21 May 1998 External T.I. 9732355 - DEFINITION OF EXEMPT TRUST IN 233.2(1)

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether certain U.S. trusts are "exempt trusts" as defined by 233.2(1) of the Act.

Position: No.

Reasons: The trusts do not satisfy criteria required to be exempt trust.

XXXXXXXXXX 973235
B. Bloom

Attention: XXXXXXXXXX

May 21, 1998

Dear Madam:

Re: Application of Foreign Reporting Rules to Certain U.S. Trusts

We are writing in response to your letter of November 19, 1997, wherein you asked us to confirm whether certain non-resident trusts are required to be reported on Forms T1141 or T1142. Further to our telephone conversation of May 12, 1998, (Bloom/XXXXXXXXXX) it was agreed that the issue could be further narrowed to whether the non-resident trusts described in your letter were exempt trusts as defined by paragraph (a) or (b) of the definition “exempt trust” in subsection 233.2(1) of the Income Tax Act (the “Act”).

Because the information you provided us is very limited, we are not able to provide you with a definitive response to your enquiry. However, we can offer the following general comments.

Under certain conditions, subsection 233.2(4) of the Act requires a resident of Canada who has transferred or lent property to a non-resident trust to file an information return in respect of the trust. One such condition is that the non-resident trust be a “specified foreign trust”, as defined by subsection 233.2(1) of the Act, at any time in the trust’s year. A trust that is an “exempt trust” is excluded from the definition “specified foreign trust”. Therefore, no filing is required under section 233.2 of the Act where the non-resident trust is an “exempt trust”.

Section 233.6 of the Act requires a beneficiary of a non-resident trust to file an information return, in certain circumstances, in respect of distributions received from, or debts owing to, the trust. However, no obligation to file exists where the trust is an “excluded trust” as defined by subsection 233.6(2) of the Act. Paragraph (a) of that definition provides that an excluded trust means a trust described in paragraph (a) or (b) of the definition “exempt trust” in subsection 233.2(1) of the Act. Accordingly, no filing is required under section 233.6 of the Act where the non-resident trust is an “exempt trust” within the meaning of paragraph (a) or (b) of that definition in subsection 233.2(1) of the Act.

Paragraph (a) of the definition “exempt trust” excludes from the foregoing reporting requirements a trust that is governed by a foreign retirement arrangement (“FRA”). A FRA is defined in subsection 248(1) of the Act as a prescribed plan or arrangement. For this purpose, section 6803 of the Income Tax Regulations prescribes plans or arrangements to which subsection 408(a), (b) or (h) of the U.S. Internal Revenue Code (the “IRC”) of 1986 applies. Such plans or arrangements are commonly referred to as individual retirement accounts or IRAs.

Paragraph (b) of the definition “exempt trust” requires a trust to satisfy the following four conditions before it can be considered an exempt trust:

– the trust must be resident in a country which imposes an income tax;

– it must be exempt from income tax in that country;

– it must be established principally in connection with, or its principal purpose must be to administer or provide benefits under, one or more superannuation, pension or retirement funds or plans or any funds or plans established to provide employee benefits; and

– it must be maintained primarily for the benefit of non-resident individuals or, once Bill C-28 becomes law, governed by an employees profit sharing plan.

Based on the information in your letter, it appears that the Life Insurance and XXXXXXXXXX trusts you describe would not satisfy the conditions of either paragraph (a) or (b) of the definition “exempt trust”. Therefore, assuming paragraph (c) of that definition is not relevant, they would not constitute exempt trusts. With respect to the Education Savings Account trust, you indicate that it could be an IRA. As discussed, an IRA that is a trust governed by the above-mentioned provisions of the IRC would be an exempt trust. It is therefore necessary for you to determine if the Education Savings Account trust is indeed such a trust.

Finally, you ask that we confirm that certain “excess” contributions made to defined-contribution pension plans would not be subject to the above-mentioned reporting requirements provided the plans to which the contributions are made are themselves exempt trusts. As already stated, no filing is required under either of section 233.2 or 233.6 of the Act in respect of a trust that is an exempt trust as described above. Provided the excess contributions do not cause an exempt trust to lose its status as such, the trust would continue to be an exempt trust and no filing would be required under those sections of the Act.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and, therefore, as described in paragraph 22 of Information Circular 70-6R3, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch