In a recent article that I posted on my Canadian International Tax Blog (“Canadian Trusts with Foreign Beneficiaries Face New Challenges”), I discussed certain surprising statements that were made by the CRA at the 2017 Canadian Tax Foundation Annual Conference. It seems that they are suddenly alarmed about steps that tax planners have long used to allow Canadian trusts with non-resident beneficiaries to “rollout” appreciated assets to such beneficiaries. The purpose of the rollout is to avoid recognition of a deemed gain as a result of the application of the “21 year deemed disposition” rule. In a nutshell, even though such planning has been widely used, apparently without any opposition by the CRA, for many years, they don’t like it! They seem to have woken-up to the fact that it can lead to deferral of tax beyond what was intended, or even avoidance. Because of the fact that subsection 107(5) of the Income Tax Act (“the Act”) will generally preclude such tax-free rollouts, the common approach has been to use a Canadian resident corporation, of which the non-resident is a shareholder, as a beneficiary of the trust. The CRA’s view expressed at that Conference has been has been referenced as CRA document 2017-0724301C6. The CRA stated: “In respect of the transactions described herein, any capital gains inherent in the Property distributed to Canco may be deferred beyond the 21st anniversary of the Trust and potentially beyond the life of the NR beneficiary or indefinitely. It is the CRA’s view that the intention of subsection 107(5) is to ensure that Canada maintains the ability to tax capital gains that accrue during the period that property is held by a Canadian resident trust and that the transactions described are not consistent with this intention. Further, these transactions contravene one of the underlying principles of the taxation of the capital gains regime which is to prevent the indefinite deferral of tax on capital gains and which is supported by subsections 70(5), 104(4) and 107(2). Accordingly, it is the CRA’s view that such transactions circumvent the application of subsections 107(5) and 107(2.1) in a manner that frustrates or defeats the object, spirit or purpose of those provisions, subsections 70(5), 104(4) and 107(2) and the Act as a whole. The CRA has significant concerns regarding these transactions and will consider the application of GAAR when faced with a similar set of transactions unless substantial evidence supporting its non-application is provided. In addition to the specific transactions described herein, it is the CRA’s view that GAAR may be applicable in respect of other situations involving the distribution of property from a family trust to a Canadian corporation with one or more non-resident shareholders.” The recent decision of the Federal Court of Appeal in 1245989 Alberta Ltd. et. al, v. AG of Canada (2018 DTC 5067) may provide some reason, for trusts to whom this issue is relevant, to conclude that the CRA’s position regarding the application of GAAR, at least at the time of the rollout, is on shaky ground. In the case before the court, the taxpayer had implemented a series of transactions that put him in a position to extract surplus, tax-free, from a corporation of which he was a shareholder. This apparently frustrated the application of an anti-avoidance rule in section 84.1 of the Act. On the face of it, this case has no relevance to the issue facing trusts with non-resident beneficiaries. However, what is relevant is the rationale that the Federal Court of Appeal used in reversing the previous decision of the Tax Court of Canada on the basis that it erred in law. Namely, because there was no evidence that the taxpayer actually had extracted any surplus from the corporation, it concluded that GAAR could not be applied. That is, all that the taxpayer had done was create the potential for avoiding tax, without any actual avoidance of tax. In the courts view, GAAR could not be applied unless and until there was an actual avoidance of tax by withdrawing surplus tax-free. I suggest that the same can be said in relation to planning to avoid the 21 year deemed disposition in trusts with non-resident beneficiaries. In this regard, the avoidance of the 21-year deemed disposition, by a trust rollout, is clearly not abusive in and of itself. The CRA has no issue with it when property is transferred to resident beneficiaries. In that case, it is assumed that the deferred gain will ultimately be taxed on the sale of the rolled-our property, or on the death or emigration of the beneficiary. However, in the case of a non-resident beneficiary, there is potential to avoid taxation of the gain because the property may not be “taxable Canadian property” (“TCP”), or, if so, it may be “treaty protected property” (“TPP”). Presumably, that is why subsection 107(5) of the Act generally precludes tax-free rollouts to non-residents. But, that potential to avoid Canadian taxation by circumventing subsection 107(5) will only manifest itself when there is an actual or deemed disposition of the rolled-out property and a gain is realized by the non-resident. Furthermore, if the property is TCP that is not TPP, any resulting gain will be taxable in the hands of the beneficiary. This will typically be the case where the rolled-out property is shares of a Canadian real estate holding company. Unless steps are taken to change the asset mix of the corporation in order to avoid Canadian taxation, the gain will be taxed. In addition, where the property is shares of a private corporation that operates a business, it is quite possible that it could sell its assets and the proceeds would be distributed as actual or deemed dividends that would be taxed in the hands of the beneficiary. There would never be any capital gain that would otherwise be taxed. Given all of the above, I suggest that, unless the 1245989 Alberta Ltd. decision is reversed by the Supreme Court of Canada, it could be used as a defense against the application of GAAR, at least at the time of the rollout, for trusts rolling out appreciated property to a Canadian corporate beneficiary which is owned by a non-resident.