Non-resident trusts and foreign investment entities

The 1999 federal budget contained proposed changes to the taxation of non-resident trusts (NRTs) and their beneficiaries and to the taxation of Canadian taxpayers who hold interests in foreign investment entities. The proposed changes, which were to apply to tax years that began after 2002, are generally designed to ensure that income earned indirectly by Canadian taxpayers through foreign intermediaries is not taxed at a more favourable rate than would be the case were the income earned without the involvement of those intermediaries.

On November 9, 2006, legislation to implement those changes was tabled in Parliament. The legislation, included in Bill C-10, would generally apply to tax years that begin after 2006, instead of tax years that begin after 2002. However, as discussed in more detail below, provision has been made to allow taxpayers to elect an earlier application of the rules as far back as their first tax year beginning after 2002 (or, for certain non-resident trusts, beginning after 2000). As a result of this change in the proposed implementation date, taxpayers who filed based on the proposed changes for a tax year that began before 2007 will need to either elect an earlier application of the rules or amend their tax returns.

Taxpayers who have filed their returns based on the proposed legislation but who do not intend to make an election should write to the Canada Revenue Agency (CRA) as soon as possible to request an adjustment to their tax returns. Taxpayers should include the reasons for the reassessment and supporting documentation, along with amended information slips where applicable. Taxpayers who do not have the proper documentation to ask for a reassessment within the normal reassessment period and who need additional time to produce such documentation can file a waiver request to permit the CRA to reassess beyond the normal reassessment period. For more information, see Form T2029, Waiver in Respect of The Normal Reassessment Period.

NRTs may elect to apply the proposed legislation to any of their tax years that begin after 2002 (and before 2007) and subsequent tax years (or, where the trust was created in 2001 or 2002, the trust may elect to have the legislation apply for the tax year in which the trust was created and subsequent tax years). Taxpayers who hold interests in foreign investment entities may elect to apply the proposed legislation to any of their tax years that begin after 2002 (and before 2007) and subsequent tax years. To make an election, NRTs and taxpayers who hold interests in foreign investment entities will have to send a letter to the CRA on or before their filing due date for the tax year in which the legislation applies.

Adjustment requests and elections for NRTs should be sent to the International Tax Services Office. Adjustment requests and elections by taxpayers who hold interests in foreign investment entities should be sent to the local tax centre.