Definitions

Definitions

In this section, we define the technical terms we use in this guide.

Administrator - a person appointed by a court to settle the estate of a deceased person.

Allocate, allocation - to assign or set apart income from the trust to a beneficiary. An amount can only be allocated to a beneficiary when one of the following applies:

• the beneficiary is entitled to the income in the year that it is earned by the trust, under the trust document

• the trust makes a preferred beneficiary election to include the trust income in the beneficiary's income

• the beneficiary is paid income in the year that it is earned by the trust, at the discretion of the trustee

In most cases, the amounts you allocate have to be included in the beneficiary's income, and they are deducted from the trust's income. For exceptions to this general rule, see "Exceptions and limits to income allocations" on page 45.

Arm's length - refers to a relationship or a transaction between persons who act in their separate interests. An arm's length transaction is generally a transaction that reflects ordinary commercial dealings between parties acting in their separate interests.

A taxpayer and a personal trust (other than a specified trust described in "Chart 1 - Types of Trusts" on page 8) are deemed not to deal with each other at arm's length if the person, or anyone not dealing at arm's length with the person, is beneficially interested in the trust.

Related persons - are not considered to deal with each other at arm's length. Related persons include individuals connected by blood relationship, marriage, common-law partnership or adoption (legal or in fact). A corporation and another person or two corporations may also be related persons.

Unrelated persons - may not be dealing with each other at arm's length at a particular time. Each case will depend upon its own facts. The following criteria will be considered to determine whether parties to a transaction are not dealing at arm's length:

• whether there is a common mind that directs the bargaining for the parties to a transaction

• whether the parties to a transaction act in concert without separate interests; "acting in concert" means, for example, that parties act with considerable interdependence on a transaction of common interest

• whether there is de facto control of one party by the other because of, for example, advantage, authority or influence

For more information, see Income Tax Folio S1-F5-C1, Related Persons and Dealing at Arm's Length.

Non arm's length - generally refers to a relationship or transaction between persons who are related to each other.

However, a non-arm's length relationship might also exist between unrelated individuals, trusts, partnerships or corporations, depending on the circumstances. For more information, see the definition of "Arm's length."

Beneficiary - includes the person for whose benefit the trust is created, the person to whom the amount of an insurance policy or annuity is payable, or the unit holder of a mutual fund trust.

Common-law partner - this applies to a person who is not your spouse (see page 7), with whom you are living in a conjugal relationship, and to whom at least one of the following situations applies. They:

1. have been living with you in such a relationship for at least 12 continuous months

2. are the parent of your child by birth or adoption

3. have custody and control of your child (or had custody and control immediately before the child turned 19 years of age) and your child is wholly dependent on that person for support

In addition, an individual immediately becomes your common-law partner if you previously lived together in a conjugal relationship for at least 12 continuous months and you have resumed living together in such a relationship.

For 2001 and later years, a person (other than a person described in b) or c) on this page) will be your common-law partner only after your current relationship with that person has lasted at least 12 continuous months.

Reference to "12 continuous months" in this definition includes any period that you were separated for less than 90 days because of a breakdown in the relationship.

Contribution of property - generally refers to a transfer or loan of property, other than an "arm's length transfer" (as defined in subsection 94(1)) to a non-resident trust by a person or partnership. A contribution is also considered to have been made by a person or partnership where the person or partnership makes (or becomes obligated to make) a particular transfer (other than an "arm's length transfer") as part of a series of transactions or events that includes another transfer or loan (other than an "arm's length transfer"), to the trust, by another person or partnership.

In these circumstances, the other transfer or loan is considered to be a contribution to the trust by the person or partnership only to the extent that the other transfer or loan can reasonably be considered to have been made in respect of the particular transfer or loan, or the obligation to make the particular transfer or loan.

Deemed disposition - used when you are considered to have disposed of property, even though you did not actually sell it.

Designate, designation - to keep the identity of certain types of allocated income or credits. In this way, the beneficiaries can take advantage of deductions or credits that relate directly to the type of income, such as a dividend tax credit or pension income amount. Generally, you report amounts designated to a beneficiary in the appropriate box on the T3 slip.

Distribute, distribution - to divide the trust property among the beneficiaries according to the terms of the trust document, or according to the applicable law.

Electing beneficiary - for a tax year of a qualified disability trust, means an individual named as a beneficiary by the particular individual (that is the deceased individual) in the instrument under which the trust was created, and who meets all of the following conditions:

• includes in their return of income for the trust year, an election made jointly with the trust, that the trust will be a qualified disability trust for the trust year

• must be eligible for the disability tax credit for the beneficiary's tax year in which the trust's year-ends

• does not elect with any other trust to be a qualified disability trust for the other trust's tax year that ends in the beneficiary's tax year

Executor - an individual or trust institution named in a will and confirmed by a court to settle the testator's estate. See the definition of "Testator" on page 7.

Exempt property - is trust property that, if disposed of, any income or capital gain resulting from the disposition is exempt from Canadian tax, either because the trust is not resident in Canada, or because of a tax treaty.

Gift - generally a voluntary transfer of property (including money) without valuable consideration. However, a transfer of property where the donor receives an advantage is still considered a gift as long as the advantage does not exceed 80% of the fair market value (FMV) of the transferred property, or we are satisfied the property was transferred with the intention of making a gift.

Generally, the eligible amount of a gift or monetary contribution is the amount by which the FMV of the gifted property exceeds the amount of the advantage, if any, received or receivable for the gift. There may be situations where the eligible amount may be deemed to be nil or the fair market value may be deemed to be less than the actual fair market value of the property. For more information, see Pamphlet P113, Gifts and Income Tax, and Income Tax Folio S7-F1-C1, Split-receipting and Deemed Fair Market Value.

The advantage is generally the total value of any property, service, compensation, use, or any other benefit that the trust, or a person not dealing at arm's length with the trust, is entitled to as partial consideration for, in gratitude for, or in any other way related to the gift. The advantage may be contingent or receivable in the future.

Liquidator - in Quebec, the liquidator is responsible for distributing the assets of all estates established after December 31, 1993. For estates with a will, the liquidator's role is similar to an executor's. For estates without a will, the liquidator acts as the administrator of the estate.

Preferred beneficiary - a person resident in Canada who is a beneficiary under the trust at the end of the year, and who meets one of the following conditions:

• they qualify for the disability amount for the tax year that ends in the trust's tax year

• they:

  • are 18 years of age or older before the end of the tax year

  • are dependant of another individual for the tax year because of a mental or physical impairment

  • have income for the tax year, not including income from a preferred beneficiary election, which does not exceed the basic personal amount

In addition, they must be one of the following:

• the settlor of the trust (see the definition of "settlor" on this page)

• the spouse or common-law partner, or former spouse or common-law partner, of the settlor of the trust

• a child, grandchild, or great-grandchild of the settlor of the trust

• the spouse or common-law partner of a child, grandchild, or great-grandchild of the settlor of the trust

Principal residence - generally means any of the following:

• a housing unit

• a leasehold interest in a housing unit

• a share of a co-operative housing corporation, if the share is acquired for the sole purpose of obtaining the right to live in a housing unit owned by that corporation

For more information, see "Principal residence" on page 37.

Settlor - generally means the person who set up a trust by contributing property to the trust. In the case of a preferred beneficiary election, a settlor is restricted to a person who is otherwise the settlor of the trust and has contributed the majority of property to the trust.

Spouse - this applies only to a person to whom you are legally married.

Testator - the deceased person who made and left a valid will.

Trust - a binding obligation enforceable by law when undertaken. It may be created by one of the following:

• a person (either verbally or in writing)

• a court order

• a statute

Generally, a trust is created when it is properly established and there is certainty of:

• the intent to create a trust

• the property to be placed in trust

• the beneficiaries of the trust

Trustee - an individual or trust institution that holds legal title to property in trust for the benefit of the trust beneficiaries. The trustee includes an executor, administrator, assignee, receiver, or liquidator who owns or controls property for some other person.

Vested interest - an immediate fixed interest in property, although the right of possession and enjoyment may be postponed.

Will - a legally enforceable document that declares the intentions about disposal and administration of the testator's estate after their death. It is effective only at death and can be revoked at any time before death.