5.3 Schedule C - Summary of Allocations and Designations

In this schedule and in its instructions, the term "beneficiary" means any person to whom the trust must allocate income or a taxable capital gain. This person can be a beneficiary that holds an interest in the trust or a transferor to which the income attribution rule applies (refer to section 3.2), as well as the electing contributor of a deemed resident trust (refer to "Election to be an electing contributor" in section 1.2.2).

657, 657.1

2. the portion of the trust's income paid in the year concerned (up to a reasonable amount) for upkeep and maintenance expenses or taxes for property used by the beneficiary in accordance with the terms of the trust deed;

3. the value of any other benefit granted to the beneficiary in the year concerned. Such a benefit cannot be deducted by the trust, and its inclusion on line 81 of the return is counterbalanced by the addition of an equivalent amount on line 75;

4. the portion of the trust's accumulating income for the year concerned that is allocated to the beneficiary (refer to section 5.3.3);

5. the portion of the trust's income for the year concerned allocated to a transferor covered by the income attribution rule or to the electing contributor of a deemed resident trust, as applicable.

Allocated income that is subject to specific designations must be entered on lines 400 through 405 of Schedule C. Amounts that are not designated must be reported on line 406. For more information, refer to "Designations of income and taxable capital gains" in section 5.3.1.1.

661-663, 667

Designations of income and taxable capital gains

As a rule, income allocated by a trust to a beneficiary is considered to be property income derived from an interest in the trust.

• claim the taxable capital gains deduction; or

• include in their income only 50% of a capital gain.

• net taxable capital gains;

• foreign business income; and

• capital losses (in the case of an insurance segregated fund trust).

The election made by a trust that is a religious organization to renounce the tax credit for donations and gifts in favour of certain of its members results in the designation of amounts as donations allocated by a religious organization.

• on line 415, the foreign income tax on business income (box K of the RL-16 slip);

• on line 418, the gifts allocated by a religious organization (box N of the RL-16 slip); and

• on line 428, the split income not reported elsewhere on the RL-16 slip (Box G of the RL-16 slip).

Designation of an amount as cost base adjustment of a capital interest

The designation of an amount as cost base adjustment of a capital interest applies only to trusts that are not personal trusts. The amount to be designated as a cost base adjustment of capital interests may be positive or negative.

A positive adjustment generally corresponds to capital distributions, non-taxable benefits granted to beneficiaries and amounts designated under subsections 104(13.1) and 104(13.2) of the Income Tax Act (federal statute) (refer to section 5.3.2). Each beneficiary's share in the adjustment (positive amount in box M of the RL-16 slip) must be used to reduce the ACB of the beneficiary's capital interest in the trust.

A negative adjustment must be made by a mutual fund trust if, for example, it made an election under section 1121.1 of the Taxation Act. Each beneficiary's share in the adjustment (negative amount in box M of the RL-16 slip) must be used to increase the ACB of the beneficiary's units.

255(j.3), 257(n)(i.1), 651.1, 663, 666-668, 669.1, 669.2, 671, 1121.3

5.3.1.2 Exceptions and limits

Whether the trust reports income for itself or allocates income to the beneficiaries, it must comply with the terms of the will or trust deed, while taking into account certain fiscal restrictions, such as the following:

1. A trust cannot allocate a loss to its beneficiaries, unless it is:

   • a net capital loss, in the case of an insurance segregated fund trust;

   • a loss sustained on transferred or loaned property or, in the case of a revocable or blind trust, a capital loss sustained on the disposition of the property.

467, 851.16

2. A post-1971 spousal trust, an alter ego trust, a self-benefit trust or a joint spousal trust cannot deduct the portion of the allocated income referred to in points 1 and 2 of section 5.3.1:

   • if that portion is considered to be derived from the income or taxable capital gain realized on property (capital property, land included in the inventory of a business, or Canadian or foreign resource property) further to:

     • the deemed sale of the property on the date of the spouse's death or, in the case of an alter ego trust or self-benefit trust, the settlor's death or, in the case of a joint spousal trust, the surviving spouse's death,

     • the transfer of property to another beneficiary, where the spouse, settlor or surviving spouse, as applicable, is still alive;

   • if that portion is allocated to another beneficiary provided the spouse, the settlor or the surviving spouse, as applicable, is alive throughout the year;

   • if, for the year in which the spouse, settlor or surviving spouse dies, that portion is allocated to another beneficiary and that portion exceeds the income that the trust earned after the death.

657(a)(i)-(iii)

3. A trust cannot deduct any allocated income referred to in points 1 and 2 of section 5.3.1 if the trust deed provides that a beneficiary may have a greater share of the trust's property than of its income. However, this restriction does not apply to a personal trust, an employee trust or a trust established under an employee benefit plan.

657.2

4. A SIFT trust cannot deduct the non-deductible allocation amount. The amount deductible on line 81 of the return must not exceed the amount on line 173a of Schedule E.

657(a)(i) and (iv)

5. A trust cannot deduct the amount of interest or dividends it receives from an investment corporation that is owned by persons that are not resident in Canada if the trust holds all its property on behalf of its non-residents.

6. Since 2016, a trust to which property has been transferred in circumstances favoring the application of the rollover rule (as part of an eligible transfer or an eligible disposition) has not been able deduct the portion of the allocated income referred to in points 1 and 2 of section 5.3.1 for the taxation year during which the beneficiary dies.

454.2(b)(ii), 692.5

5.3.2 Income or taxable capital gain that was paid or that became payable in the year to a beneficiary but was reported by the trust

5.3.2.1 Election referred to in sections 663.1 and 663.2 of the Taxation Act

If the trust was resident in Canada throughout the year, it may have filed with the CRA, for that year, an election to make a designation of income pursuant to subsection 104(13.1) of the Income Tax Act (federal statute) or a designation of a taxable capital gain pursuant to subsection 104(13.2) of that Act.

If such an election is made, either section 663.1 or section 663.2 of the Taxation Act will apply to the calculation of the trust's income or taxable capital gain that was paid or that became payable to its beneficiaries during the year.

The income and capital gain concerned are not deemed paid nor to have become payable in the year to the beneficiaries. Consequently, these amounts must not be entered in Schedule C or on the RL-16 slips issued to the beneficiaries. As a rule, the amounts reduce the ACB of the beneficiaries' capital interest in the trust, unless the interest was acquired for no consideration and the trust was a personal trust.

Since the income designated pursuant to subsection 104(13.1) is not deducted on line 81 of the return, the trust can claim (on line 91) a non-capital loss from a previous year.

Similarly, since the capital gain designated pursuant to subsection 104(13.2) is not deducted on line 81 of the return, the trust can claim a net capital loss (line 92) or a non-capital loss (line 91). Regardless of the type of loss that is carried over, you must complete Part 3 of Schedule A to calculate the net taxable capital gains that are designated for the year.

Since 2016, there have been limits to the elections that can be made under subsections 104(13.1) and 104(13.2) of the Income Tax Act (federal statute), which allow the trust to designate, for a taxation year, a portion of its income that is not deemed paid and did not become payable to its beneficiaries. These designations can no longer be made if the trust's taxable income (taking into account the amounts of the designations) for the year is higher than zero.

Furthermore, if the beneficiary of an alter ego trust, a spousal trust, a joint spousal trust or a trust to which property has been transferred under circumstances that favor the application of the rollover rule dies during the year, no amount can be designated by the trust for a given year to any beneficiary other than the deceased beneficiary.

Complete Part 4 of Schedule C. Enclose a copy of all documents submitted to the CRA for the designations (for example, the trust's T3 return and the document showing the income covered by the designations under subsections 104(13.1) and 104(13.2)).

The deductible amount on line 81 must not exceed the result of the following calculation:

A - B, where

663.2.1

5.3.2.2 Election referred to in section 688.1.1 of the Taxation Act

The trust can make the election referred to in section 688.1.1 of the Taxation Act to report as its own any taxable capital gain paid or payable during the year to its beneficiaries if the following conditions are met:

• the capital gain resulted from a transfer of property to one of its beneficiaries while the trust was resident in Canada;

• the transfer was made under the circumstances described in point 7 of section 5.1.1 (refer to "Transfer of property at its FMV").

This election is made under paragraph 107(2.11)(a) or paragraph 107(2.11)(b) of the Income Tax Act (federal statute). No such election can be made for Québec income tax purposes unless it is made with the CRA, in which case it is automatically deemed to be made. If the trust has filed this election with the CRA, you must send us proof that the election was made and written notification within 30 days after the date the election was made or after the filing deadline for the return, whichever is later.

5.3.3 Accumulating income allocated to a preferred beneficiary

When the trust files its federal income tax return for a given taxation year, it can make a joint election with a preferred beneficiary to have some or all of its accumulating income allocated to the beneficiary. In such a case, you must enter the lesser of the following amounts as income on the beneficiary's RL-16 slip:

• the amount that the trust elected to allocate and that is entered in the document submitted to the CRA;

• the allocated portion of the trust's accumulating income (refer to the explanations below under "Accumulating income") calculated on the basis of the ratio between the amount covered by the election submitted to the CRA for the preferred beneficiary and the total amount covered by all the elections submitted to the CRA for the trust's preferred beneficiaries.

You can deduct on line 81 the total of the amounts entered on the preferred beneficiaries' RL-16 slips.

Check the box on line 4 of Schedule C. Enclose a copy of all documents that you submitted to the CRA for the election, such as:

• the note proving the election was made, signed by the trustee and the preferred beneficiary (or their tutor), and showing the amount allocated;

• the note showing the calculation of the preferred beneficiary's share in the accumulating income of the trust, signed by the trustee.

Accumulating income

The accumulating income of a trust corresponds to the trust's income for the year (line 80 of the return), minus the total of the allocated income referred to in points 1, 2, 3 and 5 of section 5.3.1. Certain amounts must then be subtracted from the result obtained, such as:

• in the case of a spousal trust, an alter ego trust or a joint spousal trust, all income (or losses) and all capital gains (or capital losses) resulting from:

  • the deemed sale of property (capital property, land included in the inventory of a business, or Canadian or foreign resource property) upon the death of the spouse, the death of the individual whose death results in the deemed sale (in the case of an alter ego trust) or the death of the surviving spouse (in the case of a joint spousal trust), or

  • the transfer of such property to a beneficiary other than the spouse during the spouse's lifetime;

• amounts from a NISA Fund No. 2, except those received by a spousal trust during the spouse's lifetime;

• in the case of a testamentary spousal trust where the beneficiary spouse died in the year, the amount deemed paid to the trust regarding the balance (determined on the date of death) of a NISA Fund No. 2.

657(b), 658-659.1

• Part 4 if you are required to provide the name of the transferor (line 435) to which the income attribution rule applies, or the name of the electing contributor (line 436) and, if applicable, the total amount of income and taxable capital gains (line 440) and the portion of this amount (line 441) that is designated under subsection 104(13.1) or subsection 104(13.2) of the Income Tax Act (federal statute).

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