CRA concludes that beneficiaries of a family trust can benefit from the excluded debt exception from the TOSI rules

S. (d)(i) of the s. 120.4(1) “split income” definition excludes an amount in respect of a debt obligation of a mutual fund corporation or trust or of a corporation whose shares are listed on a designated stock exchange (an “Excluded Debt”). If the sole asset held by a trust is an Excluded Debt, would the interest thereon that is included in a beneficiary’s income under s. 104(13) be in respect of an Excluded Debt?

CRA first noted that the preamble to s. 108(5)(a) (which converts income of a trust from another source into undifferentiated property income in the hands of the beneficiary to whom it is distributed) provides that that rule does not apply to s. 120.4, and stated: “Thus, for the purposes of section 120.4, the character of the amounts allocated by a trust will be maintained.” (See also Archer-Shee v. Baker, Gilhooly and Kemp.)

CRA then concluded that interest on an Excluded Debt of a trust could maintain its status as such for purposes of the s (d)(i) exclusion when distributed to a beneficiary who was a specified individual.

Neal Armstrong. Summary of 11 October 2019 APFF Roundtable, Q.15 under s. 120.4(1) - “split income.” - (d)(i).