Discretionary family trusts may increase the impact of the passive income rules

Under the passive income proposals as implemented, the $500,000 small business limit for a taxation year of a Canadian-controlled private corporation is reduced to nil if the CCPC together with any associated corporations earned over $150,000 of passive income (“adjusted aggregate investment income”) in their taxation years ending in the preceding calendar year. A beneficiary of a discretionary family trust is deemed under s. 256(1.2)(f)(ii) to own all of the shareholdings of the trust, and if a minor is a beneficiary of a trust, ss. 256(1.3) and 256(1.2)(f)(ii) or (iii) generally will look through the trust and the minor to deem the minor’s parents to own the shares held by the trust as though the parents were beneficiaries. These and other association rules may cause the small business deduction to be lost. For example, an adult child’s corporation might be associated with those of the parents due to a testamentary trust.

Neal Armstrong. Summary of Michael Goldberg, "The Passive Investment Rules and Their Associates", Tax Topics (Wolters Kluwer), No. 2426, September 6, 2018, p. 1 under s. 125(5.1).