Tax Insights: Non-resident trust rules enacted

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Transitional measures to consider

Issue No. 2013-12

Newly enacted rules for non-resident trusts (NRTs) include relief for NRTs that have property contributed by non-Canadian residents. If an NRT is eligible for this relief, an election must be made to obtain the benefit. Other transitional rules may also be available to an NRT. Now is the time to consider whether this election should be made and what transitional rules apply.

After almost 15 years in the making, legislation that transforms Canada’s approach to taxing NRTs received royal assent on June 26, 2013, as part of Bill C-48, Technical Amendments Act, 2012.

This Tax Insights discusses some of the elective provisions included in the new legislation.

The new rules for the most part mirror draft legislation released on October 24, 2012. For an overview, see our Tax memo ‘October 24, 2012 Notice of Ways and Means Motion: “Final” version of non-resident trust rules.'

The general rule is that an NRT that is deemed resident in Canada under the new rules is subject to tax in Canada on its worldwide income and capital gains in respect of all of its property, whether contributed by Canadians or not.

However, relief is available if an NRT received contributions from both residents and non-residents. The relief results in no Canadian tax on income and capital gains from the properties contributed by non-residents (other than Canadian tax that otherwise applies to non-residents of Canada, such as Canadian withholding tax on certain Canadian sourced income).

This relief was automatic when first proposed in August 2010, but changes introduced on October 24, 2012, require NRTs to file an election.

An NRT must elect to be an ‘electing trust’ for the income and capital gains from properties contributed by non-residents to be exempt from Canadian tax.

If an election is not made, all of the NRT’s worldwide income and capital gains will be subject to Canadian tax.