TAX ISSUES FOR CANADIAN EXPATS WITH OFFSHORE TRUSTS

35602901-stand-sun-sea-palm-beach-chair-so-one-imagines-a-tax-havenAs a general rule, if a Canadian resident (“the contributor”) contributes property to a trust that would otherwise be non-resident (“NRT”), the trust will be a deemed resident trust (“DRT”).

A DRT is subject to an extremely complex set-of rules in the Income Tax Act (“the Act”) generally found in section 94. As outlined in subsection 94(3), a DRT will be subject to Canadian tax as a Canadian resident for most important purposes of the Act.

The purpose of these rules is to prevent Canadian residents from deferring or avoiding Canadian tax by transferring income-earning assets to a NRT.

But what happens if the contributor ceases to be a Canadian resident? What happens if the contributor makes the contribution after he ceases to be Canadian resident? What happens if a Canadian expat contributor returns to Canada? None of these are uncommon scenarios.

This article will attempt to answer those questions in general terms. These answers are mainly determined by the issue of whether, at the relevant time, there is a “resident contributor” (“RC”) to or a resident beneficiary “RB” under the trust for the purposes of subsection 94(3)

Contributor creases to be a Canadian resident

When the contributor ceases to be resident in Canada, he or she would no longer be a RC.

However, the trust will still be a DRT as long as there is a RB at that time. The general result is that the trust will remain a DRT as long as there are any Canadian residents who are beneficiaries of the trust. For this purpose, a person whose right to receive income or capital under the trust only comes into effect on or after the death of the contributor or a person related to the contributor (“successor beneficiary”) is not treated as a RB

Contribution made after ceasing to be a Canadian resident

The implications of the contributor making the contribution to the trust after ceasing to be a Canadian resident will depend on whether or not there is a RB and whether the contribution is made at a “non-resident time”.

If there is no RB, the trust will not be a DRT.

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In typical cases, a time is a “non-resident time” where the contributor has been continuously non-resident for at least 60 months. However, if the contribution is made as a result of the death of the individual, only an 18 month period of continuous non-residency is required.

This means that if a Canadian expatriate is intending to form a NRT, he or she generally should wait for at least 60 months after becoming a non-resident unless there will not ever be an RB.

However, it is important to note that if the contributor regains Canadian residency within 60 months after the contribution, and there is a RB, it will be a DRT because the contribution will be retroactively deemed not to have been made an a NRT.

Contributor returns to Canada

If the contributor returns to Canada, the trust will be a DNR, assuming it was not before. This is because there will then be a RC.

In cases where there is a RB, as discussed above, if the return is within 60 months of the time of contribution, it will be a DRT retroactively from that date of contribution.

If the return is after 60 months, it will be DRT from the point at which the contributor returns to Canada.

 

ABOUT THE AUTHOR OF THIS ARTICLE 

Michael I. Atlas, CPA,CA,CPA(ILL),TEP

Michael Atlas is one of the most prominent international tax experts in Canada. He advises accounting and law firms all across Canada, as well as select private clients (corporate and personal) worldwide. He can be reached by phone (416.860.9175) or email (matlas@TaxCA.com). 

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Michael Atlas
Michael Atlas is a Toronto-based CPA. He is one of Canada'a most prominent international tax experts.

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