CRA applies s. 75(2) to the 1st generation but not 2nd generation income of a non-qualified purported TFSA trust
A trust lost its status as a TFSA because it borrowed money, but continued to exist for a number of subsequent years because it continued to be administered as though it were a TFSA. What was its treatment during that period?
By ceasing to be a qualifying TFSA, the trust ceased to be excluded from the application of s. 75(2) by s. 75(3)(a). Accordingly, s. 75(2) applied to attribute the income of the trust to the individual, subject to one point. That point was that:
Subsection 75(2) does not apply to income earned by a trust from the re-investment of income that was previously subject to attribution (i.e., second generation income), as this income is not earned on property contributed to the trust by a person (or substituted property). Thus, any second generation income earned by the former TFSA trust after deregistration will generally be taxable to the trust to the extent that it is not paid or payable to the beneficiary of the trust.
Neal Armstrong. Summary of 17 July 2019 Internal T.I. 2017-0718021I7 under s. 75(2).