Photo of Rami PandherBy Rami PandherApril 27 2017
Tax Law

What is a Qualifying Environmental Trust?

Government requirements to fund future reclamation obligations present a serious cash-flow problem to taxpayers with pipeline or mining operations in Alberta. Taxpayers are required have accumulated the funds necessary reclaim land that gets damaged or contaminated before the project is expected to cease operations. This results in a timing issue. Since the reclamation expenses will not be incurred until the end of a project’s life, the taxpayer may not have any income available to deduct the expenses against.

Qualifying environmental trusts (“QET”) to solve this cash-flow problem by allowing for contributions to be deducted in the year in which they occurred. A QET is the only vehicle that enables a corporation to claim a tax deduction in the year for amounts set aside for future reclamation.

The Income Tax Act has precise definitions for what is and is not a QET.[1] Generally, a QET is a trust that is maintained for the sole purpose of funding the reclamation of a “qualifying site” in Canada, the maintenance of which is required under a qualifying law or contract. The Trustee of the QET is the Crown (or a licenced trustee company).

The following highlights the taxation of QETs:

  • Taxation – The QET is taxed on its income[2] at a special “QET income tax rate” (i.e., at the corporate rate).[3]
  • Acquiring a QET interest – A taxpayer is entitled to deduct consideration paid to acquire an interest as a beneficiary under a QET.[4]
  • Deductions to Beneficiary – Contributions made to the QET by a beneficiary (typically a corporation) to fund reclamation obligations are immediately deductible by the beneficiary.[5]
  • Taxation of Beneficiary – Any income or loss earned or realized by the QET is considered to also be earned or realized by the beneficiary,[6] but the beneficiary is entitled to a refundable tax credit for tax already paid by the QET.[7]
  • Distributions to Beneficiary – The beneficiary must include in income all amounts received from the QET during the year.[8]
  • Disposition of beneficial interest – The disposition of a beneficiary’s interest under a QET does not give rise to a capital gain or loss.[9]
  • Filing Requirements – The taxation year of a QET is the calendar year, and a QET must file a return in prescribed form[10] within 90 days after the end of the taxation year.

While, Alberta’s QET tax regime parallels the federal tax regime, an Alberta-resident QET must also file an Alberta tax return[11] in order to claim the Alberta QET tax credit.

Finally, the general provision that would normally apply in respect of beneficiaries under a trust do not apply to a QET.[12] For example, a QET is not subject to the 21-year deemed disposition rule[13] or the income attribution rules.[14]

Invitation for Discussion:

If you would like to discuss this article in greater detail, or any other tax or business law matter, please do not hesitate to contact one of the lawyers in the Tax Law group at Shea Nerland LLP.

Disclaimer:

Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.

[1] Subsection 211.6(1) of the Income Tax Act (Canada), RSC. 1985 (5th Supp) c 1. Unless specified otherwise, all statutory references herein are to the Income Tax Act.

[2] Which is calculated without considering subsections 104(4) to (31) and sections 105 to 107.

[3] Paragraph 149(1)(z) and subsection 211.6(1).

[4] Paragraph 20(1)(tt).

[5] Paragraph 20(1)(ss).

[6] Subsection 107.3(1).

[7] Section 127.41. If provincial tax is payable by the QET in Alberta, British Columbia, Saskatchewan or Ontario, the beneficiary may also be entitled to a refundable provincial tax credit.

[8] Paragraphs 12(1)(z.1) and (z.2).

[9] Subsection 39(1)(a)(v) and (b)(ii).

[10] T3M Environmental Trust Income Tax Return.

[11] Form AT1, line 087.

[12] Subsection 107.3(4).

[13] Under subsection 211.6(2), the QET’s income is determined without regard to subsections 104(4) to (31) and sections 105 to 107.

[14] Paragraph 75(3)(c).

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