Subsection 107(5) prevents a Canadian-resident trust from making a distribution to a non-resident beneficiary on a tax-deferred basis under subsection 107(2). The CRA has stated that it will apply GAAR to a distribution to a Canadian corporate beneficiary controlled by a non-resident beneficiary. The trustees, then, should consider other approaches. They might ensure that property without a significant accrued gain is distributed to the non-resident. They might distribute property that is not subject to subsection 107(5). They might put up security for tax payable in the trust (if it elects under subsection 107(2.11)). The trust could distribute property only to Canadian beneficiaries who can equalize with the non-resident through some other means. Finally, the trust could analyze the actual tax that will be paid on income allocated to the non-resident. It might only amount to 7.5% withholding tax.
Keung and Katlai “Planning Considerations for Distributing Trust Properties to Non-Resident Beneficiaries” 11:4 Canadian Tax Focus (Nov 2021)
