Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Taxation of Family Trusts
In June 1994, the Department of Finance released the attached paper entitled The Taxation of Family Trusts in order to assist the Finance Committee of the House of Commons in its review of family trusts. For the purposes of that paper, the term "family trust" was defined to mean a trust established for the benefit of the family members of an individual (the settlor). Family trusts are used a) to control family businesses, b) for estate planning purposes, c) to allow for prudent management of financial assets where the beneficiaries can not act financially responsible or are minors, and d) to allow a surviving spouse to receive income while alive and preserve capital for the settlor's children.
Generally, when an individual dies, income tax is payable on capital gains that have accrued up to the date of death. Because trusts can survive indefinitely, a so-called 21 year rule was introduced in 1972 to prevent the indefinite deferral of recognizing capital gains which accrued on property held in a trust. Under this rule, on each 21st anniversary date of a trust, income tax is payable on any capital gains accrued on the property held at that time. The first anniversary date of the 21 year rule was January 1, 1993 and all trusts established before 1972 would have been affected if they did not transfer their property to the beneficiaries or to a new trust.
There have been policy concerns with respect to the application of the 21 year rule. The deemed capital gain might be harsh in trusts used for non-tax purposes such as the care of a disabled child. In addition, a trust may have no funds available to satisfy the income tax arising from the deemed capital gain. Also, taxation usually results from real events rather than an arbitrary date.
Amendments passed in 1993 with respect to the 21 year rule prevented property from being rolled into a new trust in order to avoid the application of the 21 year rule and allowed trusts to elect to delay the recognition of accrued capital gains on property held until the death of the last family member (typically children of the settlor) who is no more than one generation removed from the settlor.
The appendix attached to the paper provides statistics that are available concerning trust returns filed in 1992. As trusts (like other taxpayers) are taxed on the basis on their income, Revenue Canada does not have any information with respect to the value of assets held in trusts or the accrued capital gains on assets held in trusts that are eligible to file the deferral election.
Prepared by C: Bowen, section 35, Rulings Directorate
August 3, 1994 file #941980
Covering memo for D. Lefebvre (ADM of Legislative and Policy Branch) to attach to Finance document to be distributed to Quebec caucus members
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