Generally, at the time a segregated fund of an insurer is established, a trust called a “segregated fund trust” is considered to be created with respect to the fund. The property of the segregated fund and the income derived from it are deemed to be the property and income of the trust and the insurer is the trustee of the segregated fund trust.

An income tax return and financial statements must be filed for each segregated fund.

Holding a portion of the segregated fund

If some of the segregated fund policies of the trust were held as a registered retirement savings plan (RRSP), a registered retirement income fund (RRIF), a registered pension plan (RPP), a pooled registered pension plan (PRPP), a voluntary retirement savings plan (VRSP) or a tax-free savings account (TFSA), you must take into account in the return and schedules only the portion of the trust's income (and, where applicable, the trust's capital gain or loss) that is to be allocated to beneficiaries other than those that hold funds under such a plan or under a TFSA.

Otherwise, complete only Part 1 (lines 1 to 11 only) and Part 7 of the Trust Income Tax Return (TP-646-V).

Merger of segregated funds

As of 2018, insurers can merge segregated funds on a tax-deferred basis. The rules that apply to the merger of segregated funds are generally the same as those that apply to the merger of mutual funds.

The non-capital losses of a segregated fund can be carried back and included in the fund's taxable income for a taxation year that begins after 2017. However, the use of these losses is subject to the normal limitations for carrying non-capital losses either forward or back.

The use of non-capital losses is restricted following a segregated fund merger, as is the case for mutual fund mergers.