IT-201R2 "Foreign Tax Credit — Trust and Beneficiaries" 12 February 1996

4. When, as a result of a designation [under s. 104(22)], a portion of the income of a trust from a foreign source is deemed to be income of a beneficiary from that source for a particular taxation year, subsection 104(22.1) deems the beneficiary to have paid for that particular year a pro-rata share of the business-income tax or non-business-income tax paid by the trust on that income for the purposes of determining the beneficiary's foreign tax credit under section 126. The pro-rata share is equal to the proportion of the business-income tax or non-business-income tax paid by the trust on the foreign source income for a taxation year of the trust that ends in the particular year that the beneficiary's deemed income under subsection 104(22) from that source is of the trust's income for the year from that source….

1. Subsection 104(22) allows a trust to designate its foreign source income for a taxation year to its beneficiaries provided the trust was resident in Canada throughout the year. The designation is made in the trust's income tax return for the year. The amount that a trust can designate in respect of a particular beneficiary is limited to the portion of the trust's income for the year from a source in a country other than Canada that

• can reasonably be considered (having regard to all the circumstances including the terms and conditions of the trust arrangement) to be part of the income that was included in the beneficiary's income by virtue of subsection 104(13) or (14)…; and
• is not designated by the trust in respect of any other beneficiary.

When the trust has made this designation, subsection 104(22) deems the designated income to be income of the particular beneficiary from that foreign source for the purposes of subsections 104(22) and (22.1) and the foreign tax credit rules under section 126.

2. When a beneficiary of a trust is another trust, the other trust can, within the terms of subsection 104(22), designate foreign source income to its own beneficiaries that had been designated to it in its capacity as beneficiary, and ad infinitum if there are other trusts in succession.