CTF - 2005 Annual Conference - Partial Presentation

September 25-27, 2005 57th Annual Conference - Vancouver
Canadian Tax Foundation
Sonja Chong - 1
Non-Resident Trust Rules
• Old Rules
- review of selective structures
• Key Concepts of Proposed Rules
- meaning of Contribution
- Arm’s Length Transfers and S.251
- Consequences of S.94(3)
• Opportunities and Pitfalls
• Case Studies
- Emigrant Trusts – Mr. Tainted Trust
- NRTs holding Canadian Real Estate

Sonja Chong - 2
Old Rules – S.94(1)
Three tests must be met
1. Contributor - > 60 months cumulative residency at trust
year end, and residency at any time in the
preceding 18 months
2. Beneficially interested* - at least one beneficiary resident in Canada
3. Contributor and beneficiary related, or an uncle, aunt, nephew or niece
of one another
* Watch definition in S.248(25); extensive scope.

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Background
• Federal Budget Announcement – February 16, 1999
• Draft Legislation – June 22, 2000
• Draft Legislation – August 2, 2002
• Draft Legislation – October 11, 2002
• Draft Legislation – October 30, 2003
• Draft Legislation – July 18, 2005
• Effective date – generally January 1, 2003
• Generally no grandfathering

Sonja Chong - 4
Old Rules
Canadian Resident as Settlor/Transferor
• Settlor resident for more than 60 months
• Cannot add Canadian residents as beneficiaries
• NRT now deemed resident under new rules
Canadian resident
settlor/transferor
Non-resident
beneficiaries
Investments
NRT

Sonja Chong - 5
Old Rules
Cross Transfers
• Mr. A and Mr. B are long term residents
• The two families are unrelated; transferor and beneficiaries of each trust
not uncles, aunts, nieces and nephews of one another.
• Trusts deemed resident under new rules.

Sonja Chong - 6
Old Rules
Immigrant Trusts
Immigrant as settlor/transferor Spouse and children as beneficiaries
NRT
Structure A
Investments
Non-resident relative settled trust
with nominal amount
Immigrant, spouse and children as
beneficiaries
NRT
Structure B
Investments
TaxHavenCo Immigrant loaned funds at interest
• Both structures remain intact; now immigrant settlor/contributor can be one of the
beneficiaries without S.75(2) concerns for 60 months.

Sonja Chong - 7
Old Rules
Emigrant Trusts versus Testamentary Trusts
• Assume residency of transferor/decedent exceeded 60 months prior to time of
departure/death.
• Deemed disposition rules apply in both cases at point of departure.
• Thereafter less generous treatment for testamentary trusts.
• Testamentary trusts perpetually not exempt if decedent resident at anytime in
18-month period prior to death.
• Emigrant trusts become tax exempt anywhere between 12 months plus 1 day (for
those who left in the first half of a year) to 18 months plus 1 day (for those who
left in the second half of a year) after point of departure.
12 to 18 months
+ 1 day
18 months
Emigrant trusts become
exempt; testamentary trusts
remain taxable
Resident Non-resident
Point of Departure
(Dead or Alive)

Sonja Chong - 8
Old Rules
Freezes – All In The Family
Non-resident
settlor/contributor
Resident beneficiaries
including Mr. A and family
FORCO
Canadian resident
(Mr. A)
Frozen Preferred 100%
New Common
Small Business Corporation
• Practitioners debated on whether NRT has received financial
assistance from Mr. A.
• Trust deemed resident pursuant to proposed S.94(2)(c) and S.94(2)(g).
CANCO
NRT

Sonja Chong - 9
Freezes – Foreign Venture Capital
Non-resident
settlor/contributor
(venture capitalists)
Non-resident beneficiaries, no
relation to and deals at arm’s
length with Mrs. Brown
Canadian resident
(Mrs. Brown)
Subscribed to 50%
Common from treasury for
$5 million
• Mrs. Brown did not provide financial assistance as FORCO paid full
price for shares.
• Trust non-resident under both old and new rules.
FORCO
CANCO
100% reduced to 50% Common
(valued at $5 million) after FORCO’s
share subscription
NRT

Sonja Chong - 10
S.94(3)
The Charging Section
• Non-resident trust
- excludes exempt foreign trust
• Trust is non-resident and has either a “Resident
Contributor” or a “Resident Beneficiary” at a specified
time during a particular taxation year of the trust
• Appendices I to VII
• Focus is on the meaning of “Contribution”

Sonja Chong - 11
Resident Contributor
• At a particular or any time, a resident and a contributor
• A contributor at any time is an entity ( including one that
does not exist anymore) who had made a contribution at or
before that time
• Exceptions
(a) individuals (other than trusts) resident for 60 months
or less at that time
- does not include those who have never been non-
resident
(b) Certain pre-1960 trusts with individual (other than
trusts) contributors

Sonja Chong - 12
Resident Beneficiary
• defined term
• means at any time there is:
(a) a beneficiary who is resident, and
(b) a “connected contributor”
under the trust
• “at any time” – usually at trust’s year end
• excludes beneficiaries that are successor beneficiaries and
specified charities

Sonja Chong - 13
Beneficiary
• Includes:
(a) an entity that is beneficially interested in the trust, and
(b) if the entity is not a person, would be deemed to be a
person in applying a modified version of S.248(25)(b)(ii)
• “beneficially interested” is defined in S.248(25) – very
wide scope; includes contingent beneficiaries

Sonja Chong - 14
Connected Contributor
• An entity that has made a contribution to a trust except for
any one of the following two situations:
1. Exception for Short-term Residents
2. Contributions made at Non-Resident Times

Sonja Chong - 15
Non-Resident Time
Conditions
1. At the time Contribution made (“Contribution Time” or “CT”), Contributor a
non-resident or not in existence.
2. Contributor non-resident for 60-month period before and after Contribution
Time.
3. Look-back period reduced to 18 months for:
(a) testamentary trusts, and
(b) Contributions before June 23, 2000
4. Look-forward period ends at the date of death if < 60 months after CT.
5. If a Contributor becomes resident within 60 months of contributing, S.94(10)
deems Contribution not made at a Non-Resident Time (see note in Appendix
VII).

Sonja Chong - 16
Examples of Non-Resident Time
Inter Vivos Trust

Sonja Chong - 17
Examples of Non-Resident Time
Testamentary Trust
• If deceased resident at any time during 18-month period before death,
and has accumulated more than 60 months of residency before the
trust’s year end, trust perpetually resident unless all beneficiaries are
non-resident.

Sonja Chong - 18
Indirect Transfers
Paragraph 94(1)(b) of “Contribution”
Example
• Mr. A, a Long-term Resident, gifted $1 million to
brother, Mr. B (non-resident)
• Mr. A wants part of the funds held for Mr. B’s
minor children
• Mr. B settled $500,000 on a non-resident trust for
benefit of his children
• Part of the same series?
• Can the $500,000 transfer by Mr. B reasonably be
considered to have been made in respect of the $1
million gift?
• If so, Mr. A deemed to transfer $500,000 to trust.

Sonja Chong - 19
Deemed Transfers and Contributions
• S.94(2)(a) to (c)
- deemed transfers unless arm’s length transfers
• S.94(2)(m) to (q)
- deemed contributions (no arm’s length
transfer exception)
• S.94(11) to (13)
- certain trust-to-trust transfers deemed
Contributions (no arm’s length transfer
exception)
• S.94(2)(r) to (u)
- certain transfers deemed not to be Contributions

CTF - 2005 Annual Conference - Partial Presentation

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