Archived - Explanatory Notes to Legislative Proposals Relating to Income Tax: 1

Archived information

Archived information is provided for reference, research or recordkeeping purposes. It is not subject to the Government of Canada Web Standards and has not been altered or updated since it was archived. Please contact us to request a format other than those available.

- Table of Contents - Next -

Preface 

These explanatory notes are provided to assist in an understanding of proposed amendments to the Income Tax Act (the "Act"). These notes are divided into three parts: the first Part relating to non-resident trusts and foreign investment entities, the second Part relating to general income tax amendments, and the third Part relating to bijuralism. Theses notes replace those notes released July 18, 2005. In turn, the first part of those 2005 notes replaced the notes released in October 2003. The second part of those 2005 notes replaced the notes released in December 2002 and February 2004 that relate to provisions of the Act, but excluded those dealing with the foreign affiliate rules (i.e. the explanatory notes relating to proposed amendments to sections 17, 93 and 95, and the definition of "qualifying member" in subsection 248(1), of the Act released in December 2002, and Part II of the notes released in February 2004).

The Honourable Jim Flaherty, P.C., M.P.,
Minister of Finance


Clause 1

Title

The title of this Act is the Income Tax Amendments Act, 2005.


Part 1 
Foreign Investment Entities and Non-resident Trusts

Clause 2

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 to 94.3 relating to foreign investment entities. For more information, see the commentary on those new sections.

This amendment applies to taxation years that begin after 2006.

Clause 3

Life Insurance Policies - Definitions

ITA
12.2(11)

Subsection 12.2(11) of the Act provides the definitions "anniversary day" and "exempt policy" for the purposes of section 12.2 and paragraph 56(1)(d.1) of the Income Tax Act, chapter 148 of the Revised Statutes of Canada, 1952.

Subsection 12.2(11) is amended so that it also applies for the purpose of paragraph 94.2(11)(c) of the Act. As a result, references to the expressions "anniversary day" and "exempt policy" in paragraph 94.2(11)(c) will carry the same meaning as that used in section 12.2.

This amendment applies after 2006.

For more detail on subsection 94.2(11), see the commentary on that provision.

Clause 4

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. As a result, an election under that paragraph, to treat a foreign affiliate of a taxpayer as a controlled foreign affiliate of the taxpayer, does not have effect for the purpose of section 17.

This amendment applies after 2006.

Clause 5

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. Under this paragraph, 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 and tracking entities. Because of paragraph 94.2(5)(b), this exclusion does not apply to gains from the disposition by a taxpayer of property where the taxpayer is not resident in Canada immediately before the time of the disposition.

This amendment applies to dispositions that occur after 2006.

Clause 6

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 other capital property that is a 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 add a reference to subsections 44.1(6), 44.1(7), and 94(2)(m).

This amendment applies to taxation years that begin after 1999, except that, for any taxation year of the taxpayer that begins before 2007 in respect of which new paragraph 94(2)(m) of the Act does not apply to the taxpayer, paragraph 51(1)(c) is to be read without the reference to paragraph 94(2)(m).

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 was, 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 to exchanges that occur in taxation years that begin after 2006.

Clause 7

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 a taxpayer’s property that is subject to the mark-to-market rules in subsection 94.2(4) for a taxation year is generally considered not to be (except where subsection 94.2(20) applies to the taxpayer for the taxation year) property a gain from the disposition of which is a capital gain, 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 to the taxpayer for the taxation year. 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 2006.

Clause 8

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 2006.

It also applies to taxation years of a taxpayer that begin

Because of the possibility of such an election, amended paragraph 53(1)(d.1) refers to paragraph 94(5)(a) as it read for taxation years that include December 31, 2000.

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 subsection 94.3(5). For more information, see the commentary on that subsection.

These amendments apply to taxation years that begin after 2006.

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 2006. It also applies to taxation years of a taxpayer that begin

Because of the possibility of such an election, amended paragraph 53(2)(b.1) refers to paragraph 94(5)(b) as it read for taxation years that include December 31, 2000.

ITA
53(2)(w)

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

New paragraph 53(2)(w) applies to taxation years that begin after 2006.

Clause 9

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 these purposes.

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 2006.

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 its fair market value immediately before that death.

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 deceased 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 2006.

Clause 10

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 2006.

Clause 11

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 property held by certain trusts from this attribution rule.

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 property held by a trust in respect of which all of the contributors are recent immigrants to Canada (i.e., none of the contributors to the trust has been resident in Canada for more than 60 months). The exception is consistent with similar 60-month exemptions in:

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, 2002, 2003, 2004, 2005 or 2006, paragraph 75(3)(c.2) applies with reference to subsection 94(1) as it reads in its application to taxation years that begin after 2006.

Clause 12

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 2006.

Clause 13

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 was, 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 2006.

Clause 14

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 was, 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 2006.

Clause 15

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 16

Amounts to be Included in Respect of Share of a Foreign Affiliate

ITA
91

Section 91 of the Act sets out rules for determining, among other things, 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 in respect of shares that are participating interests in a "tracking entity" to which the prescribed rate 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), 94.2(4) or 94.3(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. The exception provided for such shares under subsection 91(1) is intended solely to prevent any incidence of double taxation that might otherwise arise.

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 2006.

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 17

Non-resident Trusts

ITA
94

Overview

Existing Rules

Section 94 of the Act sets out rules that tax certain 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 the terms of the non-resident trust.

If the amount to be distributed to a beneficiary of the trust depends upon a discretionary power, paragraph 94(1)(c) deems the trust to be resident in Canada for the purposes of Part I of the Act and deems its taxable 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.

For other non-resident trusts to which section 94 applies, 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, then the trust is deemed resident in Canada for a number of purposes, and 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 2006.

In addition,

Note that, under the coming-into-force provision for new section 94, any election or form (but for greater certainty, not including returns of income) referred to in new section 94 that would otherwise be required to be filed before 120 days after Royal Assent is deemed to have been filed with the Minister of National Revenue on a timely basis if it is filed with the Minister of National Revenue within 365 days after Royal Assent.

For more detail on filing obligations regarding returns of income, contact the Canada Revenue Agency.

The following table 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:
  • a 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),
  • 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 successor beneficiary) that is resident in Canada and is a beneficiary under the trust.
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) "successor beneficiary" – s. 94(1)

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: paragraphs 94(3)(d) and (e) 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)(a) and 94(4)
  B. Explicit rule treats the trust as becoming resident in Canada, with resulting adjustment to cost amount of property. s. 94(3)(c)
  C. Part XII.2 does not apply to the trust. Explicit exemption from Part XIII tax on amounts distributed to the trust, although payer must still withhold. Part XIII will generally apply to amounts (other than exempt amounts) paid or credited by the trust to non-resident beneficiaries s. 94(3)(a)(viii) and (ix) and (4)(c) and 215 and 216(4.1) "exempt amount" – s. 94(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)(ix) 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 generally 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 unless a deemed contribution or deemed contributor rule applies. (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

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

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 with each other 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, to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, in repayment of or otherwise in respect of a particular loan made by the trust, corporation 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, to a corporation controlled by the trust or to a partnership of which the trust is a majority interest partner, in repayment of or otherwise in respect of a particular loan made by the trust, corporation or partnership, as the case may be, to the transferor in circumstances where either

The definition "arm’s length transfer" generally applies to trust taxation years that begin after 2006. 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 the amending legislation introducing section 94 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 (including a person) that would be beneficially interested in the trust if

(A) "any arrangement in respect of the particular trust" were read as a reference to "any arrangement (including the terms or conditions of a share, or any arrangement in respect of a share, of the capital stock of a corporation that is beneficially interested in the particular trust) in respect of the particular trust", and

(B) "the particular person or partnership might" were read as a reference to "the particular person or partnership becomes (or could become on the exercise of any discretion by any entity), directly or indirectly, entitled to any amount derived, directly or indirectly, from the income or capital of the particular trust or might".

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

  • that would give the particular entity (or the particular entity together with those other entities) 10% or more of the votes that could be cast under any circumstance at an annual meeting of shareholders of the corporation if the meeting were held at that time, or
  • that have a fair market value of 10% or more of the fair market value of all of the issued and outstanding shares of the corporation.

This amendment generally applies in respect of trusts for taxation years that begin after July 18, 2005. However, a trust may make a special election (provided for in the coming-into-force provision for new section 94) to have the definition as described above apply in respect of it for taxation years that begin after 2006 (or where the trust qualifies to so elect under the coming-into-force provision of new section 94, for its taxation years that begin after 2000, after 2001, after 2002, after 2003, after 2004, or after 2005). If the trust does not make the special election, then for its taxation years that begin on or before July 18, 2005, in respect of the trust a closely-held corporation at any time, means a corporation, other than a corporation in respect of which

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

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), 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 may apply to deem an entity to be a connected contributor to a trust), 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

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 trust"

An "eligible 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 trust may also qualify as an "exempt taxpayer" under subsections 94(1) and 94.1(1). For more detail, see the commentary on those subsections.

An eligible trust at any time means a trust other than a trust 

"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.

"excluded property"

The expression "excluded property" is relevant to determining whether a property is restricted property. In particular, paragraph 94(14)(c) suspends a property’s status as restricted property where that property is an excluded property. For more detail on the definition "restricted property" and subsection (14), see the commentary on those provisions.

Excluded property, at any time, means a particular property held, loaned or transferred, as the case may be, at that time by a particular entity if at that time:

"exempt amount"

The expression "exempt amount" is relevant in determining whether Part XIII tax applies to a non-resident person in respect of an amount paid or credited after 2003 by a trust to which subsection 94(3) applies. In general terms, Part XIII tax will not apply to such amounts if they are exempt amounts.

Three kinds of amounts may qualify as an exempt amount in respect of a particular taxation year of a trust. The first is any amount paid or credited (within the meaning assigned by Part XIII) by the trust before 2004.

The second is an amount that is paid or credited by the trust and referred to in paragraph 104(7.01)(b) in respect of the trust for the particular taxation year. For more detail on paragraph 104(7.01)(b), see the commentary on that provision.

The third type of exempt amount arises only in respect of trusts created before October 30, 2003 and to which no contributions have been made on or after July 18, 2005. In respect of such trusts, an exempt amount also means an amount (other than an amount included in computing an exempt amount in respect of any other taxation year of the trust) that is described in subparagraph 212(1)(c)(i) and paid in the particular taxation year (or within 60 days after the end of the particular taxation year) by the trust directly to a qualifying beneficiary under the trust. In this regard, a qualifying beneficiary means a beneficiary (determined without reference to subsection 248(25)) who is a natural person none of whose interests as a beneficiary under the trust was ever acquired for consideration (determined by reference to subsection 108(7)).

For more detail on subsection 108(7), see the commentary on that provision.

"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:

(a) a non-resident trust the current income (determined with reference to amended subsection 108(3)) or capital from which can be provided only to one or more physically or mentally infirm dependent individuals, provided that each such individual is at all times that they are a beneficiary under the trust during the trust’s current taxation year, non-resident and that any property settled on the trust could reasonably be considered, at the time it was settled, to be necessary for the maintenance of those individuals;

(b) a non-resident trust created as a consequence of the breakdown of a marriage or common-law partnership of two individuals, the current income (determined with reference to amended subsection 108(3)) or capital from which can be provided only for the maintenance of non-resident beneficiaries of the trust who were, during that marriage or common-law partnership, children of both of the individuals, if the beneficiaries are under 21 years of age (or under 31 years of age and enrolled in a specified educational institution) and each contribution (as defined in section 94) to the trust was to provide for the maintenance of those children – note the different description of the conditions in subparagraph (b)(i) of that definition that apply for taxation years that begin on or before July 18, 2005;

(c) certain non-resident trusts that own or administer a university described in paragraph (f) of the definition "total charitable gifts" in subsection 118.1(1) and that could qualify under that definition as a recipient permitted for the purposes of the tax credit for charitable gifts;

(d) certain non-resident trusts established exclusively for charitable purposes (as those purposes are defined in the laws of Canada);

(e) a non-resident trust that is governed by an employee profit sharing plan (as defined in subsection 248(1)), by a retirement compensation arrangement (as defined in subsection 248(1), or by a foreign retirement arrangement (as defined in subsection 248(1));

(f) certain foreign trusteed employee benefit plans if

  • at all times that the trust exists it is operated exclusively for the purposes of providing employee benefits,
  • throughout the trust’s current taxation year it is maintained for the benefit of natural persons, the majority of whom are non-resident,
  • the only benefits provided by the trust are in respect of
  • qualifying services (as defined in subsection 94(1)),
  • (only in respect of taxation years ending before 2009) particular services rendered before Announcement Date to an employer by an employee if the employee had a right before Announcement Date to receive the benefits in respect of the particular services pursuant to a written agreement entered into before Announcement Date, and (where the employee was resident in Canada on Announcement Date), a copy of which was filed with the Minister, or
  • a combination of the two, and

(g) a non-resident trust (other than a trust described in paragraph (a.1) of the definition "trust" in subsection 108(1) or a prescribed trust) that at all times since it was created has been operated exclusively for the specific purposes described below, is resident in a particular country other than Canada and has been exempt – because it is operated for these specific purposes - from paying income tax to the government of that country. The specific purposes are administering or providing superannuation or pension benefits, where those benefits are primarily in respect of services rendered in that particular country by natural persons who were non-resident at the time the services were rendered– as a result, certain trusteed foreign pension plans or similar arrangements are intended to qualify as an exempt foreign trust under this provision;

(h) a non-resident trust that is an eligible trust (as defined in subsection 94(1)) and whose only beneficiaries with rights to receive income or capital directly from the trust are qualifying investors (as defined in subsection 94(1)) in respect of the trust if either

(i) a prescribed trust or prescribed class of trusts. (At the present time, it is not anticipated that any trust or class of trusts will be prescribed for this purpose).

A trust that qualifies as an exempt foreign trust under paragraph (f) of the definition "exempt foreign trust" will be a non-resident entity for purposes of the foreign investment entity rules in subsections 94.1 to 94.4. If the trust has not held restricted property at any time on or after July 18, 2005, it will qualify, under paragraph (a) of the definition "foreign investment entity" in subsection 94.1(1) for relief from treatment as a foreign investment entity ("FIE"). However, if the trust has held restricted property on or after July 18, 2005, then in order to avoid status as a FIE, it would have to rely upon paragraphs (b) or (c) of the "foreign investment entity" definition, as paragraph (a) of that definition would not apply to it. Where the trust is a FIE, a Canadian resident beneficiary (other than an "exempt taxpayer" within the meaning assigned by subsection 94.1(1)) under 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 beneficiary in respect of their interest (i.e., "participating interest", as defined in subsection 94.1(1)) in the trust.

Paragraphs (f) and (g), as described in general terms above, of the definition "exempt foreign trust" apply in respect of a trust for its taxation years that begin after July 18, 2005, unless the trust elects under paragraph (j) of the coming-into-force provision of new section 94. Where this election is made, those paragraphs apply, as described in general terms above, to the trust for taxation years that begin after 2006 (or such earlier year as has been elected, under the coming into force provisions for new section 94, that section 94 apply to the trust). Where the election is not made, for taxation years that begin on or before July 18, 2005, paragraphs (f) and (g) apply to the trust at a particular time as set out in paragraph (j) of that coming-into-force provision, which in general terms is as follows:

Paragraph (h), as described in general terms above, of the definition "exempt foreign trust" applies in respect of a trust for its taxation years that begin after 2006 (or such earlier year as has been elected, under the coming into force provisions for new section 94, that section 94 apply to the trust). However, if the trust elects under paragraph (w) of the coming-into-force provision of new section 94, paragraph (h) of the definition applies to the trust, for its taxation years that begin on or before July 18, 2005, as described in paragraph (w) of that coming-into-force provision, which in general terms is as follows:

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.

For more detail on the expressions "specified fixed interest" and "qualifying investor" defined in subsection 94(1), and the definitions "foreign investment entity" and "participating interest," see the commentary on those provisions.

"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

(i) the service is rendered in the service provider’s capacity at that time as an employee or agent of the recipient,

(ii) in exchange for the service the recipient transfers or loans property, or becomes obligated to transfer or loan property, and

(iii) it is reasonable to conclude

(A) having regard only to the service and the exchange that the service provider would have been willing to carry out the service if the service provider had dealt at arm’s length with the recipient, and

(B) that the terms and conditions, and circumstances, under which the service was provided would have been acceptable to the service provider if the service provider had dealt at arm’s length with the recipient.

"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 qualifying 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 qualifying exempt taxpayers.

An exempt taxpayer also includes a Canadian resident trust (determined without reference to subsection 94(3)) that is an eligible trust (as defined in subsection 94(1)) under which the only beneficiaries that may for any reason receive, at or after the particular time and directly from the trust, any of the income or capital of the trust are persons that are both qualifying investors (as defined in subsection 94(1)) and qualifying exempt taxpayers described above.

For more detail on the definition "qualifying investor" in subsection 94(1), see the commentary on that provision.

"indirect contributor"

The definition "indirect contributor" in subsection 94(1) applies in determining whether certain foreign pooled fund investment trusts trust may qualify as exempt foreign trusts under paragraph (h) of the definition "exempt foreign trust" in subsection 94(1). Clause (h)(ii)(B) of the "exempt foreign trust" definition imposes upon a trust that seeks to so qualify the requirement that all of its resident contributors be specified contributors (as defined in subsection 94(1)); however, this requirement does not apply to indirect contributors to the trust.

An indirect contributor to a particular trust, at any time, means a particular entity that

  • because of a transfer of property to the trust by a another entity that is a qualifying investor in respect of the trust in the case where the particular entity would not, at that time, be a contributor to the trust because of that transfer if new section 94 were read without reference to paragraph 94(2)(l) at that time, or
  • because of a transfer of property by an entity to the trust in exchange for property acquired from the trust which acquisition was a transfer described in subparagraph 94(2)(g)(ii) or because of a transfer of property to the trust that is deemed by paragraph 94(2)(q) to have been made by an entity because of the acquisition by that entity of a specified fixed interest in the trust from another entity in the case where
  • the particular entity would not, at that time, be a contributor to the trust if section 94 were read without reference to paragraphs 94(2)(n) and (o) at that time, and
  • each interest as a beneficiary under the trust that is relevant in determining whether the particular entity is, at that time, a contributor to the trust is, at that time, a specified fixed interest in the trust that is held, at that time, by a qualifying investor in the trust.

"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 contribution to a trust and 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. However, such a time will qualify as a non-resident time only if the entity was non-resident (or not in existence) throughout a specified period.

As indicated in 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

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

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

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 (as defined in subsection 94(1)) 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 such 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 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.

"qualifying investor"

The definition "qualifying investor" is relevant in applying paragraphs (g) and (h) of the definition "exempt foreign trust" in subsection 94(1), the definition "significant interest" in subsection 94.1(1), and the definitions "exempt taxpayer" in subsections 94(1) and 94.1(1).

A qualifying investor in respect of a trust at a particular time means an entity that is at the particular time a beneficiary (in this definition, determined without reference to subsection 248(25)) under the trust whose only interest as a beneficiary under the trust is, at all times that the interest exists during the trust’s taxation year that includes the particular time, a specified fixed interest (as defined in subsection 94(1)) of the entity in the trust.

For more information on the definition "specified fixed interest" in subsection 94(1), see the commentary on that paragraph.

"qualifying services"

The definition "qualifying services" is relevant in applying paragraph (f) of the definition "exempt foreign trust" in subsection 94(1).

In general terms, "qualifying services" are

  • was resident in Canada no more than 60 months during the 72 month period that ends at the end of the particular month, and
  • became a member of, or a beneficiary under the plan or trust under which benefits in respect of the services may be provided (or a similar plan or trust for which the plan or the trust was substituted) before the end of the calendar month following the month in which the employee became resident in Canada, or

"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 "successor beneficiary" in respect of the trust) that, at that time, is a beneficiary under the trust, if, at that time,

The expressions "connected contributor", "specified charity", "specified time" and "successor 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:

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

  • the other entity is a closely-held corporation,
  • the indebtedness (or right), or a property for which the indebtedness (or right) was substituted, was at any time acquired as part of a transaction or series of transactions under which either 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 or (effective for taxation years beginning after Announcement Date) a share of a closely-held corporation that was not a specified share becomes a specified share, and
  • the amount of any payment under a right (for taxation years that begin after July 18, 2005, whether immediate or future, whether absolute or contingent or whether conditional on or subject to the exercise of any discretion by any entity or individual) to receive, in any manner whatever and from any entity, amounts in respect of the indebtedness), or the value of such a right, is, directly or indirectly, determined primarily by reference to any one or more of the criteria, in respect of one or more properties of the other entity (or an entity with which the other entity does not deal at arm’s length), identified in any of clauses (b)(iii)(A) to (D) of the definition; and

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. For more detail on the definition "excluded property" in subsection 94(1), 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:

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

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

"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 a particular 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 by the particular investor 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 (generally determined without reference to subsection 248(25)) 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

  • no consideration was received (other than property received by the particular entity that is the particular entity’s interest as a beneficiary under the trust),
  • none of the reasons (determined by reference to all the circumstances including the terms of the 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 contribution is the acquisition at any time by any entity (other than the particular entity) of a right as a beneficiary (here as defined generally in subsection 94(1)) under the trust (other than the acquisition by any such entity of an interest as a beneficiary under the trust from the particular entity for consideration equal to the fair market value of that interest) to receive, at any time and directly from the trust, income or capital of the trust, and
  • the fair market value of the particular contribution is equal to the fair market value, at the time of the particular contribution, of the particular entity's interest as a beneficiary under the trust acquired as a result of the particular contribution.

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 paragraphs 94(2)(q) and (r), the definition "specified contributor" in subsection 94(1), the definition "significant interest" in subsection 94.1(1), and the definition "qualifying investor" in subsection 94(1), which in turn is relevant in applying paragraph (b) of the definitions "exempt taxpayer" in subsections 94(1) and 94.1(1), and paragraph (h) of the definition "exempt foreign trust" in subsection 94(1). 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 an interest of the entity as a beneficiary under the trust, if

For taxation years that begin on or before July 18, 2005, a trust may elect to have an alternative definition of "specified fixed interest" apply in respect of the trust. Where that election is made, 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

"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:

  • in contemplation of the entity becoming after that time a "specified controlled foreign affiliate" of an entity referred to in subparagraph (b)(i) or (ii) of the definition, or
  • to avoid or minimize a liability under this Part that arose, or that would otherwise have arisen, because of the application of subsection (3) with respect to the particular entity; or

"specified property"

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

"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

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.

"successor beneficiary"

The expression "successor beneficiary" is used in the definition "resident beneficiary" in new subsection 94(1). A resident beneficiary under a trust does not include a successor beneficiary. The interest of a successor beneficiary in a trust that is a foreign investment entity may, in certain circumstances, also be exempt from the application of those rules to the interest – for more detail, see the commentary on the definition "specified interest" in subsection 94.1(1).

A successor 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 any of the trust’s income or capital, if under that right the entity may so receive that 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" 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) or the deemed contribution rules. In this regard, it should be noted that a transfer or loan, unless it is deemed to be a contribution under a provision of section 94, 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 2006, 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, created in 2002, created in 2003, created in 2004, created in 2005 or created in 2006 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, 2002, 2003, 2004, 2005 and 2006, 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 referred to in subparagraph (2)(c)(i).

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 acquired otherwise than from a beneficiary under the trust, interests in a partnership acquired otherwise than from a member of the partnership, or interests in an other entity acquired otherwise than from an entity having an interest in the other 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 is 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)(k.1) applies where a particular entity loans or transfers property, at any time after Announcement Date, to another entity at the direction of or with the acquiescence of a second entity (the "specified entity"). In these circumstances, if it is reasonable to conclude that one of the reasons for the loan or transfer is to provide benefits in respect of services rendered by a person as an employee of the specified entity, 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 particular entity is at the time of the transfer a controlled foreign affiliate of the specified entity (or would be a controlled foreign affiliate of the specified entity if the specified entity were resident in Canada), or
  • it is reasonable to conclude that the transfer was made in contemplation of the particular entity becoming after the time of the transfer a controlled foreign affiliate of the specified entity (or a controlled foreign affiliate of the specified entity if the specified entity were resident in Canada).

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 corporation or a second entity (described below) if

  • the terms or conditions of the particular property change,
  • the second entity redeems, acquires or cancels the particular property or the particular part of it,
  • where the particular property is a debt owing by the second entity, the debt or the particular part of it is settled or cancelled, or
  • where the particular property is a right to acquire or to be loaned property, the particular entity exercises the right.

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)(q) 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 first time at which the trust becomes an exempt foreign trust,
  • the first time at which the particular entity ceases to be a manager or promoter of the trust, and
  • the time that is 24 months after the first time at which the total fair market value of consideration received by the trust in exchange for beneficial interests (other than the particular entity’s interest referred to in subparagraph 94(2)(s)(iii)) in the trust is greater than $500,000.

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 the 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, under paragraph 94(2)(t) 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

  • having regard only to the sale and the consideration that the seller would have been willing to make the sale if the seller dealt at arm’s length with the buyer,
  • that the terms and conditions made or imposed in respect of the exchange are terms and conditions that would have been acceptable to the seller if the seller dealt at arm’s length with the buyer, and
  • that the value of the consideration is not, at or after the particular time, determined in whole or in part, directly or indirectly, by reference to shares of the capital stock of, or debt issued by, the Canadian corporation.

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 (and any entity not dealing at any time at arm’s length with the individual) has never loaned or transferred, directly or indirectly, restricted property to the trust,
  • in respect of each contribution (determined without reference to paragraph 94(2)(u)) made before October 11, 2002 by the individual to the trust, none of the reasons (determined by reference to all the circumstances including the terms of the 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 contribution was to permit or facilitate, directly or indirectly, the conferral at any time of a benefit (for greater certainty, including an interest as a beneficiary under the trust) on

(I) the individual,

(II) a descendant of the individual, or

(III) any entity with whom the individual or descendant does not, at any time, deal at arm’s length, and

  • the total of all amounts each of which is the amount of a contribution (determined without reference to paragraph 94(2)(u)) made before October 11, 2002 by the individual to the trust does not exceed the greater of

(I) 1% of the total of all amounts each of which is the amount of a contribution (determined without reference to paragraph 94(2)(u)) made to the trust before October 11, 2002, and

(II) $500.

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 2007, 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 is not a "resident contributor" as long as it does not become resident in Canada.

Liabilities of Non-resident Trusts and Others

ITA
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 defined 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 section 2, in 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) and, for example, in determining whether a foreign affiliate of the trust is its controlled foreign affiliate and whether it has FAPI);
  • for the purpose of subsection 111(9), with the result that in determining the trust’s losses for the taxation year, subsection 111(9) will not apply in computing its taxable income for the year;
  • 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 to 94.4;
  • for the purposes of applying subsections 104(13.1) to (29), and 107(2.1) and (2.002) 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 more detail, see the commentary to subsection 94(4));
  • for the purpose of applying Part XIII in respect of an amount (other than an exempt amount) paid or credited by the trust to any person;
  • for the purpose of determining after July 18, 2005 whether a foreign affiliate of a taxpayer (other than the trust) is a controlled foreign affiliate of the taxpayer; 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 taxable 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 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 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,
  • to be income of the trust from sources (other than a business carried on by the trust) in a particular country (other than Canada) in which the trust is resident (determined without reference to this subsection), and
  • not to be from any other source; and
  • 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, because of paragraph 94(4)(d), subsection 128.1(1) will not apply in the preceding taxation year only because of the application of paragraph 94(3)(a).

Paragraph 94(3)(c) is 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 2007. The trust is not at any time an exempt foreign trust. At the end of its 2007 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, 2008, John makes a contribution to the trust. At the end of the trust’s 2008 taxation year, John is a resident contributor to the trust, and the trust is non-resident.

On July 1, 2009 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 2007 Taxation Year

1. Subsection 94(3) does not apply to deem the trust to be resident in Canada in computing its income for its 2007 taxation year.

Trust’s 2008 Taxation Year

2. Paragraph 94(3)(a) applies to deem the trust to be resident in Canada, throughout its 2008 taxation year, for a number of purposes, including the computation of its income. Because the trust was non-resident throughout its 2007 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 2007 taxation year and to have reacquired those properties at a cost equal to that fair market value at the beginning of the 2008 taxation year. Because of paragraph 94(4)(d), the application of the deemed residency rule in paragraph 94(3)(a) will not cause the trust to become resident in Canada for purposes of subsection 128.1(1).

Trust’s 2009 Taxation Year

3. Because the trustee of the trust becomes resident in Canada on July 1, 2009, 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 2009 taxation year of the trust, paragraph 94(3)(a) applies to deem the trust to be resident in Canada, throughout that first 2009 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 2008 taxation year) throughout the year preceding the 2009 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, 2009. Because the trust is resident in Canada at the end of this second 2009 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 for the first 2009 taxation year (i.e., the 2009 taxation year discussed in #3 above), subsection 128.1(1.1) 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 2009 taxation year because of the trust becoming resident in Canada on July 1, 2009. This ensures that the trust does not realize at the end of that first 2009 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 whether the trust becomes resident in Canada 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 2006 under subsection 94(2) (as it read in its application to taxation years that began before 2007) in respect of the trust if the entity had received before 2007 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 2007). 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 where a trust created in 2001, 2002, 2003, 2004, 2005 or 2006 has elected under the coming-into force of new section 94 to have new section 94 apply to it for its taxation years that begin in 2001, 2002, 2003, 2004, 2005 or 2006, as the case may be, paragraph 94(3)(e) does not apply to it (i.e., because "old" section 94 would never have applied to it).

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 under Part XIII or to pay any tax under Part XIII.2 in respect of distributions of income earned by the trust from Canadian sources to non-resident 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).

In addition, 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, except to the extent that the amount is described in paragraph (b) of the definition "exempt amount" in subsection 94(1), or paid or credited before 2004.

Excluded Provisions

ITA
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 the purposes of:

  • 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, for transfers to trusts that occurred before February 28, 2004, subparagraph 107.4(1)(c)(i)), and paragraph (f) 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 Canadian resident trust generally do not apply to transfers to a trust otherwise deemed to be resident in Canada by subsection 94(3));
  • determining whether subsection 107(5) applies to a distribution on or after July 18, 2005 of property to the trust;
  • in determining whether an amount can be attributed, under subsection 75(2), to the trust. (This rule had earlier been proposed through a modification to subsection 75(2));
  • determining whether the exception, under paragraph 94(14)(b), to property that is restricted property is available in respect of property held by a non-resident trust;
  • paragraph (a) of the definition "mutual fund trust" in subsection 132(6) – making 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;
  • determining, for taxation years that begin after July 18, 2005, whether a partnership is a "Canadian partnership" (as defined in subsection 102(1) of the Act); 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).

Note that paragraphs 94(4)(d) and (e) are generally suspended, for a brief transitional period, in their application to a trust that is subject without interruption to "old" and "new" sections 94. That transitional period starts immediately before the end of the trust’s last taxation year that began before 2007 and for which it was deemed resident by "old" section 94 and ends immediately after the beginning of the trust’s first taxation year that begins after 2006 (i.e., its first taxation year in respect of which "new" section 94 applies). This is intended to ensure that section 128.1 does not apply to a trust solely because of the transition between the old and new NRT regimes. The suspension of paragraphs 94(4)(d) and (e) does not apply, however, where in the transitional period a change in the trustees of the trust occurred (e.g., the number of trustees changed, the residency of any of the trustees changed, or any of the trustees was replaced).

Furthermore, except as otherwise permitted under subsection 216(4.1) of the Act, paragraphs 94(3)(a) and 94(4)(c) do 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 itself liable for Part XIII tax on amounts paid or credited to it, because of the application of subparagraph 94(3)(a)(viii). 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 2006 under subsection 94(2) (as it read in its application to taxation years that began before 2007) if the trust had had tax payable under Part I of the Act at the end of 2006 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 2005),
  • 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), and
  • except where the trust was created in 2001, 2002, 2003, 2004, 2005 or 2006 and new section 94 applies to the trust for its 2001, 2002, 2003, 2004, 2005 and 2006 taxation years, as the case may be, because of an election by the trust in the coming-into-force provision;
  • 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 Revenue Agency ("CRA") under subsection 94(3) (or under subsection 94(1) as it read in its application to taxation years that began before 2007, except where the trust was created in 2001, 2002, 2003, 2004, 2005 or 2006 and new section 94 applies to the trust for its 2001, 2002, 2003, 2004, 2005 and 2006 taxation years, as the case may be, because of an election by the trust in the coming-into-force provision) 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 CRA under subsection 94(3) (or under subsection 94(1) as it read in its application to taxation years that began before 2007, except where the trust was created in 2001, 2002, 2003, 2004, 2005 or 2006 and new section 94 applies to the trust for its 2001, 2002, 2003, 2004, 2005 and 2006 taxation years, as the case may be, because of an election by the trust in the coming-into-force provision) 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 CRA 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 CRA 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 purposes of section 94, including in 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 section 94 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 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) 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, except where the trust was created in 2001, 2002, 2003, 2004, 2005 or 2006 and elects under the coming-into-force provision of new section 94 to have that section apply for its 2001, 2002, 2003, 2004, 2005 and 2006 taxation years, was deemed resident because of subsection (1) as it read in its application to taxation years that began before 2007 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, except where the trust was created in 2001, 2002, 2003, 2004, 2005 or 2006 and elects under the coming-into-force provision of new section 94 to have that section apply for its 2001, 2002, 2003, 2004, 2005 and 2006 taxation years, as the case may be, because of subsection (1) as it read in its application to taxation years that began before 2007).

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 operates to suspend, in limited circumstances, a particular property’s status as restricted property.

Paragraph 94(14)(a) is, in general terms, intended to apply only to preferred shares of the capital stock of a corporation that are issued by the corporation only for money. More specifically, paragraph 94(14)(a) provides that a particular property, that is or will be at any time held, loaned or transferred, as the case may be, by an entity, is not restricted property held, loaned or transferred, as the case may be, at that time by the entity if

  • the particular property is a share of a specified class (as defined in subsection 256(1.1)) of shares of the capital stock of a corporation,
  • the particular property was issued by the corporation in exchange for, or as consideration for, money and no other property, and
  • no other property (other than identical shares issued by that corporation) was acquired by any entity as part of that issuance.

Paragraph 94(14)(b) provides that a particular property (identified in prescribed form filed with the Minister of National Revenue) 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 particular property (or property for which the particular property is, or is to be, substituted property) was not, and will not be, 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) in whole or in Part for the purpose of permitting any change in the value of the property of a corporation (that is, at any time, a closely-held corporation) to accrue directly or indirectly in any manner whatever to the value of property held by a non-resident trust; and
  • the Minister is satisfied that this is the case with respect to the property (and property, if any, for which it is to be substituted).

The prescribed form in which the particular property is identified must be filed by the entity’s filing-due date (or another date acceptable to the Minister) for the entity’s taxation year that includes that time. The other date will generally be a date later than the entity’s relevant filing due-date, but in circumstances in which the entity has no filing-due date, the other date is intended to provide the Minister with the ability to choose a filing deadline for the prescribed form.

Paragraph 94(14)(c) provides that property is not restricted property of an entity where it is, at that time, an excluded property.

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

Arm’s Length Dealing and Related Persons

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 or are related to each other. The subsection provides in effect, that for the purposes of section 94, when determining whether a particular entity and another entity are related to each other or deal, at any time, with each other at arm’s length, each 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 or Persons

ITA
94(16)

Subsection 94(16) is an anti-avoidance provision that is relevant to the application of the definition "closely-held corporation" in subsection 94(1), paragraph (h) of the definition "exempt foreign trust" in subsection 94(1), and the definition "excluded property" 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 shareholders of the capital stock of a corporation, at least 150 beneficiaries under a trust, or at least 150 persons that hold property (identical to a particular property) issued by a trust, corporation or limited partnership.

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, holds a capital interest in a trust, or holds a property is to cause the applicable above condition to be met in respect of the corporation, the trust or – in the case of the condition in the definition "excluded property" – the particular property (or an identical property), the condition is deemed not to have been met with respect to the corporation, the trust or the particular or identical property.

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. In the case of the definition "excluded property", the particular property and the identical property would not be excluded property.

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

Clause 18

Foreign Investment Entities

ITA
94.1

Overview

Existing Rules

Existing section 94.1 of the Act applies where a taxpayer has invested in an offshore investment fund and one of the main reasons for the investment is to reduce or defer the tax liability that would have applied to the income generated from the underlying assets of the fund if such income had been earned directly by the taxpayer. In these circumstances, existing section 94.1 generally requires an amount to be included in computing the taxpayer’s income from the investment. This amount is determined, in general terms, by multiplying the cost amount of the taxpayer’s investment by a factor based on interest rates prescribed under Part XLIII of the Income Tax Regulations.

New Rules

Section 94.1 is replaced by provisions in new sections 94.1 to 94.4, which contain rules governing the tax treatment of interests in foreign investment entities (FIEs), tracking entities and foreign insurance policies.

In computing a taxpayer’s income for a taxation year, new subsection 94.1(4) will generally require an amount to be included in computing the taxpayer’s income from the investment. This amount will be determined, in general terms, by multiplying the designated cost of the taxpayer’s investment by a factor based on interest rates prescribed under paragraph 4301(b) of the Income Tax Regulations.

If a taxpayer elects and has sufficient information to comply, either new subsection 94.2(4) or 94.3(4) will apply in place of the rules in subsection 94.1(4) for computing income from the investment. However, in the case of interest in a tracking entity, subsection 94.3(4) will not be available, and in the case of an interest in a foreign insurance policy, only subsection 94.2(4) will apply.

Under subsection 94.2(4), a taxpayer must take into account the annual increase or decrease in the fair market value of the taxpayer’s interest in computing the taxpayer’s income from the interest.

Under subsection 94.3(4), a taxpayer is required to include the taxpayer’s share of the FIE’s income for each FIE taxation year that ends in the taxpayer’s taxation year.

Section 94.4 is designed to prevent double taxation with respect to amounts included in income under any of sections 94.1 to 94.3.

New sections 94.1 to 94.4 apply to taxation years that begin after 2006.

Note that under the coming-into-force provision for new sections 94.1 to 94.4, an election or form (but for greater certainty not including a return of income) referred to in any of new sections 94.1 to 94.3 of the Act made by a taxpayer is deemed to have been filed with the Minister of National Revenue

(i) on a timely basis if it is filed with the Minister of National Revenue on or before the taxpayer’s filing-due date for the taxpayer’s taxation year that includes the day of Royal Assent, and

(ii) in the taxpayer’s return of income for the taxpayer’s taxation year identified by the taxpayer in the election, if it is filed with the Minister of National Revenue in writing in the taxpayer’s return of income for the taxpayer’s taxation year that includes the day of Royal Assent.

For more detail on filing obligations in respect of returns of income, contact the Canada Revenue Agency.

The table below provides an overview of new sections 94.1 to 94.3 and related provisions.

Issue Summary References

1. Who is subject to the new FIE rules? A. All taxpayers, except exempt taxpayers. Except as indicated in (C), below, FIE rules do not apply to non-resident taxpayers. S.94.1(3), 94.2(3), (9) and (11). "Exempt taxpayer" (s.94.1(1)). Non-resident taxpayers: see also s.94.1(3) and 94.2(5).
  B. Partnerships with members resident in Canada must allocate FIE income to those members. Section 96, including exception in s. 96(1.9). See also s. 94.2(6) for application to cases where partnership members become resident in Canada.
  C. Controlled foreign affiliates. New s. 95(2)(g.3).

2. What property is subject to the new FIE rules? A. If subsection 94.1(3) applies, Participating interests (other than exempt interests) in foreign investment entities. However, if no taxation year of a FIE has ended in the taxpayer’s taxation year, the FIE rules do not apply to the taxpayer for the taxpayer’s year in respect of the FIE. S. 94.1(3) and the following definitions in s. 94.1(1): "entity", "non-resident entity", "foreign investment entity", "exempt interest" and "participating interest".
  B. If 94.1(3) does not apply, interests in tracking entities for which subsection 94.2(9) applies. Section 94.3 not available for such interests. S. 94.1(4) and 94.2(3) and (9). The definition "tracking entity" in 94.2(1) See also amended s. 91(1).
  C. Interests in certain foreign insurance policies. This property is subject only to s. 94.2, not s. 94.1, 94.3 and 94.4. S. 94.2(3), (10) and (11).

3. What is the difference in the tax treatment of FIE interests between ss. 94.1, 94.2 and 94.3? A. Section 94.1. Investor’s income inclusion based on a prescribed rate of return. S. 94.1(4).
  B. Section 94.2. Full appreciation/decline in fair market value of the investment is recognized on an annual basis. S. 94.2(4). S. 94.2(20).
  C. Section 94.3. Investor includes its "share" of a FIE’s income (e.g., does not include FIE’s share of unrealized gains). S. 94.3(4).

4. How will foreign affiliates of taxpayers resident in Canada be treated under new FIE rules? Subject to s. 94.2(9) (interests in tracking entities), a taxpayer’s share of the capital stock of a controlled foreign affiliate is exempt from the new FIE rules. In certain cases, a taxpayer can elect to have a foreign affiliate treated as a controlled foreign affiliate. Otherwise, the FIE rules will apply to the interest in the affiliate. Paragraph (a) of the definition "exempt interest". Paragraphs 94.1(2)(h) and (i).

5. If a non-resident corporation that is a FIE pays out dividends, how are these dividends taxed? A. General principle: existing rules apply. Existing s. 90 and 113.
B. Relief provided to prevent double taxation. This relief applies to taxable distribution from other FIEs (e.g., trusts). S. 94.4.

6. In what circumstances is a taxpayer subject to any of sections 94.1 to 94.3, respectively? A. Requirement to use s. 94.1 where insufficient information to use s. 94.2 or s. 94.3. S. 94.1(4), 94.2(3), 94.3(3).
B. Election to use s. 94.2 available – interest must have readily ascertainable fair market value. S. 94.2(2) and (3).
C. Requirement to use s. 94.2 in the case of interests in foreign insurance policies. S. 94.2(3), (10) and (11).
D. Election to use s. 94.3 available (but not if 94.2(9) applies to the interest) – must have sufficient information. S. 94.3(2) and (3).

Definitions

ITA
94.1(1)

New subsection 94.1(1) of the Act defines a number of expressions for the purpose of section 94.1. These definitions are also relevant for the purposes of sections 94.2 and 94.3.

"arm’s length interest"

The definition "arm’s length interest" is relevant in determining whether a taxpayer’s particular participating interest is, under paragraph (e) of the definition "exempt interest" in subsection 94.1(1), an exempt interest and whether an interest has at any time a "readily obtainable fair market value" as defined in subsection 94.2(1). For more information, see the commentary on those definitions.

A particular participating interest in a particular non-resident entity is an arm’s length interest at any time only if

  • either
  • it is reasonable to conclude that there are at least 150 persons each of which holds participating interests in the particular non-resident entity that, at that time, are identical to the particular participating interest, and have a total fair market value of at least $500, or
  • participating interests, in the non-resident entity, that are identical to the participating interest are listed on a prescribed stock exchange, and those interests have, at that time, a "readily obtainable fair market value" (as that term is defined in subsection 94.2(1)),
  • the total of all amounts each of which is the fair market value, at that time, of the particular participating interest or of a participating interest in the non-resident entity that is identical to the particular participating interest and that is held, at that time, by the taxpayer or an entity or individual with whom the taxpayer does not deal at arm’s length does not exceed 10% of the total of all amounts each of which is the fair market value, at that time, of a participating interest in the non-resident entity that is held, at that time, by any entity or individual and that is identical to the particular participating interest, and
  • it is reasonable to conclude that the participating interests in the non-resident entity that are identical to the particular participating interest can
  • normally be acquired and sold by members of the public in the open market, or
  • can be acquired from and sold to the non-resident entity by members of the public.

"beneficiary"

A reference in sections 94.1 to 94.4 to a "beneficiary" carries, except for the purpose of paragraph 94.2(11)(e) (i.e., a beneficiary in respect of an interest in an insurance policy), the meaning assigned by subsection 94(1). For more information, see the commentary on the definition "beneficiary" in subsection 94(1).

"carrying value"

In applying sections 94.1 to 94.4 in respect of a taxpayer, the "carrying value" of a property held by a particular entity at any time means:

  • the fair market value of the property at that time, if
  • the particular entity is an entity (referred to in this note as the "first entity") in which the taxpayer holds at that time a participating interest or is another entity in which the first entity holds at that time a direct or indirect interest,
  • the taxpayer elects, by notifying the Minister in writing in the taxpayer’s return of income for the taxpayer’s taxation year that includes that time to have this paragraph apply to all of the particular entity’s property, and
  • the property is property that is valued for the purpose of the entity’s "financial statements" (as defined in subsection 94.1(1)) as of that time; and
  • in any other case, the amount at which the property is valued for the purpose of the entity’s financial statements as of that time.

The carrying value of property is relevant primarily for the purpose of determining whether a non-resident entity is a FIE. For more information, see the commentary on the definitions "foreign investment entity" and "financial statements".

It should also be noted that paragraph 94.1(2)(j) provides a "look-through" rule that can affect the properties considered to be owned by an entity and the carrying values of the entity’s properties. In particular, the rule in paragraph 94.1(2)(j) can impute to an entity both ownership of property otherwise owned by certain other entities in which the entity has a significant interest, and the "net accounting income" (as defined in subsection 94.1(1)) and certain business activities of such other entities derived from such property. For the purposes of the look-through rule, the time at which the determination of carrying value is made is the end of the last "taxation year" (as defined in subsection 94.1(1)) of the first tier non-resident entity (whether lower tier entities share the same taxation year or not) that ends in a relevant taxation years of an electing taxpayer. For more information, see the commentary to new paragraph 94.1(2)(j) and the definition "taxation year".

"designated cost"

In computing a taxpayer’s income for a taxation year from a participating interest of the taxpayer in a non-resident entity, where subsection 94.1(4) applies, the taxpayer will be required to include the amount, determined under that subsection, in computing the taxpayer’s income from the investment. That amount is determined by multiplying the "designated cost" of the taxpayer’s investment by a factor based on the interest rate prescribed under paragraph 4301(b) of the Income Tax Regulations.

The designated cost to a taxpayer at any time of a participating interest held at that time by the taxpayer in a non-resident entity, is determined, in general terms, as follows:

  • ADD the cost amount to the taxpayer of the participating interest at that time (determined without reference to certain provisions of the Act),
  • ADD the amount of any previous income inclusions, of the taxpayer in respect of the participating interest, arising because of the application of subsection 94.1(4) for a previous taxation year that ends after 2006,
  • ADD, if the participating interest was an offshore investment fund property (as defined in subsection 94.1(1) as it read in its application to taxation years that began before 2007) of the taxpayer at the end of the taxpayer’s last taxation year that began before 2007, certain amounts required to be included in computing the designated cost under "old" subsection 94.1(2),
  • ADD, if the participating interest was acquired by the taxpayer before 2007, and was not an offshore investment fund property of the taxpayer at the end of the taxpayer’s last taxation year that began before 2007, the amount, if any, by which the fair market value of the participating interest at the end of that last taxation year exceeds the cost amount to the taxpayer of the participating interest at the end of that last taxation year,
  • ADD, if one or more particular amounts has been made available by a person to another person after the last 2006 taxation year of the non-resident entity and before that time for the main purpose of increasing the value of the taxpayer’s participating interest, the total of all amounts each of which is the amount, if any, by which each particular amount exceeds any increase in the cost amount to the taxpayer of the participating interest because of that particular amount,
  • ADD, if the participating interest is acquired by the taxpayer after 2006, the amount, if any, by which the fair market value of the participating interest at the time it was so acquired exceeds the cost amount to the taxpayer of the participating interest at the time it was so acquired, and
  • SUBTRACT, if the participating interest was last acquired by the taxpayer before 2007, and was not an offshore investment fund property (as defined in subsection 94.1(1) as it read in its application to taxation years that began before 2007) of the taxpayer at the end of the taxpayer’s last taxation year that began before 2007, the amount, if any, by which the cost amount to the taxpayer of the participating interest at the end of that last taxation year exceeds the fair market value of the participating interest at the end of that last taxation year.

"entity"

An entity includes an association, a corporation, a fund, a joint venture, an organization, a partnership, a syndicate and a trust. It does not include a natural person.

"exempt business"

The definition "exempt business" is relevant in determining whether a "non-resident entity" (as defined in subsection 94.1(1)) is carrying on an "investment business" (as defined in subsection 94.1(1)) and whether the non-resident is not a FIE. An investment business does not include an exempt business.

An exempt business of an entity at any time, in general terms, is a business — other than a business carried on by the entity principally with entities or individuals with whom the entity does not deal at arm’s length, a business carried on by a trust that is an exempt foreign trust because of paragraph (h) of the definition "exempt foreign trust" in subsection 94(1), and a business carried on by the entity as a member, of a partnership, that is not a qualifying member of the partnership, or that would not be such a qualifying member if the entity were a person — that is carried on by the entity at that time and that, throughout the period (in its taxation year that includes that time) is

  • carried on by the entity as a foreign bank, a trust company, a credit union or an insurance corporation , or
  • a business the principal purpose of which is to derive income from certain real estate businesses, certain leasing or licensing businesses, or businesses involved in the development of foreign and Canadian resource properties and timber resources.

The reference in this definition to a "permanent establishment" is intended to carry the meaning of that expression assigned by proposed section 8202 of the Income Tax Regulations. Proposed section 8202 of the Regulations was released in draft form as part of the February 27, 2004 release of draft technical amendments.

The reference in this definition to a "qualifying member" of a partnership is intended to carry the substantive meaning of that expression assigned by proposed subsection 248(1) of the Act, contained in the December 20, 2002 legislative proposals relating to income tax. For more detail on the proposed definition "qualifying member" in subsection 248(1) of the Act, see that provision and its commentary in the legislative proposals and explanatory notes published on February 27, 2004.

For more information generally, see the commentaries on the definitions "foreign investment entity" and "investment business" in subsection 94.1(1).

"exempt interest"

The FIE income inclusion rules under any of subsections 94.1(4), 94.2(4) or 94.3(4) apply to a taxpayer for a year generally only where subsection 94.1(3) applies to the taxpayer. Subsection 94.1(3) will not apply to a taxpayer for a particular taxation year of the taxpayer in respect of a participating interest of the taxpayer in a non-resident entity if at the end of a taxation year of the non-resident entity that ends in the particular taxation year the taxpayer’s participating interest is an "exempt interest". An exempt interest of a taxpayer in a non-resident entity is defined to mean at any time a particular participating interest of the taxpayer in the non-resident entity if any of the following applies:

  • the non-resident entity is a controlled foreign affiliate of the taxpayer (including an affiliate that is a controlled foreign affiliate because of an election under new paragraph 94.1(2)(h)), a "qualifying entity" (as defined in subsection 94.1(1)) that is a foreign affiliate (other than a controlled foreign affiliate) of the taxpayer in respect of which the taxpayer has a qualifying interest (within the meaning assigned by paragraph 95(2)(m)), or a partnership;
  • the taxpayer is a financial institution (as defined in subsection 142.2(1)) and the participating interest is a mark-to-market property (as defined in that same subsection) or a property described in an inventory of a business of the taxpayer, which inventory is valued, in computing the taxpayer’s income from the business, in accordance with section 1801 of the Income Tax Regulations;
  • the participating interest is a right
  • under an agreement referred to in subsection 7(1), to acquire a share of the capital stock of the non-resident entity,
  • granted by the non-resident entity, or another entity with which the non-resident entity does not deal at arm’s length,
  • acquired by the taxpayer, at a time when the taxpayer dealt at arm’s length with the entity that granted the right, and
  • acquired by the taxpayer solely because the taxpayer was an employee of the non-resident entity, or another entity with which the non-resident entity does not deal at arm’s length;
  • the non-resident entity is an entity — other than a trust that is an exempt foreign trust because of paragraph (h) of the definition "exempt foreign trust" in subsection 94(1) — all or substantially all of the carrying value of the property of which is attributable to the carrying value of properties that are shares of the capital stock of a corporation (that is not a foreign investment entity) that employs the taxpayer or that is related to another corporation that employs the taxpayer, and an amount that is all or substantially all of the non-resident entity’s "payable net accounting income" (as defined in subsection 94.1(1)) becomes payable (as determined under paragraph 94.1(2)(o)) by it to its interest holders within specified times, and the taxpayer’s share of that amount is included in computing the taxpayer’s income for the taxpayer’s taxation year that includes the time at which it became payable;
  • it is reasonable to conclude that the taxpayer had no tax avoidance motive (determined by reference to paragraphs 94.1(2)(k) to (n)) in respect of the particular participating interest, and
  • the particular participating interest is an "arm’s length interest" (as defined in subsection 94.1(1)) of the taxpayer, the non-resident entity is resident (determined by reference to paragraph 94.1(2)(g)) in a country in which there is a prescribed stock exchange, and participating interests in the non-resident entity that are identical to the particular participating interest are listed on a prescribed stock exchange, or
  • the non-resident entity is governed by the laws of one or more countries (other than a prescribed country) with which Canada has entered into a tax treaty (or governed by the laws of a political subdivision of such a country), the non-resident entity exists, was (unless the entity was continued in any jurisdiction) formed or organized, or was last continued, under those laws, while it is governed by the laws of a country (or of is political subdivision), the non-resident entity is under the tax treaty with that country resident in that country, and either

(I) the participating interest is an arm’s length interest of the taxpayer, or

(II) the non-resident entity is, under the tax treaty with the United States of America, resident in the United States of America, and throughout the period, in the taxpayer’s taxation year that includes that time, during which the taxpayer is resident in Canada, the taxpayer is a citizen of the United States of America and is liable for and subject to income tax in the United States of America for that taxation year because of that citizenship;

  • the taxpayer’s participating interest is a share, of the capital stock of a corporation resident in Canada, the rights under which include a right to acquire a share in a non-resident corporation, such that the participating interest would not be a participating interest in a non-resident entity if paragraph (d) of the definition "participating interest" were read without reference to rights to acquire shares of the capital stock of a non-resident corporation. However, the taxpayer’s participating interest will qualify as an exempt interest under this provision only if the participating interest is convertible into, exchangeable for, or a right to acquire only property that, if the conversion, exchange or right were exercised by the taxpayer at that time, would be a participating interest, in the non-resident corporation, that is at that time an exempt interest (determined without reference to paragraph (f) of the definition "exempt interest") of the taxpayer, or
  • the non-resident entity, is during the period in its taxation year that the taxpayer held the participating interest, a testamentary trust that is an estate that arose on and as a consequence of the death of an individual, and the time is no more than 12 months after the death (or, such time as the Minister considers reasonable in the circumstances, if the taxpayer applies to the Minister within the 12 months after the death of the individual).

The definition "exempt interest" is also relevant in applying subsection 94.2(9) in determining whether subsection 94.1(4) or 94.2(4) will apply to a taxpayer’s interest in a "tracking entity" (as defined in subsection 94.2(1)). However, note that a taxpayer’s interest in a controlled foreign affiliate, or a qualifying entity (other than a partnership), will not avoid being subject to subsection 94.2(9) solely because it is an exempt interest. For more information, see the commentary on those provisions.

"exempt property"

The definition "exempt property" is relevant in determining whether a property is an "investment property"(as defined in subsection 94.1(1)) and whether a "non-resident entity" (as defined in subsection 94.1(1)) is not a FIE. Except for the purposes of applying the definitions "investment business" in subsection 94.1(1) and "tracking entity" in subsection 94.2(1), investment property does not include exempt property.

In general terms, exempt property of a particular entity means at any time, in determining whether a particular taxpayer’s interest in the particular entity is a participating interest in a FIE,

  • under paragraph (a) of the definition, a property, of the particular entity, that is at that time used or held principally in a business (other than an investment business) carried on by the particular entity or a related entity,
  • under paragraph (b) of the definition, indebtedness (that would be "excluded property", as defined in subsection 95(1), of the particular entity if certain assumptions applied) owing by a debtor to the particular entity, where the particular entity and the debtor are foreign affiliates of the taxpayer or of another entity of which the taxpayer is a controlled foreign affiliate and in respect of which the taxpayer or the other entity, as the case may be, has a qualifying interest (as defined in subsection 95(2)(m)).

In addition, under paragraph (c) of the definition, exempt property means a property acquired by the particular entity within the 36 months preceding that time (or where written application has been made to the Minister of National Revenue by the taxpayer within 36 months of having acquired the property, within such longer period as the Minister considers reasonable in the circumstances) as a result of qualified activities. Those activities are

  • the issuance of a debt or a participating interest in the particular entity;
  • the disposition of property used in a business (other than an investment business) carried on by the particular entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity;
  • the disposition of a participating interest in another entity all or substantially all of the fair market value of the property of which is attributable to property used principally in a business (other than an investment business) carried on by the other entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the other entity; and
  • the accumulation of income of the particular entity derived from a business (other than an investment business) carried on by the particular entity or an entity related (otherwise than by reason of a right referred to in paragraph 251(5)(b)) to the particular entity.

The qualified activities also must have been undertaken for the purpose of

  • acquiring property to be used principally in or making expenditures for the purpose of earning income from a business (other than an investment business) carried on by the entity or an entity related to the entity, or
  • acquiring a participating interest that is a significant interest in another entity all or substantially all of the fair market value of the property of which is attributable to property used or held principally in the course of earning income from a business, other than an investment business, carried on by the other entity.

"exempt taxpayer"

The rules in new sections 94.1 to 94.4 do not apply in respect of periods during which a taxpayer is an exempt taxpayer. For more information, see the commentary on paragraph 94.1(3)(a) and subsections 94.2(9) and (10).

An individual is an "exempt taxpayer" for a taxation year where the individual, before the end of the year, was a resident of Canada for a period of, or periods the total of which is, 60 months or less. (Individuals who have never been non-resident cannot fall within the 60-month exception.) This 60-month exemption for new immigrants to Canada is similar to an exemption in the rules for non-resident trusts in existing section 94.

Except as indicated below, tax-exempt entities to which subsection 149(1) applies are also exempt taxpayers. 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 (including a trust deemed resident by subsection 94(3)) under which the only beneficiaries that may for any reason receive, at or after the particular time and directly from the trust, any of the income or capital of the trust are persons that are both qualifying investors (as defined in subsection 94(1)) and the qualifying exempt taxpayers. Qualifying exempt taxpayers are for this purpose, tax-exempt entities to which subsection 149(1) applies, other than 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. For more detail on the definition "qualifying investor" in subsection 94(1), see the commentary on that provision.

The express reference to tax-exempt entities is generally of significance for the purposes of calculating Part I tax only in the context of the narrow circumstances to which new subsection 94.2(17) applies. That subsection contemplates a case where a taxpayer ceases to be an "exempt taxpayer" and subsequently becomes an "exempt taxpayer". However, the reference to tax-exempt entities may also be of significance in the context of Part XI (foreign property limits), given that the application of sections 94.1 to 94.4 has an impact on the cost amount of participating interests in FIEs.

"financial statements"

The definition "financial statements" is relevant primarily for the purpose of determining whether a non-resident entity is a FIE. For more information, see the commentary on the definitions "foreign investment entity" and "carrying value".

In general, the financial statements, for a taxation, of an entity will be the balance sheet and statement of income provided by the entity to its investors if they are prepared in accordance with generally accepted accounting principles used for the taxation year in Canada or in accordance with generally accepted accounting principles that are substantially similar (including by reference to paragraph 94.1(2)(b)) to those used for the taxation year in Canada. Taxpayers, will however, be allowed to elect to treat an unconsolidated balance sheet and statement of income of an entity as its financial statements if they are prepared in accordance with those principles (or would be so prepared if those principles did not require consolidation).

More precisely, in applying sections 94.1 to 94.4 to a taxpayer, the financial statements, of a particular entity for a particular taxation year of the entity, are

  • the balance sheet and the statement of income of the particular entity, if
  • the particular entity is an entity (referred to in this note as the "first entity") in which the taxpayer holds, in the particular taxation year, a participating interest or is another entity in which the first entity has, in the particular taxation year, a direct or indirect interest,
  • the taxpayer elects (in the taxpayer’s return of income for the taxpayer’s taxation year in which the particular taxation year ends) to have this paragraph apply in respect of the particular entity and the participating interest, and
  • that balance sheet and statement of income would be prepared in accordance with generally accepted accounting principles used in Canada for the particular year or in accordance with generally accepted accounting principles that are substantially similar to those used in Canada if those principles did not require consolidation; and
  • in any other case, the balance sheet and statement of income of the particular entity, if that balance sheet and statement of income are prepared for the particular taxation year in accordance with generally accepted accounting principles used for the taxation year in Canada or in accordance with generally accepted accounting principles that are substantially similar to those used for the taxation year in Canada.

"foreign bank"

The definition "foreign bank" has the same meaning as in subsection 95(1). The expression is used in the definition "exempt business".

"foreign investment entity"

Under subsection 94.1(3), the new tax regime for FIEs in sections 94.1 to 94.4 generally applies only to participating interests in a "foreign investment entity" as defined in subsection 94.1(1).

A non-resident entity (as defined in subsection 94.1(1)) at any time will be a FIE at that time, unless any one of the following exceptions applies to the non-resident entity:

  • at the end of its taxation year that includes that time, it is an "exempt foreign trust" (as defined in new subsection 94(1)) other than a trust that is an exempt foreign trust because of any of paragraphs (a) to (g) of that definition,
  • at the end of its taxation year that includes that time, the carrying value of all of its investment property is not greater than one-half of the carrying value of all of its property, or
  • throughout its taxation year that includes that time, its principal undertaking was the carrying on of a business that is not an investment business.

The new rules are designed so that, in the case of partnerships, members’ shares of incomes and losses are allocated in accordance with section 96 (including new subsection 96(1.9), described in the commentary below).

For more information generally, see the commentary on the definitions "entity", "exempt interest", "non-resident entity", "investment property" and "carrying value" in subsection 94.1(1) and "exempt foreign trust" in subsection 94(1). See also the commentary on paragraphs 94.1(2)(a), (b), (e) and (h) to (j) and paragraph 96(1)(d).

"investment business"

The expression "investment business" is relevant in determining whether a non-resident entity is a FIE or a "qualifying entity", as defined in subsection 94.1(1). An "investment business" of an entity at any time, means a business (other than a business that is at that time an exempt business) carried on by the entity (including, for greater certainty, a business carried on by the entity as a member of a partnership) at that time, if the principal purpose of the business is to derive any of the following income or profits:

  • income (including interest, dividends, rents, royalties or any similar return on investment or any substitute for such a return) from property,
  • income from the insurance or reinsurance of risks,
  • income from the factoring of trade accounts receivable, or
  • profits from the disposition of investment property.

"investment property"

The expression "investment property" includes a list of specified properties. Most of the specified properties (e.g., shares, partnership interests, real estate and resource properties) are also specified in the definition of the same expression in subsection 95(1). In addition to the properties also specified in the definition in subsection 95(1), "investment property" held by a particular entity includes:

  • an interest in an organization, fund or other entity;
  • intellectual property;
  • most derivative financial products; and
  • interests, options and rights in respect of the above properties.

It should be noted, however, that investment property of an entity does not include

  • except for the purpose of applying the definition "investment business" in subsection 94.1(1) or the definition "tracking entity" in subsection 94.2(1), an "exempt property" (as defined in subsection 94.1(1)),
  • except for the purpose of applying the definition "qualifying entity", a "significant interest" (as defined in subsection 94.1(1)) in a "qualifying entity" (as defined in subsection 94.1(1)), an interest in a qualifying entity that has a significant interest in the entity, and debt owing by qualifying entities in which the entity has a significant interest or by a qualifying entity that has a significant interest in the entity,
  • certain exempt commodities and futures in respect of those exempt commodities, and
  • property that is owned by a corporation resident in Canada.

The definition is relevant for the purpose of the determining whether a non-resident entity is a FIE. For more information, see the commentary on the definitions "investment business", "qualifying entity", "significant interest", and "exempt property" in subsection 94.1(1).

"net accounting income"

The net accounting income of an entity for a taxation year means the amount that is its net income, before income taxes and extraordinary items, for the year reported in its financial statements for the year. For more information, see the commentary on the definition "financial statements" in subsection 94.1(1).

"non-resident entity"

One of the requirements for an entity to be a FIE to which sections 94.1 to 94.4 apply is that the entity be a "non-resident entity". In this regard, it should be noted that, under proposed subparagraph 94(3)(a)(iv), certain trusts that would otherwise be non-resident are deemed (for certain limited purposes including the definition "non-resident entity") to be resident in Canada for taxation years in which the trust has a resident contributor or a resident beneficiary. For more information, see the commentary to new subsection 94(3).

In addition to non-resident corporations and trusts, a "non-resident entity" includes at any time any other type of entity that at that time

  • exists, was (unless the entity was continued in any jurisdiction) formed or organized, or was last continued under the laws of a country or a political subdivision of a country other than Canada, or
  • is governed under the laws of a country or a political subdivision of a country other than Canada.

"participating interest"

A "participating interest" in an entity means a share of the capital stock of corporation, a specified interest (as defined in subsection 94.1(1)) in a trust and an interest in any other type of entity.

It also includes a property that is (under a contract, in equity or otherwise, either immediately or in the future and either absolutely or contingently) convertible into, exchangeable for, or confers a right to acquire

  • such a share, specified interest or other interest, or
  • a property (other than money) the fair market value of which is determined primarily by reference to the fair market value of such a share, interest as a beneficiary or other interest in an entity.

For a related rule that applies in determining whether an interest is a participating interest, see the commentary on paragraph 94.1(2)(s).

"payable net accounting income"

The payable net accounting income, of an entity for a taxation year of the entity, means its net income, after income taxes and extraordinary items, for the year reported in its "financial statements" (as defined in subsection 94.1(1)) for the year.

This definition is relevant in determining whether an interest in a non-resident entity is an "exempt interest" (as defined in subsection 94.1(1)) in the entity. In particular, it is relevant in applying paragraph (d) of the definition "exempt interest" in subsection 94.1(1) and paragraphs 94.1(2)(m) and (n).

"qualifying entity"

A "qualifying entity" in a period means a particular entity that is a partnership or a corporation all or substantially all of the "carrying value" (as defined in subsection 94.1(1)) of the property of which is, throughout the period, attributable to the carrying value of property that is:

  • property other than "investment property" (as defined in subsection 94.1(1)),
  • investment property that is a participating interest in or debt of another entity if the other entity is an entity whose principal undertaking is the carrying on of a business that is not an investment business and the particular entity has either a significant interest in the other entity or a strategic interest in the other entity,
  • investment property in respect of which the particular entity establishes that the property or proceeds from the disposition of the property is to be used by the particular entity for the purpose of acquiring property described in the two paragraphs above, or
  • investment property that is held by the particular entity if the particular property (or other property for which the particular property is substituted property) was last acquired by the particular entity within 36 months before the end of the period (or, where applicable conditions are met, within such longer period as the Minister considers reasonable in the circumstances), as a result of qualifying activities.

For this purpose, qualifying activities are

  • the issuance of a debt or a participating interest in the entity,
  • the disposition of property described in any of paragraphs (a) to (c) of the definition "qualifying entity", and
  • the accumulation of income of the entity.

The qualifying activities must also have been made for the purpose of acquiring property that, if owned by the entity, would be property described in paragraph (a) to (c) of the definition of "qualifying entity".

For the purpose of applying this definition, an entity will be considered to have a strategic interest in another entity where the entity participates in or has established a plan of action for participating in the management and control of the other entity by reason of its status as a holder of a significant number (not to be confused with the "significant interest" definition) of participating interests in the other entity (in comparison with the number of participating interests held by each holder of interests in the entity) or an agreement with other such significant interest holders.

In establishing if an entity actively participates in or exercises a significant influence over the governance or the management of an other entity the following facts (among others) will be considered:

  • whether the entity, alone or in alliance with others, appoints members of the board of directors and management;
  • whether the entity, alone or in alliance with others, significantly influences the appointment of members of the board of directors and management; and
  • whether the entity, alone or in alliance with others, is actively involved in the strategic planning for the entity.

In determining if an entity is carrying out a plan of action for the purpose of obtaining its objective of actively participating in or exercising significant influence over the governance or the management of another entity, all factors will be considered. For example, an entity’s board-approved plan of action, board minutes, investment studies and other material relating to the strategic investment will be considered. As well, evidence that increasing numbers of shares of the other entity are being bought or that property is being sold in order to raise money to acquire such shares will be considered important factors. The entity’s investment history and patterns will also be considered.

Finally, it should be noted that under paragraph 94.1(2)(r), the definition "qualifying entity" in subsection (1) does not apply in determining whether a taxpayer has a participating interest in a FIE, if the Minister sends a written demand to a taxpayer requesting additional information for the purpose of enabling the Minister to determine whether an entity is a qualifying entity, and information sufficient to make the determination is not received by the Minister within 120 days (or within such longer period as is acceptable to the Minister) after the Minister sends the demand.

For more information, see the commentary on paragraph 94.1(2)(r) and on the definitions "carrying value", "significant interest" and "investment property" in subsection 94.1(1).

"significant interest"

An entity is considered to have a significant interest in a corporation, partnership, or trust if the entity or a group of entities comprised of the entity and entities related to the entity holds shares or interests in the corporation, partnership or trust that have a fair market value equal to 25% or more of the fair market value of all the shares or interests in the corporation, partnership or trust and,

  • in the case of a corporation, the entity or the group of entities comprised of the entity and the entities related to the entity has shares entitling the entity to cast at least 25% of votes at an annual shareholders’ meeting of the corporation, or
  • in the case of a trust, for taxation years that begin after Announcement Date, the only beneficiaries that may for any reason receive, at any time and directly from the trust, any of the income or capital of the trust are persons that are qualifying investors (as defined by subsection 94(1)) in respect of the trust.

In these circumstances, the entity’s significant interest will be its share of the capital stock of the corporation, its interest as a member of the partnership or its interest as a beneficiary under the trust, as the case may be. For more detail on the definition "qualifying investor" in subsection 94(1), see the commentary on that provision.

"specified interest"

The definition "specified interest" applies in determining whether an entity or individual has a "participating interest" (as defined in subsection 94.1(1)) in a non-resident entity that is a trust. A specified interest at any time of an entity or individual in a trust, means, an interest of the entity or individual as a beneficiary under the trust if

  • The trust is at that time an exempt foreign trust because of paragraph (h) of the definition "exempt foreign trust" in subsection 94(1). As a result, an interest in a foreign commercial investment trust or in certain employee remuneration arrangements will generally be subject to the income computation requirements in sections 94.1 to 94.4 if the trusts are FIEs or tracking entities; or
  • The entity or individual may for any reason receive, as a beneficiary under the trust, at or after that time any of the income or capital of the trust directly from the trust. However, such an interest will, under paragraph (b) of the definition "specified interest", not be treated as a participating interest if
  • the entity or individual would at that time be a successor beneficiary (as defined by subsection 94(1)) under the trust, if in applying the definition "successor beneficiary" to the entity or individual, as the case may be, contributors whose contributions were 10% or less of all contributions to the trust at that time were ignored, or
  • every amount of income and capital of the trust that the entity or individual may receive at or after that time depends at and after that time on the exercise — after that time, in favour of the entity or individual, and by any other entity or individual — of a discretionary power.

"specified party"

The definition "specified party" is relevant in determining whether a taxpayer has an avoidance motive in respect of a participating interest in a FIE. This determination is relevant to applying the definition "exempt interest" in subsection 94.1(1). For more information, see the commentary on the definition "exempt interest".

A specified party in respect of a particular individual or particular entity, as the case may be, means another individual or other entity that does not deal at arm’s length with the particular individual or the particular entity, as the case may be.

"taxation year"

The "taxation year" of a non-resident entity that is a corporation or an individual is generally determined in accordance with subsection 249(1) and paragraph 250.1(a). Where the non-resident entity is not an individual or a corporation, this definition provides that the entity’s taxation year means:

  • in respect of a business or property of the non-resident entity for which the accounts of the non-resident entity are ordinarily made up, the period that would be determined under section 249.1 in respect of the non-resident entity if the non-resident entity were a corporation, and
  • in any other case, a calendar year.

"trust"

A definition of "trust" is provided for the purpose of applying section 94.1. The definition clarifies that a reference to a trust in that section includes an estate.

Rules of Application

ITA
94.1(2)

Subsection 94.1(2) sets out a number of rules for the purposes of applying sections 94.1 to 94.4 in respect of a particular participating interest, in a particular non-resident entity, held by a taxpayer in a particular taxation year of the taxpayer (and in respect of any other participating interests in the particular non-resident entity that are identical to the participating interest and that are held by the taxpayer in the particular taxation year). These rules are relevant, for example, in determining whether the particular non-resident entity is a FIE and whether the particular participating interest is an "exempt interest".

Determining Whether Entity is a FIE

New paragraph 94.1(2)(a) contains rules for applying the financial statements (as defined in subsection 94.1(1)) of an entity in determining whether a particular non-resident entity, in which a taxpayer holds a particular participating interest, is a FIE.

If the financial statements of an entity (referred to in this note as the "first entity") for a taxation year (referred to in the commentary on paragraph 94.1(2)(a) as the "specified year") of the first entity reflect property, indebtedness, income or losses of another entity, then in determining whether a particular non-resident entity is a FIE:

  • the business and non-business activities for the specified year carried on by the other entity, the net accounting income for the specified year determined for the other entity from those activities, and the property and indebtedness for the specified year owned by or owed by, as the case may be, the other entity are deemed for the specified year to be carried on by, determined for, owned by or owed by, as the case may be, the first entity, and
  • an exempt business of the other entity at any time in the specified year is, if it is a business the activities of which are deemed by subparagraph 94.2(a)(i) to be carried on by the first entity, deemed to be an exempt business of the first entity at that time in the specified year.

Paragraph 94.1(2)(a) is relevant in applying, for example, the definition "carrying value" in subsection 94.1(1), when determining whether the non-resident entity is a FIE because of the carrying value of its investment property.

For more information, see the commentary on the definitions "carrying value", "foreign investment entity" and "investment property" in subsection 94.1(1). See also, the commentary on paragraph 94.1(2)(b), for more information on determining whether accounting principles are substantially similar to Canadian GAAP, and the commentary on paragraph 94.1(2)(j), for more information on the look-through rule for significant interests.

GAAP Substantially Similar to Canadian GAAP

Paragraph 94.1(2)(b) provides that generally accepted accounting principles used for a taxation year in the United States of America or in countries that are members of the European Union are, for greater certainty, considered to be substantially similar to those used in Canada for that taxation year.

Designated Cost

Paragraph 94.1(2)(c) applies in determining, at any time in a particular taxation year, the designated cost to a taxpayer of a participating interest of the taxpayer that is a specified interest (as defined by subsection 94.1(1)) in a trust. However, the rule only applies where the trust is not an exempt foreign trust (as defined by subsection 94(1)).

Under paragraph 94.1(2)(c), the designated cost to the taxpayer of a participating interest in a trust that is not an exempt foreign trust is deemed to be the greater of two amounts. The first amount is the designated cost, determined without reference to paragraph 94.1(2)(c), at that time to the taxpayer of the participating interest. The second amount is the total of all amounts each of which is

  • in the case of property that is restricted property (within the meaning of section 94), held by the trust in respect of the particular participating interest, the fair market value of the restricted property, to the extent that it is reasonable to consider that the restricted property is held for the purpose of satisfying the rights of the taxpayer, or
  • the amount that would be the cost amount (as determined under paragraph (b) of the definition "cost amount" in subsection 108(1)) at that time to the taxpayer of the participating interest if
  • a reference to property in the description of A in the formula in the definition of "cost amount" were read without reference to property that is restricted property held by the trust for the purpose of satisfying the rights of the taxpayer in respect of the particular participating interest,
  • the value of B in the formula in that definition were nil,
  • the value of C in the formula in that definition were 1, and
  • the value of D in the formula in that definition were the number of persons resident in Canada that hold a participating interest in the trust and that are identified by the taxpayer in the taxpayer’s return of income for the particular taxation year.

Characterization of Income from FIE Interest

Paragraph 94.1(2)(d) provides a special rules for determining whether a taxpayer’s income for a taxation year from the application of subsection 94.1(4) or 94.3(4) will be treated as income from a source outside Canada. Paragraph 94.1(2)(d) provides that in applying subsections 94.1(4) and 94.3(4) to a taxpayer (that is a trust) for a particular taxation year of the taxpayer and in respect of a participating interest of the taxpayer in a non-resident entity, the reference in those subsections to "as income from property from a property that is the participating interest" is to be read as a reference to the expression "as income from property from a property that is a source outside Canada that is the participating interest". However, this special rule applies only if the portion of the net accounting income of the non-resident entity, from sources outside Canada, for its last taxation year that ends in the particular taxation exceeds 90% of the total net accounting income of the non-resident entity for that last taxation year.

Paragraphs 94.2(2)(e) and (f) provide similar rules that apply with respect to subsection 94.2(4). For more detail, see the commentary on those paragraphs.

The application of paragraph 94.1(2)(d) and paragraphs 94.2(2)(e) and (f) in respect of a participating interest of a taxpayer will not be relevant in determining a taxpayer’s eligibility for a foreign tax credit under section 126 of the Act. In this regard, see the commentary below on subsections 94.3(2) and 126(1.2). Rather, these paragraphs provide relief to trusts resident in Canada that hold participating interests in a FIE and that make payable to their non-resident beneficiaries all or part of the trusts’ incomes arising under any of subsections 94.1(4), 94.2(4) or 94.3(4). Where paragraph 94.1(2)(d) or 94.2(2)(e) or (f) applies and the terms of the trust permit amounts of deemed income of the trust to be made payable to beneficiaries, the amounts of such trust income arising under any of subsections 94.1(4), 94.2(4) or 94.3(4) and made payable to non-resident beneficiaries of the trust may qualify for reduced withholding if the non-resident beneficiary is resident in a country with which Canada has entered into a tax treaty and the tax treaty contains a provision permitting such a reduction in withholding.

Investment Business

Under paragraph 94.1(2)(e), a determination of whether the principal undertaking of an entity for a taxation year of the entity is the carrying on of a business that is not an investment business is made by reference to:

  • subject to the rules below, all the relevant facts and circumstances that relate to the undertakings of the entity and that are within the knowledge of the taxpayer or knowledge of which would, upon diligent inquiry made by the taxpayer, be obtainable by the taxpayer,
  • if the taxpayer elects, by reference to the entity’s "net accounting income" (as defined in subsection 94.1(1)) from investment property and investment businesses, or
  • if the taxpayer elects, by reference to the entity’s gross revenue from investment property and investment businesses.

Under subparagraph 94.1(2)(e)(iii), if the Minister of National Revenue sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to determine whether the principal undertaking of the entity is in that taxation year the carrying on of a business that is an investment business, and information sufficient to make the determination is not received by the Minister within 120 days (or within such longer period as is acceptable to the Minister) after the Minister sends the demand, the principal undertaking of the entity for that taxation year is deemed to be the carrying on of a business that is an investment business.

Arm’s Length and Related

Under paragraph 94.1(2)(f), in determining whether an entity or natural person and another entity or natural person are related to each other or deal at arm’s length with each other, a person referred to in section 251 includes an entity.

Residence of an Entity - Special Case

New paragraph 94.1(2)(g) of the Act applies in determining whether a taxpayer’s participating interest (as defined in subsection 94.1(1)) in a FIE is an "exempt interest"(as defined in subsection 94.1(1)). Paragraph 94.1(2)(g) provides that in applying subparagraph (e)(i) of the definition "exempt interest", if the FIE is not a corporation, a partnership or a trust, it is deemed not to be resident in a particular country, unless

  • the particular country is a country other than a prescribed country,
  • the FIE is governed, and exists, was (unless the FIE was continued in any jurisdiction) formed or organized, or was last continued under the laws of, the particular country or of a political subdivision of the particular country, and
  • the FIE is liable, under the laws of the particular country, to pay an income or profits tax imposed by the government of the particular country on all of its income, profits or gains.

If the paragraph 94.1(2)(g) applies so that the FIE is not considered resident in a particular country for the purpose of subparagraph (e)(i) of the definition "exempt interest", then the taxpayer would not be able to rely upon that paragraph in order to qualify the participating interest as an exempt interest.

Entity Treated as Controlled Foreign Affiliate

New paragraph 94.1(2)(h) of the Act permits a taxpayer to make an irrevocable election to treat a foreign affiliate, of the taxpayer, that is a foreign investment entity (including an affiliate the shares of which are held by the taxpayer’s controlled foreign affiliate) as a controlled foreign affiliate of the taxpayer for a particular taxation year and subsequent taxation years. This one-time election is available only if:

  • the taxpayer elects in prescribed form in the taxpayer’s tax return for the taxation year ("the election year") for which the election is to first take effect,
  • either
  • the taxpayer holds a participating interest in the foreign affiliate and a taxation year of the foreign affiliate ends (or the first taxation year of the foreign affiliate begins) in the taxpayer’s election year, or
  • a controlled foreign affiliate of the taxpayer holds a participating interest in the foreign affiliate and a taxation year of the foreign affiliate ends (or the first taxation year of the foreign affiliate begins) in a taxation year of the controlled foreign affiliate that ends in the taxpayer’s election year,
  • the taxpayer has a "qualifying interest" (as defined in paragraph 95(2)(m)) in the affiliate, and
  • the taxpayer has not made any other election under paragraph (h) in respect of the foreign affiliate.

However, under paragraph 94.1(2)(i), described in the commentary below, the election may be rendered invalid in the event that the taxpayer cannot provide sufficient information to the Minister of National Revenue for the Minister to be able to determine amounts required to be included in the taxpayer’s income under section 91. In addition, the election ceases to have effect if the corporation ceases to be a foreign affiliate of the taxpayer.

In the period during which an election under paragraph 94.1(2)(h) is effective, a foreign affiliate of a taxpayer is deemed to be a controlled foreign affiliate of the taxpayer. As a result, a share issued by the affiliate to the taxpayer would be an "exempt interest" under the definition in subsection 94.1(1). Sections 94.1 to 94.4 generally would not apply to the taxpayer’s participating interest in the affiliate where that affiliate is a FIE. However, the foreign accrual property income (FAPI) rules would apply and the taxpayer would be required to include in income under section 91 a percentage of any FAPI derived by the affiliate in the year. In addition, notwithstanding an election under paragraph 94.1(2)(h), the FIE rules may still apply in the event that a taxpayer’s interest in a controlled foreign affiliate is a participating interest to which subsection 94.2(9) applies.

Demand for Information – CFA election

Under paragraph 94.1(2)(i), an election made by a taxpayer (or in the case of a taxpayer that is a partnership, a member of it) under paragraph 94.1(2)(h) is, other than for the purposes of applying paragraph 94.1(2)(i) and subparagraph 94.1(2)(h)(iii), deemed never to have been made, if the Minister sends a written demand to the taxpayer requesting additional information for the purpose of enabling the Minister to make a determination referred to in one of those paragraphs, and information sufficient to make the determination is not received by the Minister within 120 days (or within such longer period as is acceptable to the Minister) after the Minister sends the demand.

The determination referred to in paragraph 94.1(2)(i) concerns an amount that would, if the Act were read without reference to that paragraph, be required to be added or deducted (otherwise than under subsection 104(13)) in computing the taxpayer’s income for the year because of the application of section 91 and an election under paragraph 94.1(2)(h) in respect of a foreign affiliate.

Look-through Rule – Significant Interests

New paragraph 94.1(2)(j) applies in determining whether a particular non-resident entity is a foreign investment entity (FIE) and, in some circumstances, in determining whether the particular non-resident entity is a qualifying entity. A particular non-resident entity is a FIE at any time if none of the exceptions found in paragraphs (a) to (c) of the definition "foreign investment entity" applies to it. In this regard, paragraph 94.1(2)(j) will be, where it applies, relevant in determining whether paragraphs (b) and (c) of that definition apply to a non-resident entity.

Paragraph 94.1(2)(j) will apply in respect of a taxpayer’s participating interest in a particular non-resident entity if the taxpayer has made a valid election under 94.1(2)(j) in respect of the participating interest and a specified entity (i.e., the particular non-resident entity or another entity in which the particular non-resident entity has, directly or indirectly, an interest)) has a "significant interest" (as defined in subsection 94.1(1)) in another entity ("the other entity") that is a corporation, partnership or trust. In this case, and provided that the financial statements of the specified entity do not reflect property or indebtedness of the other entity, then in determining whether the particular non-resident entity is a FIE (and, where the taxpayer so stipulates in the election, a qualifying entity):

  • In determining the carrying value of the specified entity’s property, the carrying values of its participating interests in the other entity are deemed to be nil. Debt owing to the specified entity by the other entity (other than debt acquired in the ordinary course of a business other than an investment business of the specified entity) is also deemed to have a carrying value to the specified entity of nil, and the net accounting income of the specified entity is also deemed to be nil to the extent that it is derived from debt or participating interests of the specified entity that are deemed to be nil.
  • The specified entity is deemed to own the property of the other entity. Each such deemed owned property is deemed to have a carrying value to the specified entity based on the product obtained by multiplying the property’s carrying value to the other entity by the specified entity’s proportional ownership of the other entity’s property. In general terms, this proportional ownership is the quotient obtained by dividing:
  • the amount that is the fair market value of the specified entity’s shares and certain debt issued by the other entity, by
  • the amount that is the total fair market value of shares and certain debt issued by the other entity.
  • In general terms, the activities carried on by the other entity (including an exempt business of the other entity) using the property deemed to be owned by the specified entity, and the other entity’s net accounting income derived from those activities, are deemed to be those of the specified entity to the extent of that proportional ownership.

If the taxpayer notifies the Minister of National Revenue in writing of its intention to value the specified entity’s property at its fair market value in accordance with paragraph (a) of the definition "carrying value" in subsection 94.1(1), the property of the other entity must also be valued on that basis to the extent that paragraph 94.1(2)(j) applies to deem the property to be property of the specified entity.

If there are tiers of entities each of which has a significant interest in the other, paragraph 94.1(2)(j) operates to deem each higher tier entity to own properties of the immediately lower tier entities on an iterative basis. For example, assume a non-resident entity (Foreignco-1) owns 100% of the shares in Foreignco-2, which in turn owns 100% of shares in Foreignco-3 and that Foreignco-1, Foreignco-2 and Foreignco-3 have identical taxation year-ends. The carrying values from properties in Foreignco-3 would, under paragraph 94.1(2)(j), become the carrying values of properties in Foreignco-2. Because paragraph 94.1(2)(j) operates on an iterative basis, the carrying value of those properties would be considered to be the carrying values of properties held by Foreignco-1.

The example below illustrates the operation of paragraph 94.1(2)(j).

Example

1. Jean, who resides in Canada, holds shares in Foreignco, a non-resident corporation that is not a controlled foreign affiliate of Jean. Foreignco’s principal activity is the carrying on of investment activities on behalf of its shareholders. Foreignco prepares its financial statements in accordance with accounting principles substantially similar to generally accepted accounting principles used in Canada.

2. The carrying values of Foreignco’s assets at the end of its taxation year ending in Jean’s year are as follows:

Guaranteed investment certificate $10,000
Shares of XYZ Inc. in which Foreignco has a significant interest $20,000
Shares of ABC Inc. in which Foreignco does not have a significant interest $ 5,000
Cash $ 4,000

Total assets $39,000

3. XYZ Inc. owns assets at that time that are used in the course of carrying on an active business, with a carrying value of $80,000. It also has investment property with a carrying value of $15,000.

4. The fair market value of the shares of XYZ Inc. held by Foreignco is $40,000 while the fair market value of all the issued and outstanding shares of XYZ Inc. is $100,000 at that time.

Results

1. The guaranteed investment certificate, cash, and the shares of XYZ Inc. and ABC Inc. are all investment property by virtue of the definition "investment property" in subsection 94.1(1).

2. However, since Foreignco owns a significant interest in XYZ Inc., the special look-through rule in new paragraph 94.1(2)(j) applies. Under this look-through rule the carrying value of Foreignco’s shares in XYZ Inc. is deemed to be nil. Instead, Foreignco is deemed to own a portion of the property that XYZ Inc. owns.

3. The carrying value of the XYZ property deemed to be owned by Foreignco is 40% of its carrying value to XYZ, since Foreignco’s percentage ownership of shares is 40%.

4. Consequently, the carrying values of the investment property of Foreignco are:

Guaranteed investment certificate $10,000
Shares of XYZ Inc. nil
Shares of ABC Inc. $ 5,000
Cash $ 4,000
Investment property of XYZ Inc. (40% of $15,000) $ 6,000

Total $25,000

5. The total carrying value of the assets of Foreignco is:

Investment property (see above) $ 25,000
Assets of XYZ Inc. (other than investment property) (40% of $80,000) $ 32,000

Total $ 57,000

6. As a result, Foreignco is not a FIE because less than 50% of the carrying value of its property is investment property.

- Table of Contents - Next -