the corporation, it would be treated at that time as a closely-held corporation and in the case of the trust, it would not be treated at that time as an exempt foreign trust.

For more detail on the definitions "closely-held corporation" and "exempt foreign trust", see the commentary on those definitions.

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