Effective September 19, 2014, the Canada Revenue Agency (the “CRA”) released a new Income Tax Folio on the Residence of a Trust or Estate. This Income Tax Folio (“S6-F1-CI”) replaces and cancels Interpretation Bulletin IT-447, Residence of a Trust or Estate. The purpose of S6-F1-CI is to provide CRA’s views concerning the determination of the residence status of a trust (as that term is defined in subsection 248(1) of the Income Tax Act, as amended (“ITA”)) for Canadian income tax purposes. S6-F1-CI applies for both federal and provincial tax purposes.
Prior to the decision in Fundy Settlement v. Canada, 2012 SCC 14 (“Fundy”), trusts were generally considered to be resident where the majority of the trustees resided. For the purposes of the ITA, Fundy decided that a trust will reside in the jurisdiction where the central management and control actually takes place. S6-F1-C1 further clarifies that if there is more than one trustee involved in the exercise of management and control over the trust, the trust will reside in the jurisdiction in which the more substantial central management and control takes place. Regardless of any contrary provisions in the trust agreement, central management and control may be found to rest with someone other than the trustee, such as a settlor or a beneficiary.
S6-F1-C1 also provides factors that will be considered by the CRA when determining the jurisdiction in which the central management and control of the trust is exercised. They are as follows:
- the factual role of a trustee and other persons with respect to the trust property, including any decision-making limitations imposed thereon, either directly or indirectly, by any beneficiary, settlor or other relevant person; and
- the ability of a trustee and other persons to select and instruct trust advisors with respect to the overall management of the trust.
When considering these factors, the CRA will look to any evidentiary support that demonstrates the exercise of decision making powers and responsibilities over the trust. After examining all factors, the CRA may determine that a trust is resident in a specific province or in Canada even if another province or country considers the trust to be resident in that other province or country.
In addition, trusts that are not factually resident in Canada may be deemed to be resident in Canada for a tax year under the non-resident trust rules in section 94 of the ITA for certain purposes, including computing the income of the trust and determining its liability for Part 1 tax. These rules will be applicable where there is a resident contributor to the trust or a resident beneficiary under the trust.
Paragraph 94(4)(h) of the ITA ensures that a deemed resident trust is not considered resident for the purposes of applying the attribution rule respecting property held by the trust in subsection 75(2) of the ITA. Generally each of the resident contributors of and the resident beneficiaries under a deemed resident trust are jointly and severally liable with the trust for many of the trust’s obligations, including Part 1 tax liability.
S6-F1-C1 also reflects the amendments to section 4.3 of the Income Tax Conventions Interpretation Act(“ITCIA”). For the purposes of applying a particular tax convention, in accordance with section 4.3 of theITCIA, if a trust is deemed resident of Canada by subsection 94(3) of the ITA, it will be deemed to be a resident of Canada and not a resident of the other contracting state. The concluding note in S6-F1-C1 respects subsection 250(6.1) of the ITA which operates to avoid unintended tax consequences that may arise under a number of the provisions of the ITA that require a trust to be resident in Canada throughout a tax year. Subsection 250(6.1) of the ITA deems a trust that ceases to exist at any time in a tax year to be resident in Canada during the remaining period in the year if it was resident in Canada immediately before it ceased to exist.
This newly introduced Income Tax Folio, S6-F1-C1, consolidates the content of former Interpretation Bulletin IT-447 and reflects the substantive technical and interpretive changes introduced through legislative amendments and the decision of the Supreme Court of Canada in Fundy. This new Income Tax Folio can be relied upon as an up to date summary of the CRA’s interpretation of the law, and feedback from the tax community on the substance and content of this Income Tax Folio is open until December 19, 2014.
The establishment of trusts and the residency of trusts in particular can be complicated. Professional advice from a qualified practitioner is highly recommended.