Part A - Calculating Part XII.2 tax and the refundable Part XII.2 tax credit - Lines 1 to 14

Part A - Calculating Part XII.2 tax and the refundable Part XII.2 tax credit - Lines 1 to 14

Pay any Part XII.2 tax no later than 90 days after the trust's tax year-end.

Part XII.2 tax applies when a trust meets all of the following conditions:

• has specified income as described on this page

• has a designated beneficiary as described on this page

• allocates or designates any of its income

Part XII.2 tax does not apply to a trust that was one of the following throughout the year:

• a graduated rate estate

• a mutual fund trust

• a specified trust (as defined in "Chart 1 - Types of Trusts" on page 8), unless the trust is a related segregated fund trust, a retirement compensation arrangement trust, a trust whose direct beneficiaries are specified trusts, a trust governed by an eligible funeral arrangement, a cemetery trust and, in certain circumstances, an amateur athlete trust

• a trust that was exempt from Part I tax under subsection 149(1) of the Act

• a non-resident trust

• a deemed resident trust

Specified income

Specified income of a trust generally means its taxable capital gains or allowable capital losses from the disposition of taxable Canadian property, certain property transferred to a trust in contemplation of a person beneficially interested in the trust ceasing to be resident in Canada, and the total income (or loss) from all of the following sources:

• businesses carried on in Canada

• real properties located in Canada, such as land or buildings

• timber resource properties

• Canadian resource properties the trust acquired after 1971

  Note
  Although the term designated income is used in Part XII.2, we use specified income in this guide and on Schedule 10 to avoid confusion with the term "designated income" used in other parts of this guide.

Designated beneficiary

Subject to all of the exclusions listed below, for the purpose of Part XII.2 tax, a designated beneficiary under a particular trust at any time, includes:

• a non-resident person

• a person who is exempt from Part I tax on all or part of their taxable income under subsection 149(1), where that person acquired an interest as a beneficiary under the particular trust after October 1, 1987 directly or indirectly from a beneficiary under the trust. For example, there are two exceptions to this rule. A person exempt from Part I tax is not a designated beneficiary if:

  • the interest has been owned continuously since the later of October 1, 1987 and the date on which the trust was created, by persons who were exempt from Part I tax on all of their taxable income under subsection 149(1)

  • the person is a trust governed by an RRSP or RRIF that acquired the interest directly or indirectly from an individual, the spouse or common-law partner, or former spouse or common-law partner of the individual who was, a beneficiary under the trust governed by the plan or fund

• another trust if any of its beneficiaries is either a trust or a designated beneficiary

• a partnership if any of its members is either a partnership or would be a designated beneficiary if that member held an interest in a trust

A designated beneficiary does not include any of the following:

• a mutual fund trust resident in Canada

• a graduated rate estate

• an RRSP or RRIF that acquired its interest directly or indirectly from its beneficiary, the beneficiary's spouse or common-law partner, or former spouse or common-law partner

• an entity that is exempt from Part I tax if its interest in the trust has been owned continuously since October 1, 1987, or the date on which the trust was created, by one or more entities that are exempt from Part I tax under subsection 149(1)

• a partnership, which would otherwise be a designated beneficiary, where no members of the partnership are designated beneficiaries and the partnership's interest in the trust has never been held by anyone other than the partnership or an entity that is exempt from Part I tax under subsection 149(1)

• a trust, the beneficiaries of which are all either trusts that have no designated beneficiaries, or persons who are not designated beneficiaries

A designated beneficiary is usually not entitled to the refundable tax credit for Part XII.2 tax that the trust paid. This means that you will generally not complete box 38 on the T3 slip for a designated beneficiary who is a Canadian resident. Also, before you calculate Part XIII non-resident withholding tax, you have to reduce the income payable to a non-resident beneficiary by the non-resident's share of the Part XII.2 tax. For more information, see "Line 13 - Adjustment for Part XIII tax purposes" on page 53.

Eligible beneficiary

This term is used for a beneficiary who is not a designated beneficiary as described on page 52. An eligible beneficiary is generally a Canadian resident who is entitled to a refundable Part XII.2 tax credit in proportion to the share of allocated or designated trust income. You have to include an amount equal to the Part XII.2 tax credit in the income allocated to the beneficiary. In effect, this credit replaces the income that the beneficiary would have received if the trust did not have to pay Part XII.2 tax.