Family Trust Beneficiary Moving Abroad: Departure Tax, Payouts

Is a family trust interest hit by departure tax when you leave Canada?

Usually not. An interest in a personal trust resident in Canada is an "excluded right or interest", so it is not deemed sold on your departure date, as long as you never acquired the interest for consideration (you did not buy it) and it did not arise from a "qualifying disposition" by you, a transfer of your property to the trust that did not change who benefits from it (Income Tax Act s. 128.1(10), paragraph (j); CRA: Dispositions of property). This can fit a family trust a parent settled for the children, if no beneficiary paid for an interest or transferred property into the trust; check the trust deed and the trust's history.

The departure is not the end of the story. Tax arrives later, when the trust pays you income or hands you property. What makes a case not simple:

• The trust holds shares of a family company, and the trustees plan to distribute them to you.
• The trust's 21-year date is close (see below).
• A trustee is also leaving Canada.
• You bought your interest, or you transferred property into the trust yourself.

What to gather before you leave: the trust deed, the names and home countries of all trustees, the trust's last T3 return, a list and rough value of what the trust holds, the date the trust was created, and any distributions planned for the next few years, and Form NR301 if your new country's treaty lowers the withholding rate. Departure tax on everything you own directly is covered in leaving Canada.

Do you still list the trust interest on Form T1161?

Yes. "Reportable property" for Form T1161 is defined by reading the excluded-interest list without paragraph (j), so a personal trust interest that escapes the deemed sale still goes on the list (s. 128.1(10)). The CRA says the same: its list of items left off T1161 points to that definition read without paragraphs (c), (j) and (l) (CRA).

Valuing a discretionary interest is a judgment call; record how you arrived at the figure. For how to fill in the form, see Form T1161 when leaving Canada.

How are trust payments to a non-resident beneficiary taxed?

Trust income paid or credited to a non-resident beneficiary is subject to Part XIII withholding at 25%, unless a tax treaty specifically reduces the rate for trust income (s. 212(1)(c); IC76-12R8, paragraph 36). The trust withholds, and that withholding is generally the final Canadian tax on the payment: you do not normally file a Canadian return just for it. Filing duties after you leave are covered in non-resident Canadian return and catch-up.

Points that surprise people:

• What is taxed is the trust's income, not every payment. Withholding applies to the trust's income paid or made payable to you, whatever the trust earned it from (s. 212(1)(c) and (11)). Dividends the trust received from the family company are taxed as trust income, at the trust-income rate, not the dividend rate. A cash payment out of the trust's capital, not its income, is not caught by this rule. Capital dividends passed through to you are caught too, though a resident would receive them tax-free (s. 212(1)(c)(ii)).
• Treaty relief only where the treaty says so. A lower rate applies only if the treaty specifically provides it for trust income (IC76-12R8, paragraph 36). For example, the Canada–US treaty caps tax on income from a trust at 15%. Rates by country are in non-resident tax rates in Canada.
• Capital gains designated to you are carved out. Part XIII on trust income does not reach an amount deemed by subsection 104(21) to be your taxable capital gain (s. 212(1)(c)(i)). How that gain is then taxed depends on the property; get advice before the trust designates one.

The trust remits the tax by the 15th day of the following month, and gives you an NR4 slip when it pays or credits you $50 or more in the year, even if no tax was withheld (or any amount on which it withheld tax). A trust files its NR4 return within 90 days after the end of the trust's tax year (T4061). If the trust pays without withholding, the trust can be assessed for the tax that should have been withheld, even if it cannot recover it from you, plus interest and a penalty of 10% of it (20% for a repeated knowing or grossly negligent failure) (T4061). What the slip shows is covered in the NR4 slip.

A trust must file a T3 return for a year in which it allocates any income to a non-resident beneficiary (T3 Trust Guide).

Can a family trust distribute shares to a non-resident beneficiary tax-free?

Usually not. A trust can normally hand capital property to a beneficiary at the trust's cost, with no tax until the beneficiary sells. That rollout does not apply when the beneficiary is non-resident. Instead, the trust is deemed to dispose of the property at fair market value, and you take it at that value (s. 107(5) and 107(2.1)). The exception is taxable Canadian property, such as shares of a company whose value comes mainly from Canadian real estate (s. 128.1(4)(b)).

The common trap: trustees plan to roll shares out to a child, the child moves first, and the distribution happens after. The gain then lands in the trust in the year of the distribution. If a distribution to you is planned, the order of the steps (distribution date versus your departure date) matters.

The 21-year rule adds pressure. A trust is deemed to sell most of its capital property at fair market value every 21 years from its creation (s. 104(4)). Trustees often plan to roll property out to beneficiaries at cost before that date. For a non-resident beneficiary that rollout is generally not available, so the plan may need to change: distribute to that beneficiary before departure, distribute to resident beneficiaries only, or accept the gain in the trust.

Does the trust pay Part XII.2 tax because a beneficiary is non-resident?

It can. A trust with a "designated beneficiary" (which includes a non-resident) that deducts amounts paid to beneficiaries owes Part XII.2 tax at 40% of the least of its "designated income", its income before paying beneficiaries, and 100/60 of the amount it deducted for amounts paid to beneficiaries (s. 210.2(1); s. 210).

Designated income is narrow. It covers income from real property in Canada, Canadian resource and timber property, businesses carried on in Canada, and taxable capital gains on taxable Canadian property. Portfolio dividends and interest are not on that list. A family trust that only collects dividends from a holding company may owe none; a trust that owns Canadian rental property may.

The trust reports Part XII.2 on Schedule 10 of its T3 return (T3 Trust Guide). The trust can designate part of the tax as paid by beneficiaries who are not designated beneficiaries, so resident beneficiaries include their share in income and claim it as tax paid on their own returns (s. 210.2(3)). If no beneficiary was a designated beneficiary in the year, the trustee certifies that and no tax is payable (s. 210.3(1)). The return and tax are due 90 days after the trust's tax year-end, and a trustee is personally liable for Part XII.2 tax the trust does not pay on time (s. 210.2(5) and (6)).

Can the family trust become non-resident if trustees move abroad?

Yes, potentially. A trust is resident where its central management and control actually takes place. That is usually where the trustees act, but a trustee's home does not always decide it, and with several trustees the trust resides where the more substantial control is exercised (Folio S6-F1-C1, paragraphs 1.2 to 1.4).

Why it matters:

• Emigration of the trust. When a trust ceases to be resident, the emigration rules apply to it as a taxpayer, including a deemed sale of most of its property (other than taxable Canadian property and certain Canadian business property) at fair market value (s. 128.1(4)).
• Your exclusion depends on the trust staying resident. Your interest escapes departure tax only if the trust is a personal trust resident in Canada when you leave; if the trust has already become non-resident, your interest can be deemed sold (s. 128.1(10)).
• It may be deemed resident anyway. A trust that is non-resident under the control test can be deemed resident in Canada for many purposes while it has a resident contributor, or a resident beneficiary and a connected contributor (typically the parent who funded it) (s. 94(3)).

If the whole family leaves, trustees and contributors included, no one may be left in Canada to keep the trust resident, and the trust can emigrate with you. If you are a trustee and you are the one leaving, this is the question to settle before you go. Where trust residence is unclear, it is a facts-and-circumstances test, not a box on a form.

What should trustees and the beneficiary sort out before the departure date?

Settle the order of events while everyone is still resident. Before you leave:

1. Confirm your interest is excluded. Check that you never paid for it and never transferred property into the trust.
2. Value the interest for T1161. Record the method.
3. Decide on planned distributions. A capital distribution after you leave is taxed in the trust at fair market value. One made before you leave usually rolls out at cost but then counts in your own departure tax. Decide the timing with the trustees before you go.
4. Check the 21-year date. If it falls after your departure, a rollout to you will generally not be at cost; decide before you leave.
5. Confirm where the trust is managed. List each trustee's country; replace or add a trustee if control would shift abroad.
6. Set up withholding. The trustees need your foreign address, a completed Form NR301 (your declaration of treaty residence) if a treaty rate is claimed, and a process to withhold, remit and issue the NR4.
7. Check what the trust earns. Canadian rental or business income may trigger Part XII.2 tax.

Example

Daughter moves to London, trust holds family company shares

Figures in Canadian dollars. A daughter is a beneficiary of a family trust set up by her parents; the trust owns shares of the family operating company (not a real-estate holding company). She moves to London in March.

• Departure year: her trust interest is not deemed sold, but she lists it on T1161 with her other reportable property.
• Next year: the trust pays her C$40,000 out of dividends it received. The trust withholds Part XIII tax on the C$40,000 as trust income, at the statutory rate unless the Canada–UK treaty specifically reduces it, remits by the 15th of the next month, and issues an NR4.

Same trust distributes C$500,000 of shares to her after she left

The trustees distribute company shares worth C$500,000 to her (trust's cost C$100), two years after she left. The rollout at cost is not available. The trust is deemed to sell the shares for C$500,000, reports a capital gain of about C$499,900 on its T3, and she takes the shares at a cost of C$500,000. Had the distribution happened before she left, the resident rules would have applied, and the shares would then have been part of her own departure-tax calculation.

One son stays, the other moves to Dubai

Figures in Canadian dollars. The trust earns C$60,000 of income and allocates C$30,000 to each son. The resident son reports his share on his own return. The non-resident son's C$30,000 draws Part XIII withholding and an NR4. The trust also checks its income: if part of it is designated income (for example rent from a Canadian property), Part XII.2 tax may apply because one beneficiary is now non-resident.

Different for you?

• The trust owns your family's private company, or a capital distribution is planned: the timing against your departure date decides who pays and how much; this is worth reviewing with a CPA through individual tax services. Shares you hold directly are covered in departure tax on private company shares.
• A trustee is moving too, or the whole family is leaving: trust residence and a possible deemed sale of most trust property are in play; see individual tax services.
• The trust paid you after you left and withheld nothing: the trustees may owe the missed tax and penalties; review the missed years with a CPA through individual tax services.
• You also own a Canadian corporation directly: see non-resident owners of a Canadian corporation and paying yourself from your corporation after moving abroad.
• The money comes from a deceased parent's estate, not a living trust: see inheriting from a Canadian estate as a non-resident.
• You are not sure you have actually become non-resident: see Canadian tax residency.
• You left years ago and nothing was filed or withheld: see non-resident Canadian return and catch-up.
• Everything else you own when you leave: see leaving Canada.