There are still numerous open questions on the taxation of Canadian trusts

Comments on the taxation of trusts resident in Canada include:

• A CRA indication that a charity is a majority-interest beneficiary of a trust when the trustee has the discretion to make a gift to the charity under the declaration of trust may not be correct, given that “it is unclear whether the charity has the power to compel the administration of the trust, which is generally recognized as a necessary condition for a person to be considered a beneficiary.”
• Given that the CRA has indicated in other contexts that an s. 84.1(1)(b) deemed dividend is not deemed to be paid on shares, this suggests that ss. 112(3) to (7) would not apply to a capital dividend that is deemed to be paid under s. 84.1(1)(b).
• S. 107(1)(c), which generally reduces the amount of a loss realized on a disposition of a capital interest in a trust by dividends received under s. 104(19) or (20) could result in double taxation where the beneficiary is a second trust, and the second trust flows out those amounts to its beneficiaries.
• Although a spousal trust that otherwise would qualify for rollover treatment under s. 70(6) but for having U.S. resident trustees may apply for competent authority relief under Article XXIX B(5) of the Canada-U.S. Treaty, that Article requires that the transfer to the spousal trust be made under a will – which is often a problem because US individuals often use an inter vivos trust to reduce or defer US estate tax.
• The CRA view that a trust funded with insurance does not qualify as a spousal trust for purposes of s. 70(6) if the terms of the trust were not set out in the will appears to be incorrect: “A pre-existing declaration of trust that is funded and created pursuant to the terms of the taxpayer's will should be treated as having been created under the terms of the taxpayer's will because the trust did not exist before the transfer.”
• The CRA view that a trust does not qualify as a spousal trust when its terms permit or require the trust to pay life insurance premiums, also is questionable.
• A fully discretionary trust with resident and non-resident beneficiaries and receiving both dividends from shares of US public corporations and interest from Canadian sources should be able to allocate its dividend income first to its resident beneficiaries so that they can access foreign tax credits under ss. 104(19) and 126(1).

Neal Armstrong. Summaries of Elie Roth, Tim Youdan, Chris Anderson and Kim Brown, Chapter 3: “Taxation of Trusts Resident in Canada,” Canadian Taxation of Trusts, (Canadian Tax Foundation), 2016 including under s. 251.1(4)(d), s. 112(3.2), s. 107(1)(c), Treaties Art. 29B, s. 70(6), 104(19).