Trust of Which the Beneficiary is the Spouse or a Minor

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As a rule, where an individual (the transferor) transfers or loans property to a trust, it is the trust that must report:

  • the income or loss from the property or from property substituted for the property (both referred to as “property concerned”); and 
  • the capital gain or loss realized on the subsequent disposition of the property.

However, if the trust is an inter vivos trust in which the transferor's spouse (or a minor related to the transferor or the nephew or niece of the transferor) holds a right as a beneficiary, we consider that the transfer or loan of the property concerned is an inter vivos transaction between persons not dealing at arm's length. Where the trust allocates to such a beneficiary the income from the property concerned or a capital gain resulting from the subsequent disposition of the property, it is the responsibility of the transferor (not the beneficiary) to report the amounts allocated (income attribution rule).

The trustee must check the box on line 17 of the Trust Income Tax Return (TP-646-V), enter the requested information on line 17a and complete Part 4 of Schedule C of the return.

The transferor must report, for his or her taxation year in which the trust's taxation year ends:

  • the lesser of the following amounts: 
    • the income allocated by the trust to the beneficiary concerned, and
    • the result obtained by multiplying the trust's income from the property concerned by a fraction whose numerator is the income allocated by the trust to the beneficiary concerned and whose denominator is the total income allocated to those beneficiaries who throughout the year were the transferor's spouse or a minor related to the transferor (or the nephew or niece of the transferor);
  • where the beneficiary is the spouse, the lesser of the following amounts, if the trust disposed of the property during its taxation year:
    • the taxable capital gain allocated by the trust to the spouse, and
    • the net amount of the taxable capital gains and allowable capital losses resulting from the disposition of all the properties so transferred or loaned or property substituted therefore.
Example 1

Mr. X (the transferor) transferred rental property to a personal trust, of which his spouse and adult son are equal beneficiaries. They have the right to receive all the trust's income.

In 2019, the total income of the trust is $1,200 ($1,000 in rental income and $200 in interest). The trust pays $600 to each beneficiary.

Mr. X must report an income equal to the lesser of the following two amounts:

  • the income paid to his spouse ($600)
  • the rental income allocable to Mr. X ($1,000)

The trust must therefore issue two RL-16 slips (see courtesy translation RL-16-T) for the amount of $600; one in the name of Mr. X, and one in the name of his son.

Example 2

Mr. Y (the transferor) transferred rental property to a personal trust, of which his spouse and their two sons, ages 16 and 20, are all equal beneficiaries. They have the right to receive all the trust's income.

In 2019, the trust decides to sell the property. The total income of the trust is $1,800 ($1,000 in rental income, $200 in interest and $600 in taxable capital gains from the sale of the property). The trust pays $600 to each beneficiary.

The trust does not designate any capital gains

Mr. Y must report the lesser of the following amounts:

  • the income allocated to his spouse and to their minor son ($600 x 2 = $1,200)
  • the rental income allocable to his spouse and to their minor son ($1,000)

The trust must issue an RL-16 slip (see courtesy translation RL-16-T) to:

  • Mr. Y for $1,000
  • the spouse for $100
  • the minor son for $100
  • the adult son for $600

The trust designates capital gains

Mr. Y must report $800 in income, which corresponds to the lesser of the following amounts:

  • the income allocated to his spouse and to his minor son (($1,000 + $200) x 2/3 = $800)
  • the rental income allocable to his spouse and his minor son ($1,000)

Mr. Y must also report $200 in taxable capital gains, which corresponds to the lesser of the following amounts:

  • the taxable capital gain allocated to his spouse ($200)
  • the taxable capital gain realized on the property ($600)

The trust must therefore issue an RL-16 slip to:

  • Mr. Y for $800 in income and $400 in capital gains
  • the minor son for $400 in capital gains; and
  • the adult son for $400 in income and $400 in capital gains

If the beneficiary is the transferor's spouse, only the income and capital gain for a period in which the transferor is the beneficiary's spouse and is resident in Canada can be attributed to the transferor.

If the beneficiary is a minor who is related to the transferor (or is the transferor's nephew or niece), only the income for a period in which the transferor is resident in Canada can be attributed to the transferor.

Note

The income attribution rule does not apply:

  • if the property is transferred for consideration at least equal to its fair market value (FMV), or if it is loaned at an interest rate at least equal to the prescribed rate; 
  • if certain types of income derived from the transferred property are allocated to a beneficiary who is a minor (for more information, click Exception for Split Income of a Beneficiary Who Is a Minor).

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