Tax Insights: Canada’s new non-resident trust rules: What they mean for global equity plans

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Issue 2013-20

Newly enacted non-resident trust (NRT) rules will likely create tax liabilities and filing requirements for global equity plans that use foreign trusts and have Canadian-resident participant employees.

Now is the time to consider whether the new NRT rules apply to your global equity plan and, if they do:

  • what the implications are
  • what filing requirements and deadlines apply
  • whether any elections should be filed to mitigate their tax bite

Canada’s approach to taxing NRTs was transformed when Bill C-48 received royal assent on June 26, 2013. The legislation is complex and meant to combat offshore tax evasion.

The new rules will affect the Canadian tax liability and administration of global equity plans with participants in Canada.

Their impact means that foreign trusts used to hold shares for Canadian employees are now subject to treatment similar to that of equity plans funded through Canadian-resident trusts or custodial arrangements.

An NRT will be deemed to be resident, and taxable, in Canada:

  • on its worldwide income, or
  • if an election is made, only on income on contributions made (or deemed to be made) by Canadian residents

Instead of paying tax at the NRT level, Canadian employers can be subject to corporate tax rates (which are lower than trust tax rates) by filing an election that deems the NRT’s income to be the employer’s income.

Joint, several and solidary liability is imposed on contributors (Canadian employers) and resident beneficiaries (employee participants) for Canadian taxes not paid by the NRT, but recovery limits can apply.

The rules are retroactive to taxation years ending after 2006. Transitional measures allow until June 26, 2014, to file most of the elections and tax returns required to comply for taxation years ending before 2013.