Is that trust resident, or non-resident?

By Staff | June 17, 2014 | Last updated on September 15, 2023
3 min read

Trusts with non-resident beneficiaries pose many tax challenges. A STEP 2014 session explored these issues, and here are our live tweets:

Canadian resident trusts with foreign beneficiaries

‪#step2014 panelists are Ed Northwood (moderator), Michael Cadesky, Peter Wong.

We have 3 tax regimes: resident, non-resident, and deemed resident trusts. ‪#step2014

‪#step2014 resident inter vivos trusts are taxed at top personal tax rate. Resident testamentary trusts are taxed at graduated rates (for now).

There’s a little-known Part XII.2 tax: 36% on deduction of income from designated income, e.g. Canadian source business income.

There’s also a non-resident withholding tax on income distributed and capital dividends at 25%, with a treaty reduction if applicable. Therefore, it’s usually better to distribute income to a non-resident beneficiary to avoid personal rates. But if no treaty applies it’s better to use the personal rate.

Part XII.2 tax is deductible.

Also, Part XII.2 tax will apply to testamentary trusts as of 2016. So if you have such a trust, sell any designated property before then.

If a trust makes a distribution to a non-resident, there’s 25% tax. If the non-resident holds the property directly, and is arms length, no tax. So it’s better not to have the trust in most cases:

Sad conclusion: Canadian resident trusts are usually not useful for non-resident beneficiaries from a Canadian tax perspective only. If you need a trust for other reasons, maybe ok. But think about not using one.

Since ‪@STEPSociety members know trusts have many non-tax reasons, you’ll probably still need to create them.

Deemed resident trusts

Many immigrant trusts may soon become deemed resident trusts due to Budget 2014.

Read: No more immigration trusts? No problem

Immigrant trusts become resident Jan 1, 2014 if someone made a contribution after Feb 10, 2014 (the date of Budget 2014). Otherwise from 2015 onward.

A deemed resident trust is taxed on worldwide income. After doing the calculations, a deemed resident trust is taxed about the same as a resident trust (about 1% difference).

But don’t forget, a deemed resident trust is also resident somewhere else. So that trust may also be subject to other tax! Things get complicated unless that other country imposes no tax.

The Department of Finance has made deemed resident trusts unattractive, and moved non-resident trusts into the deemed category.

Non-Canadian-resident trusts

Non-resident trusts are only taxed on designated income. There’s no deduction for distributions to non resident beneficiaries. The 21-year rule applies to non-resident trusts (if there is designated income).

How would you arrange a non-resident trust? Non-resident trustee, contributor, and beneficiary. There are very few situations when this would apply.

Conclusion: unless you can safely create a non-resident trust, it’s usually better to make an outright transfer to a non-resident.

Foreign beneficiares

For Hong Kong and China, trust income distribution is not taxable. Hong Kong doesn’t tax foreign income. Trust income therefore not taxed by HK, just 25% Canadian withholding.

‪#step2014 For China, trust income appears to be treated as gift, and there is no tax on gifts — for now. Trust income to a French resident is taxable and that can be quite high. (~50%)

‪#step2014 Hong Kong and China do not tax capital distributions. France does between 45% and 50%. UK 28-45%.

Panelists poll audience: less than half provides info to foreign trust beneficiaries for tax compliance.

Poll question 2: Should extra admin costs and taxes be borne by foreign beneficiaries? About 20% of audience say yes.

Poll question 3: Do you need to provide same economic return to foreign beneficiaries as resident beneficiaries (post tax)? Not many ppl say yes. In a non-discretionary trust, trustee wouldn’t take into account personal tax issues.

One audience member adds a clause in trust documents that non resident beneficiaries bear all extra costs and taxes. She’ll add language about all extra fees, too, after this session.

Another audience member says people struggle to equalize distributions among U.S. and non-U.S. children beneficiaries after taxes. Some U.S. beneficiaries could have nothing after tax.

A 1985 trust case, Liberal Petroleums Trust, ruled that foreign tax burden would be shared equally among beneficiaries, despite the fact that not all of them were foreign. Court said there was no wording to contrary in trust document, so if you anticipate foreign beneficiaries, explicitly state how the tax burden should be borne. ‪#step2014 staff


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