The CRA generally has, in the past, sought to tax some foundations as if they trusts, (and, accordingly, apply the punitive tax regime applicable to Non Resident Trusts (NRT’s)).
The CRA position outlined in their Technical News #38, states as follows:
We cannot always reach a general position for a particular foreign entity. In certain situations, we have reached a conclusion after an analysis not only of the foreign legislation under which an entity was formed but also of the agreements like articles of incorporation and contracts between the parties that governed it. Accordingly, great care must be taken in considering the issue of foreign entity classification.
Our approach remains as stated last year, that is, to determine the status of an entity for Canadian tax purposes, we generally follow the two-step approach described below:
1.Determine the characteristics of the foreign business association under foreign commercial law;
2.Compare these characteristics with those of recognized categories of business associations under Canadian commercial law in order to classify the foreign business association under one of those categories.
Even if we consider all the characteristics of an entity, the most important attributes are the nature of the relationship between the various parties and the rights and obligations of the parties under the applicable laws and agreements.
In Canada v Sommerer, 2012 FCA 207 The Federal Court of Appeal reviewed the situation of an Austrian foundation .
The Tax Court of Canada, whose decision was appealed against, held that To determine whether a trust existed, the court considered whether the following features were present: (i) segregated property; (ii) owned by a person (trustee) having control of the property; (iii) for the benefit of persons (beneficiaries); (iv) to whom the trustee has a fiduciary duty enforceable by the beneficiaries.
The Court of Appeal explored the matter in greater depth. Like a corporation, an Austrian private foundation is a juridical person with the legal capacity to own property in its own right and to deal with its property on its own account. A corporation does not hold its property in trust for its shareholders or members, except to the extent that a trust deed or an analogous legal instrument imposes the legal and equitable obligations of a trustee on the corporation. Nothing in the constating documents of the foundation or the law of Austria supports the conclusion that the right of the foundation to deal with its property is constrained by any legal or equitable obligations analogous to those of a common law trustee. Further, a shareholder is not the beneficial owner of any property or the corporation, and has no legal or equitable claim to the corporate property (unless such a claim arises upon the declaration by the board of directors of a dividend, or when the dissolution of the corporation is imminent). Unless and until such an event occurs, a shareholder has only an inchoate right to receive distributions of corporate property from time to time at the discretion of the board of directors, and to share in the distribution of the corporate property upon its dissolution. The same can be said of the interest of a beneficiary or an ultimate beneficiary in the property of an Austrian private foundation.
Technical News #38 would still appear to be current, even in light of the decision in Sommerer.
As recently as this past summer, at the STEP Canada conference, the CRA was asked if they keep a list of foreign entities that they generally consider to be foreign trusts. This was their reply:
There currently is no list. CRA still thinks the two-step approach is the correct one. In determining the status of an entity for Canadian tax purposes, the characteristics of the foreign business association are reviewed under the commercial law of that jurisdiction and the relevant documentation. Those characteristics are compared to the characteristics that are recognized in Canada under Canadian commercial law in order to classify the entity under one of the categories.
There is support for this approach in the Sommerer case. Miller J in the Tax Court looked not so much to whether the foundation in that case was a trust but rather whether there was a trust relationship and whether the foundation could be seen as a trustee and, in fact, could it be a corporate trustee.
Foundations may be used as substitute for trusts without running afoul of Non Resident Trust taxation regime, but the CRA and the courts will look at each foundation, if need be, to determine what their structure is. Careful planning is required.
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