Today’s Blog was written by Rahul Sharma, Partner, Fasken LLP, Toronto
My last blog post was very early in the year. In that post, I outlined — and generally responded to — certain common questions posed by newcomers to Canada. As the year progresses, Canada continues to draw in large numbers of immigrants (with many more arrivals anticipated in the coming years). For many newcomers, their first or second Canadian tax filings (for the 2022 year) will need to be filed by the end of this month.
As is often the case in the world of tax, Canada Revenue Agency’s (“CRA’s”) form T1141 (Information Return in Respect of Contributions to Non-Resident Trusts, Arrangements or Entities) may seem more straightforward than is actually the case. This is also true for CRA form T1142 (Information Return in Respect of Distributions From and Indebtedness to a Non-Resident Trust). These forms are relevant to newcomers to Canada who maintain some nexus to non-resident trusts and are the subjects of this blog post.
Recent experience has shown that T1141 and 1142 filings are often missed, overlooked and/or misunderstood. Sometimes, T1141 and T1142 filings are not properly done, if at all, leading to the possibility of CRA scrutiny and inquiry. While I acknowledge that not all newcomers to Canada will have beneficial interests in, or have contributed to, non-resident trusts, that is not universally the case. Indeed, inquiries related to foreign trusts are becoming increasingly common, particularly from newcomers to Canada who are relocating from jurisdictions like the United States and the United Kingdom, where trust planning is fairly common. Regrettably, for many newcomers, it is only now — during tax season — that they are first confronted with the Canadian tax implications and compliance requirements associated with their foreign trust structures. Planning might have been possible had advice been sought prior to relocation to Canada.
Let us begin with form T1141. In very general terms, subsection 233.3(4) of the Income Tax Act (Canada) (the “Act”) requires form T1141 to be filed by certain persons resident in Canada to record contributions made by such persons to a trust that was non-resident during a taxation year. A “contribution”, for the purposes of the filing obligation imposed under subsection 233.3(4) of the Act, includes a transfer or loan, other than an arm’s length transfer. The persons required to make T1141 filings are contributors, connected contributors or resident contributors to non-resident trusts. These are defined terms in subsection 94(1). As long as a contribution was made by such persons to the non-resident trust (even if made in a prior taxation year) and the contributor continues to exist, while the trust was non-resident at some point during the taxation year in question, a filing in form T1141 is required.
There are exceptions for contributions made to certain exempt trusts or exempt foreign trusts. Such trusts could include foreign retirement arrangements that are structured as trusts, as well as certain foreign employee benefits or similar plans or arrangements.
A good amount of information is required to complete form T1141. Needless to say, this is not the sort of filing that should be left to the last minute — neither by the taxpayer, nor by the tax preparer, particularly as details may need to be obtained from third parties who are outside of Canada. The CRA has stated that information collected under the requirements of section 233.2 of the Act is entered into its Foreign Requirements Management System. When a T1141 filing is made and a resident contributor is present, or a connected contributor and a resident beneficiary (once again, all defined terms in subsection 94(1) of the Act), there would also be a Canadian tax filing requirement in form T3 for the non-resident trust to which contributions were made on account of deemed Canadian tax residency under subsection 94(3) of the Act.
The form T1142 filing obligation may seem a little more straightforward in comparison to the informational requirements of the T1141. But appearances can sometimes be deceiving.
The filing of form T1142 is governed by section 233.6 of the Act. Subsection 233.6(1) generally provides that Canadian residents who receive distributions from non-resident trusts during a particular taxation year, or who are indebted to non-resident trusts during a taxation year, must make a filing in form T1142 in respect of that year. There are, once again, exclusions for certain exempt and excluded trusts. Notably, distributions to Canadian resident beneficiaries from an estate that arose on or and as a consequence of the death of an individual are outside of the scope of the [T1142] filing obligation imposed by subsection 233.6(1). In one case, income from a non-resident testamentary trust was held by the Tax Court of Canada to fall outside of the reporting obligation imposed by subsection 233.6(1) (see Hess v. R., 2011 TCC 360).
In terms of a distribution of funds from a non-resident trust to a Canadian resident beneficiary, form T1142 requires distributions to be identified as being on account of income or capital. Generally, distributions of capital from non-Canadian trusts that are neither factually resident in Canada, nor deemed residents of Canada under section 94 of the Act (we often refer to such trusts as “granny trusts”), are not subject to tax in Canada. This makes capital distributions to be very favourable to those newcomers to Canada who are fortunate enough to be beneficiaries of granny trusts.
But before you run off to check the “capital” box on form T1142, you need to be sure that the distribution is, in fact, on account of capital for Canadian tax purposes. This generally requires communication from the trustees of the trust, and for the trustees to properly manage and administer the trust’s capital and income receipts every calendar year. Although that may not be horrendously complicated, it is also not tremendously simple.
There is good new for the first year of Canadian tax residency of individuals (other than trusts). Section 233.7 of the Act provides an exception to the compliance obligations under, inter alia, sections 233.3 and 233.6 for such year. Put differently, form T1141 and T1142 filings do not need to be filed by individuals (other than trusts) for their first year of Canadian tax residency. Although the form filing obligation is waived for the first taxation year, if distributions of income were received by an individual beneficiary of a non-resident trust during that year, such income must be included in the computation of the beneficiary’s total income in his, her or their T1 tax return for the year.
It goes without saying that proper tax advice in this area is invaluable—if not imperative. Newcomers who have not already done so should engage competent advisors to assist with the preparation of forms T1141 and T1142, as well as to provide related tax advice and guidance.