Personal Trust Audit Issues. Wendy Stewart Ontario Regional Coordinator – Trust Program. Topics for Discussion. Garron Case – Residency of a Trust Antle Case – Proper Trust Constitution Loans to Personal Trusts “Paid” or “Payable” Amounts Section 116 Certificates for estates.
Ontario Regional Coordinator – Trust Program
2009 DTC 1287 (TCC); 2010 FCA 309 (FCA)
Trust residence determined based on location of central management and control, not residence of trustee.
For tax purposes, trusts are deemed to be taxpayers for the calculating tax, but they are not a legal person or entity in the same way as individuals and corporations.
There has always been uncertainty around determining where a trust is resident for tax purposes.
For Canadian income tax purposes a trust will be resident where a majority of the trustees are resident, provided that:
Justice Woods in Garron decided that the residency test for corporations, management and control, ought to apply equally to trusts because;
2009 TCC 465; 2010 FCA 280
Court finds that trust not validly constituted and concludes that GAAR would have applied
“If the capital property step-up strategy [used by the taxpayers in this case] is considered acceptable tax planning, then there would be two tiers of taxation of capital gains in Canada:
This is an unacceptable result to the Respondent. The real question before me is whether it is for the legislators to introduce legislation to defeat such a result, or can existing legislation and jurisprudence be relied upon by the Courts to do so?”
AND there must be a a completed transfer of the subject property by the contributor to the Trust
This is why we always ask to view the settled property!!
Mandatory audit steps include:
“ This conclusion emphasizes how important it is, in implementing strategies with no other purpose than avoidance of tax, that meticulous and scrupulous regard be had to timeing and execution. Backdating of documents, fuzzy intentions, lack of transfer documents, lack of discretion, lack of commercial purpose, delivery of signed documents distributing capital from the trust prior to it’s purported settlement, all frankly miss the mark by a long shot. They leave the impression of elaborate window dressing,
In short, if you are going to play the avoidance game, it is not enough to have brilliant strategy, you must have brilliant execution”
104(24) compliance allows 104(6) deduction
The CRA has strict interpretations as to what is considered payable, and legal documents must be in place prior to the end of the year to meet these requirements.
Income, including taxable capital gains will be taxed in the trust unless one of four conditions is satisfied:
Paragraph 104(6)(b) of the ITA allows income allocations to beneficiaries to be deducted from the income of the trust.
Such amounts deducted must be included in the beneficiary’s income pursuant to subsection 104(13).
The meaning of "an amount payable in a taxation year" is defined in subsection 104(24) as an amount:
(a) that is paid in the year to the person to whom it was payable, or;
(b) with respect to which the person to whom it was payable is entitled in the year to enforce payment.
The Income Tax Act provides attribution rules will NOT apply provided:
(i) the prescribed rate as described in regulation 4301(a).
(ii) the rate that would be been agreed upon between parties dealing with each other at arm’s length.
In order to avoid the attribution rules the interest payable in respect of the loan must be paid no later than 30 days after the taxation year end of the trust.
No necessity to apply for section 116 certificate as estate is not distributing to non resident beneficiaries
The non-resident beneficiary may be required to apply for a Section 116 Certificate depending on the source of the capital interest (see above)
The non-resident beneficiary will be required to apply for a Section 116 Certificate as the cash will be derived from the sale of real property.