There are no specific provisions in the Income Tax Act (“the Act”) that deal with foreign foundations.
Such entities are commonly formed in such civil law jurisdictions as Luxembourg, Liechtenstein, Panama, Austria and Switzerland. They typically have certain attributes that are like a trust, and others like a corporation-the issue is whether they should be treated like a trust or corporation for Canadian tax purposes.
If they are to be treated like corporations for Canadian tax purposes, as long as their “central management and control” (and, therefore their corporate residence) is kept outside of Canada, they may well be a vehicle for Canadians to defer, if not totally avoid, Canadian tax on offshore investment income. The “foreign accrual property income” (“FAPI”) rules that are designed to counter the use of foreign corporations as a means of creating deferral of Canadian tax on offshore investment income can only apply if the corporation is a “foreign affiliate” of a Canadian resident. However, that requires the Canadian to have an “equity percentage” in the foreign corporation, which, in turn, requires that the foreign corporation has at least one “class of ….issued shares”. A foundation does not have “issued shares”. In this connection, section 93.2, which was added to the Act in 2014, retroactive to 1994, can deem other forms of “equity interest” in foreign corporations to be “shares of a…class of the capital stock” of that corporation. It is unclear that this provision can apply to foundations, although it is quite likely that the CRA would take the position that it does, based on its questionable views contained in Interpretation Bulletin IT-392, as well as statements in CRA Document 2010-0388611I7.
If they are to be treated like trusts for Canadian tax purposes, it is likely that various rules in section 94 of the Act, that apply to non-resident trusts, would defeat their use as a tax-deferral or avoidance vehicle in any situation where a Canadian resident makes a “contribution” to the foundation.
There is virtually no Canadian case law to provide any guidance on this issue. The decisions in Sommerer, which dealt with an Austrian Private Foundation, are rather confusing and inconclusive in this respect. At the Tax Court of Canada level (2011 DTC 1162), the court concluded that the foundation was a corporation, but that it held its property in trust for the beneficiaries. The Federal Court of Appeal expressed reservations about that conclusion, but still rendered its decision based on the premise that there was a trust.
Over the years, the CRA’s position on this issue has vacillated somewhat, but, at least in the context of foundations formed under Liechtenstein law (“Stiftungs”), issued various interpretations that all conclude that they should be treated as trusts for Canadian tax purposes (see for example CRA Documents 2008 0266251I7 and 2010-0388611I7).
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An additional one was issued last August, and has recently been made public. CRA Document 2015-0581681E5 is consistent with the prior ones, and elaborates on the application of the non-resident trust rules in section 94 of the Act.
Of course, one would always have to look at the specific laws governing the foundation in the case of other jurisdictions; however, it is a pretty safe bet that unless they are significantly different from those which apply to the Liechtenstein Stiftung, the CRA would reach the same conclusion. There are many Canadians who have used Panamanian Private Foundations for tax avoidance purposes, and they should be particularly concerned, given that it is generally understood that the Panamanian version was largely modeled on the Liechtenstein Stiftung.
But then again, CRA’s views are not necessarily valid unless and until they have been confirmed by a court.
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).
