On August 17, 2016, Canada Revenue Agency (“CRA”) released a technical interpretation 2016-064795, concerning CRA’s comments on subparagraph 94(1)(d)(ii) of the Income Tax Act’s (“ITA”) definition of “exempt foreign trusts”. Section 94 of the ITA deems certain non-resident trusts to be resident in Canada for income tax purposes. In this regard, subparagraph 94(1)(d)(ii) dealing with foreign exempt trusts which are excepted from section 94, requires a non-resident trust to be “created exclusively for charitable purposes and has been operated throughout the particular period exclusively for charitable purposes”.
CRA provided its comments concerning its interpretation of “charitable purposes” and “created exclusively for charitable purposes” in a manner consistent with existing Canadian case law as it applies to domestic charities. As such, CRA relied on the interpretation of charitable purposes as determined by Canadian common law. That is, the purpose must fall within the four categories of charitable purposes established at common law recognized in Canada and “benefit the community or an appreciably important class of the community.”
With regard to CRA’s interpretation of “created exclusively for charitable purposes”, CRA stated that if charitable activities are carried out through an intermediary, the activities and resources of the foreign exempt trust used by the intermediary must be subject to the “direction and control of the trust.” Moreover, CRA’s interpretation of “exclusively for charitable purposes” in the context of subparagraph 94(1)(d)(ii) means that an exempt foreign trust may conduct incidental commercial or investment activities if they serve as a means to further the exclusive charitable purpose, but not to the extent they become a collateral non-charitable purpose of the trust. As well, CRA stated that funds held by an exempt foreign trust must also be used exclusively for charitable purposes. CRA reiterates that “the determination of whether a trust is operated throughout a particular period exclusively for charitable purposes constitutes a question of fact that must be determined on an ongoing basis.”
These comments will be of assistance to non-resident trusts with charitable purposes operating in Canada in determining how the Income Tax Act (Canada) may apply to them.