Foreign trusts are routine in US estate planning. They're far from routine in Canadian tax practice. Whenever a Canadian-resident person contributes property to a non-resident trust — or a Canadian-resident beneficiary is named in a trust created by someone who has Canadian-resident-connected to the trust — Section 94 of the Income Tax Act can quietly turn the structure into a Canadian-resident trust for tax purposes.
The two key triggers
Section 94 applies to a non-resident trust in any tax year where there is either (i) a "resident contributor" — a Canadian-resident person who contributed property to the trust — or (ii) a "resident beneficiary" — a Canadian-resident beneficiary whose connected contributor (typically the settlor) is also a Canadian resident OR was a Canadian resident at any time during a specified look-back period.
Both definitions are intentionally broad. "Contribution" includes the transfer of property to the trust whether or not for consideration, in any year. The definition of "resident beneficiary" reaches back through years of past residency for connected contributors. The combined effect is that ordinary US-style estate plans can fall into Section 94 unexpectedly, particularly when a settlor or beneficiary moves to Canada.
The consequence
When Section 94 applies, the non-resident trust is deemed to be resident in Canada for most purposes of the Income Tax Act. It files a Canadian T3 return on its worldwide income. Canadian tax applies to the trust's income at top trust rates (the highest marginal rate, with no graduated-rate benefit).
Crucially, subsection 94(3)(d) makes the resident contributor and the resident beneficiary jointly and severally liable, with the trust, for the Canadian tax. The CRA can pursue any of them for the full amount. A US settlor who never thought their family trust would touch Canada can find themselves personally liable for Canadian tax simply because an adult child moved to Toronto.
Common fact patterns we see
- The classic US grantor trust. Mom and Dad set up a US grantor trust 15 years ago to hold publicly-traded securities for the benefit of their children. One child moves to Canada. Section 94 now applies (unless one of the relieving exceptions discussed below is available), and the trust starts filing Canadian T3s.
- The Canadian-emigré-funded foreign trust. A Canadian high-net-worth individual emigrates to Florida and sets up a US-resident trust to hold accumulated wealth. The settlor is no longer a Canadian resident — but if any contributions were made within the look-back window, the resident-contributor rule can still apply.
- Cross-border families. A multi-generational family with members in both countries names a Canadian-resident beneficiary as one of several beneficiaries of a foreign trust. The Section 94 status depends on who funded the trust and when.
Relieving exceptions
Several narrow exceptions exist:
- The 60-month rule. Contributions made by an individual who has been a Canadian resident for less than 60 months in total are excluded from the resident-contributor calculation. A new immigrant to Canada has a 60-month window during which their pre-immigration trust contributions don't count.
- Commercial trusts. Genuine commercial trusts (mutual funds, REITs, employee-benefit trusts) are generally excluded from the deemed-residence consequences.
- Charitable trusts meeting certain conditions.
Planning
For US families with a Canadian member, the practical options are:
- Restructure the trust before the Canadian connection forms. If a child is expected to move to Canada, a pre-migration restructuring (typically into a Canadian trust or into direct ownership structures) is straightforward; a post-migration cleanup is much harder.
- Use the 60-month window. For new immigrants who can't avoid being beneficiaries or settlors of a pre-existing US trust, the 60-month window provides time to plan an exit (distribution, restructuring, beneficiary change) before Section 94 attaches.
- Convert to a fully-distributed trust. Distributing income currently to all beneficiaries can change the effective tax bracket on the trust's accumulated income and, depending on the residency mix, can reduce the net Section 94 cost.
The takeaway
Section 94 is the most-overlooked provision in cross-border family planning. The risk surface grows whenever someone moves between the two countries. For US trustees, asking the question "is any beneficiary a Canadian resident?" annually is cheap insurance.