5.2 Income attribution rule

5.2 Income attribution rule

5.2.1 Trust of which the beneficiary is the spouse or a minor

As a rule, if 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 the "property concerned" below) 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, including a niece or nephew) 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. If 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). You must check the box on line 17 of the return, enter the requested information on line 17a and complete Part 4 of Schedule C.

For their taxation year in which the trust's taxation year ends, the transferor must report:

• 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 (including a niece or nephew);

• 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 for the property.

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 (including a niece or nephew), only the income for a period in which the transferor is resident in Canada can be attributed to the transferor.

Note that 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 (see Exception for split income of a minor).

Sections 462.1, 462.5, 462.8 to 462.10, 462.15 and 462.21

5.2.2 Revocable or blind trust

A trust is said to be a revocable or blind trust if the transferred or loaned property (or the property substituted for that property) can revert to the transferor or be transferred to persons designated by the transferor after the creation of the trust, or if this property cannot be disposed of during the lifetime of the transferor without their consent.

If the trust is resident in Canada, it is the responsibility of the transferor, during the time the transferor is resident in Canada, to report any income or loss on the property and any capital gain or loss on its subsequent disposition (income attribution rule). You must check the box on line 18 of the return, enter the requested information on line 18a and complete Part 4 of Schedule C.

Note that the income attribution rule does not apply:

• to the transfer of a share of the capital stock of a private corporation where the share generates dividends or taxable benefits or where the disposition of such a share results in a capital gain that is deemed to be a taxable dividend, and the dividends, benefits or capital gain is paid or payable in the taxation year to a specified individual;

• if the trust:

  • is an employee trust,

  • is a trust established under an RPP, a PRPP, a VRSP, a profit-sharing plan (PSP), a DPSP, a registered education savings plan (RESP), a registered disability savings plan (RDSP), a registered supplementary unemployment benefit plan (RSUBP), an RRSP, a RRIF, an employee benefit plan, a tax-free savings account (TFSA) or a first home savings account (FHSA),

  • is an employee life and health trust,

  • is an insurance segregated fund trust,

  • is a retirement compensation arrangement trust,

  • is a trust all or substantially all of whose property is held for the purpose of providing benefits to individuals, for their current or former office or employment,

  • is an environmental trust,

  • is a private foundation that is a registered charity, or

  • received property (or substituted property) from an individual who received it for a child, provided the only beneficiaries of the trust are children for whom benefits were received by the individual (such as the child's parent) who transferred the property to the trust.

Sections 467 and 467.1

5.2.3 Exception for split income of a minor

Notwithstanding the income attribution rule explained under Trust of which the beneficiary is the spouse of a minor and Revocable or blind trust, if a trust allocates certain types of income (called split income) to a beneficiary who is a minor (minor beneficiary), it is the minor beneficiary, not the transferor, who must report the income. In this situation, the minor beneficiary must pay a special income tax on this income, calculated at the highest marginal rate on form TP-766.3.4-V, Income Tax on Split Income. In some cases, the father or mother is solidarily liable, with the minor beneficiary, for ensuring the payment of this income tax.

The split income must be entered on the minor beneficiary's RL-16 slip and certain codes must be entered in the blank boxes. See the Guide to Filing the RL-16 Slip: Trust Income (RL-16.G-V) for instructions for the following boxes:

• box A - Canadian and foreign capital gains

• box E - Foreign business income

• box F - Foreign investment income

• box G - Canadian business or property income

• box I - Taxable amount of eligible dividends and ordinary dividends

Split income cannot be designated under subsections 104(13.1) and 104(13.2) of the federal Income Tax Act, and must be reported by the minor beneficiary in their income tax return. The amount can subsequently be deducted on line 295 of the minor beneficiary's return, provided the special tax on split income is being paid (line 443).

However, a minor beneficiary does not have to report the split income for the taxation year in which the split income is earned by the trust and the income attribution rule applies to the transferor (see Trust of which the beneficiary is the spouse of a minor and Revocable or blind trust) if:

• the minor was not resident in Canada throughout the taxation year;

• the minor's father and mother were not resident in Canada at any time during the taxation year; or

• the income was allocated to the minor because of the death of:

  • their father or mother, or

  • another person, if, for the taxation year, the minor was a full-time student at a post-secondary educational institution, or a tax credit for severe and prolonged impairment in mental or physical functions could be claimed with regard to the minor.

Section 462.24.1

5.2.4 Exception for split income of an adult beneficiary

Since 2018, measures have been in place that broaden the rules regarding the taxation of split income so that they apply to adults resident in Canada who receive split income. Consequently, such adults must pay income tax, calculated using form TP-766.3.4-V, Income Tax on Split Income, on the portion of their income that is split income.

These rules do not apply to persons engaged in the activities of a business. Such persons can receive income from the business without being subject to the tax on split income.

The amount of split income must be entered on the beneficiary's RL-16 slip. Enter a code describing the split income in a blank box. See the instructions regarding the amounts received by beneficiaries in the Guide to Filing the RL-16 Slip: Trust Income (RL-16.G-V).

Solidary liability for the tax on split income

The age of a specified individual determines who is solidarily liable for the payment of the tax on split income. If the specified individual did not reach age 17 before the taxation year concerned, the individual and the individual's parents are solidarily liable for the payment of the tax. If the specified individual reached age 17 before the taxation year concerned, the tax on the income from a related business is the solidary liability of the individual and of each source individual who is sufficiently related to the related business. The relationship required between the source individual and the related business is described in the definition of related business.

The liability of the parents and of each individual who is related to the specified individual is limited to the amounts included in the specified individual's split income. However, the liability of the specified individual, the individual's parents and of each individual who is related to the specified individual is not limited with respect to interest payable as a result of the application of the measures applicable to the tax on split income.

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