20 June 2023 STEP Roundtable Q. 5, 2023-0959801C6 - Subsection 94(8) Recovery Limit

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Consider a trust to which paragraph 94(3)(a) applies, has tax payable in a particular taxation year, and does not make a distribution of property in that year. Where the trust’s tax liability remains unpaid and the trust makes a distribution to a resident beneficiary under the trust in a subsequent taxation year, is the Minister able to collect the trust’s tax payable pursuant to paragraph 94(3)(d) in respect of the particular taxation year?

Position: Yes, subject to the recovery limit determined in subsection 94(8).

Reasons: The liability pursuant to paragraph 94(3)(d) is not extinguished until the taxes owing by the trust in respect of that year are collected.

2023 STEP CRA Roundtable – June 20, 2023
Question 5. Subsection 94(8) Recovery Limit Calculation

A trust to which section 94 of the Act (footnote 1) applies is subject to Part I tax on its worldwide income. To facilitate the collection of taxes owing by these non-resident trusts, paragraph 94(3)(d) provides that:

(d) each person that at any time in the particular taxation year is a resident contributor to the trust (other than an electing contributor in respect of the trust at the specified time) or a resident beneficiary under the trust

(i) has jointly and severally, or solitarily, with the trust and with each other such person, the rights and obligations of the trust in respect of the particular taxation year under Divisions I and J, and

(ii) is subject to Part XV in respect of those rights and obligations;

However, when the conditions in subsection 94(7) are satisfied, the maximum amount recoverable pursuant to paragraph 94(3)(d) from a person in respect of a trust is the person’s recovery limit which is calculated in subsection 94(8). Therefore, depending on the elements within the recovery limit calculation, a person who is jointly and severally or solidarily liable for the taxes owing by the trust may ultimately be liable for the entire amount owed by the trust, but could be liable for a lesser amount.

Please consider the following scenario:

• A factually non-resident, inter vivos, personal trust has one resident beneficiary under the trust for the trust’s 2020, 2021 and 2022 taxation years, and section 94 therefore applies in each year;
• There are no resident contributors to the trust;
• The trust earns income only in its 2020 taxation year;
• The trust makes a capital distribution of cash in the amount of $100,000 to the beneficiary on December 30, 2022;
• No other distribution of property occurs during the 2020, 2021 or 2022 taxation years of the trust;
• The taxes owing by the trust in respect of its 2020 taxation year have yet to be paid; and
• When the property, $100,000, is distributed there is a resulting disposition of part of the beneficiary’s capital interest in the trust.

Would the resident beneficiary be liable for the taxes payable by the trust in respect of the trust’s 2020 taxation year given the beneficiary did not receive any distributions from the trust in that year? Would distributions of property from the trust to the beneficiary in subsequent taxation years affect the Minister’s ability to collect in respect of the trust’s 2020 taxation year?

CRA Response

When subsection 94(3) applies to a non-resident trust in a particular taxation year (footnote 2) , the trust is deemed to be resident in Canada for the purposes outlined in paragraph 94(3)(a) throughout that year. Of note are subparagraph 94(3)(a)(i) which deems the trust to be resident in Canada for the purposes of section 2 and subparagraph 94(3)(a)(ii) which deems the trust to be resident in Canada for the purposes of computing the trust’s income for the particular taxation year.

Since each resident contributor to the trust and each resident beneficiary under the trust is subject to paragraph 94(3)(d) in respect of the particular taxation year, each has, jointly and severally or solidarity with the trust, the obligation to pay the trust’s tax in respect of that same year.

Additionally, given the rights and obligations pursuant to paragraph 94(3)(d) are in respect “of a particular taxation year” of the trust, the shared liability for the tax payable by the trust will cease only when the trust’s liability for that year is extinguished.

However, when the conditions in subsection 94(7) are satisfied for a resident contributor or a resident beneficiary (footnote 3) who is subject to paragraph 94(3)(d), a maximum amount recoverable - the recovery limit - is calculated pursuant to subsection 94(8) for that particular person.

Like paragraph 94(3)(d), subsection 94(7) applies in respect of a trust and a particular taxation year of the trust. The conditions therein are tested for at “any particular time” and may be repeated at any time. This would include any time after a particular taxation year of a trust for which a liability for tax payable remains outstanding but could not previously be collected pursuant to paragraph 94(3)(d) because, the amounts described in paragraphs 94(8)(a) and (b) had yet to be for example, paid, received or receivable, enjoyed, or contributed.

The preamble of subsection 94(8) considers the calculation of the recovery limit “at a particular time”, which is the same “particular time” that the conditions in subsection 94(7) are tested for, and the calculation is in respect of the same taxation year of the trust.

Turning to the example, the trust had tax payable only in its 2020 taxation year. Accordingly, 2020 is the particular taxation year that the testing of the conditions in subsection 94(7) will be in respect of. It is also the particular taxation year that the calculation of the recovery limit in subsection 94(8) will be in respect of.

The resident beneficiary is liable under paragraph 94(3)(d) for the taxes owing by the trust in respect of that year, yet does not receive a distribution until December 30, 2022. Given the conditions in subsection 94(7) can be tested for at any particular time in respect of a trust and a particular taxation year of the trust, for illustration, we will consider two points in time in respect of the trust’s 2020 taxation year: January 1, 2021, and December 31, 2022.

Generally speaking, the conditions in paragraphs 94(7)(a) and (b) are satisfied at both particular times because the resident beneficiary:

• is liable under a provision referred to in paragraph 94(3)(d) solely because that person is a resident beneficiary under the trust; and
• has contributed nothing to the trust.

Finally, the purpose test in paragraph 94(7)(c) must also be satisfied for the 2020 taxation year. While the specific facts will determine if paragraph 94(7)(c) is satisfied, for the purpose of this example, we will assume that it has been.

Since the conditions in subsection 94(7) are met, the recovery limit in subsection 94(8) will apply to determine the maximum amount recoverable from the resident beneficiary in respect of the trust’s 2020 taxation year for both points in time.

Generally speaking, the recovery limit calculation in subsection 94(8) first determines the greater of:

• paragraph 94(8)(a): which totals various amounts that were for example, paid, or made payable to, received or receivable or enjoyed by the particular person (the resident beneficiary in the example) or a specified party (footnote 4) in respect of the particular person; and
• paragraph 94(8)(b): which is the total of all contributions made to the trust before the particular time by the particular person.

Paragraphs 94(8)(c) to (e) deduct certain amounts, however none of these amounts are relevant to our example.

For the example, the formula produces a nil result for the particular time that is January 1, 2021, and an amount of $100,000 for December 31, 2022. Accordingly, on January 1, 2021, although the resident beneficiary is jointly and severally or solidarily liable for the taxes owing by the trust in respect of the 2020 taxation year, the Minister could not have collected as of that date. The Minister could have however assessed the resident beneficiary for an amount not exceeding $100,000 on December 31, 2022.

Therefore, given a situation where:

• a trust to which subsection 94(3) applies earned income in a particular taxation year; and
• the amounts described in paragraphs 94(8)(a) and (b) are not received, receivable, enjoyed, or contributed until a subsequent taxation year of the trust,

as long as the conditions in subsection 94(7) are satisfied in respect of the particular taxation year, the recovery limit of each person that was subject to paragraph 94(3)(d) in respect of that particular year can be calculated at any time in a later taxation year. Where the calculation in subsection 94(8) results in a positive amount, any outstanding taxes payable in respect of a particular taxation year of the trust may be assessed pursuant to paragraph 94(3)(d), subject to the limit established by subsection 94(8).

Dawn Dannehl
2023-095980

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 The Act means the Income Tax Act R.S.C. 1985 (5th Supp.) c.1 as amended from time to time and consolidated to the date of this response and, unless otherwise expressly stated, every statutory reference herein is a reference to the relevant provision of the Act.

2 The conditions that invoke subsection 94(3)(a) are tested for at a “specified time” in a particular taxation year of the trust. “Specified time” is a defined term in subsection 94(1).

3 Subsection 94(7) does not apply to persons deemed by subsections 94(12) or (13), to be contributors or resident contributors to a trust.

4 A specified party is in respect of a person and is defined in subsection 94(1).