Thank you, Mr. Chairman and honourable members. Thank you very much for the invitation to appear before you today.
I would like to address a possible anomaly of foreign trusts, which only have a marginal relationship with Canada, as well as clause 274 of the bill, remedying an inequity in the departure tax provisions.
Trusts are established for a lengthy term, whether by deed or by will. The principal purpose of a family trust is to divide functions of administration and beneficial ownership, with settlors often arranging for assets to be held in trust for two or three generations.
There are numerous Canadians who established trusts 60 or 80 years ago, with respect to which most of the family beneficiaries were born and have long been resident elsewhere, and the trust administration has similarly been resituated. These trusts generally have no Canadian assets and their ancestral relationship with Canada may even have been forgotten.
In the event a single beneficiary, perhaps a great-grandchild of the settlor, remains in Canada, the trust would, however, be deemed to constitute a section 94 trust, subject to Canadian taxation, generally on its full income, notwithstanding that the trust assets, the trust administration, and most of the beneficiaries are elsewhere. This would, no doubt, come as a surprise, a most unwelcome surprise, to the foreign trust, the trustees, and in particular to the non-resident beneficiaries.
Unless the interest of the Canadian resident beneficiary could be segregated in a separate trust, which is probably not feasible, or the Canadian resident could be persuaded to give up his or her interest, which wouldn't be fair, the foreign trustees are placed in a quandary. While they may wish to comply with Canadian law, generally speaking, under trust law they would not be able to comply because the Canadian tax obligation would not be enforceable. Taxing a foreign resident trust on its entire income, based upon the slender thread of a single Canadian resident beneficiary, often with a minor interest, is excessive, in my opinion.
This could be remedied as set forth in this submission by excluding non-resident trusts in which Canadian residents may have a minor interest, 10% or 20%, excluding Canadian trusts established 20 or more years ago, or perhaps taxing only the share of the trust allocable to Canadian residents. This latter alternative could be effected through an elective mechanism similar to the QEF mechanism in the United States code. This issue could perhaps be reviewed by Finance after the adoption of the bill to determine the appropriateness of a technical amendment.
Clause 274 will remedy a longstanding problem under section 128.1 relating to departure tax for individuals who reside in Canada for less than five years. Foreign entrepreneurs come to our country for several years, owning shares in their companies. They establish businesses and jobs and then return to their country of origin. In the event their company shares were subject to a corporate reorganization, even one without any economic effect, which is entirely tax free in Canada, they would, however, be subject to Canadian departure tax upon their leave.
The exemption from the departure tax liability relates only to identical shares that the person held upon his or her migration to Canada. This problem will, fortunately, be remedied such that a share reorganization or other tax-free event would not deny the availability of the exemption. This remedial provision will assist in the establishment of Canadian businesses by foreign entrepreneurs who may wish to come to our country for a limited time, and it gives effect to the original intent of subsection 128.1(4).
Lastly—and I believe I share the views of my colleagues here as well as many outside—the adoption of the bill will be welcomed, as it will finally enact provisions, many of which were originally proposed in 1999, and which will have effect from 2007 or 2010, and in certain instances even earlier.
Thank you.