Section 122

Subsection 122(1) - Tax payable by inter vivos trust

Administrative Policy

9 March 1993 Memorandum (Tax Window, No. 29, p. 10, ¶2453)

Where the residuary beneficiaries of a non-spousal testamentary trust that provides for the distribution to a third beneficiary of all the proceeds of an RRSP of the deceased reimburse the estate for all tax paid as a result of the inclusion in the deceased's terminal return of the RRSP proceeds, and no election is made under s. 104(13.1) or (13.2), the trust will lose its status as a testamentary trust for the taxation year in which the contribution is made.

Paragraph (c)

Paragraph 122(1)(c)

Articles

Elie Roth, Tim Youdan, Chris Anderson, Kim Brown, "Classification of Trusts for Income Tax Purposes", Chapter 2 of Canadian Taxation of Trusts (Canadian Tax Foundation), 2016.

General effect of formula (p. 70)

[T]he amount: of the recovery tax is calculated in accordance with a complicated formula in paragraph 122(1) (c) whose effect is to calculate the amount of the tax that would have been paid in any previous year if the trust had been subject to the highest rate of tax, and if the taxable income of the trust for that year had excluded amounts that were subsequently distributed as capital to an electing beneficiary.

Subsection 122(2) - Where subsection (1) does not apply

Cases

The Queen v. Robinson, 98 DTC 6065 (FCA)

An inter vivos trust that otherwise would have been grandfathered was found to be carrying on an active business in the year by virtue of being a limited partner of a Manitoba limited partnership.

Administrative Policy

7 October 2016 APFF Financial Strategies and Instruments Roundtable Q. 7, 2016-0651751C6 F - Recovery Tax of Qualified Disability Trust

recovery tax applies to undistributed income in a QDT at the time of the disabled beneficiary’s death

A testator created a trust for the benefit of his mentally incapacitated son, with the trustees accorded the discretion to distribute income and encroach on capital. At the time of the beneficiary’s death, the trust holds a sum which it would be reasonable to consider had not become payable or been distributed out of the taxable income of the trust for a previous taxation year. If the balance of the taxable income of the trust for a taxation year prior to the year of death is paid to the estate of the disabled beneficiary in the year of his decease (as permitted under the trust deed), would s. 122(1)(c) apply to retroactively impose tax at the high marginal rate? CRA responded:

[P]aragraph 122(1)(c) applies since none of the beneficiaries under the trust at the end of the year of death was an electing beneficiary of the trust for a preceding taxation year, as required under paragraph 122(2)(a). Furthermore, a recovery tax is payable by the trust in the year of the death of the disabled beneficiary since the entire taxable income of the trust for the taxation years during which it was a QDT was not paid or distributed to an electing beneficiary.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 159 - Subsection 159(2) potential liability of QDT trustee for s. 122(1)(c) recovery tax 262
Tax Topics - Income Tax Act - Section 122 - Subsection 122(3) - qualified disability trust s. 122(1)(c) liability in year of death of disabled beneficiary 55

Subsection 122(3)

qualified disability trust

Administrative Policy

7 October 2016 APFF Financial Strategies and Instruments Roundtable Q. 7, 2016-0651751C6 F - Recovery Tax of Qualified Disability Trust

s. 122(1)(c) liability in year of death of disabled beneficiary

CRA confirmed that where the disabled beneficiary of a qualified disability trust dies during a year, this will result in the imposition of “recovery” tax, based on the top marginal rate, on any undistributed income from previous years still in the hands of the trust at the time of the beneficiary’s death.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 122 - Subsection 122(2) recovery tax applies to undistributed income in a QDT at the time of the disabled beneficiary’s death 213
Tax Topics - Income Tax Act - Section 159 - Subsection 159(2) potential liability of QDT trustee for s. 122(1)(c) recovery tax 262

10 June 2016 STEP Roundtable Q. 4, 2016-0645801C6 - QDT & pref beneficiary election

preferred beneficiary and QDT elections not mutually exclusive

Where, for example, four grandparents each established a trust for their mutual disabled grandchild under their wills, with one of the trusts (after death) now being intended to be a qualified disability trust, CRA confirmed that the designation of that trust as a QDT would not restrict the availability of the preferred beneficiary election for the other three trusts (and the fourth trust could make the preferred beneficiary election even if it had elected to be a QDT).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(14) preferred beneficiary election and qualified disability trust election potentially can coexist 116

Finance

7 October 2016 APFF Financial Strategies and Instruments Roundtable, Q.7

[policy reasons for QDT graduated rates and requirement to distribute]

A testator created a trust for the benefit of his mentally incapacitated son, with the trustees accorded the discretion to distribute income and encroach on capital. At the time of the beneficiary’s death, the trust held an amount of undistributed income. What are the policy considerations respecting recovering tax on this amount under s. 122(1)(c) at the top marginal rate and the personal liability of the trustees if a final distribution were made following the death? Finance responded:

The rules regarding qualified disability trusts are measures to accommodate certain trust arrangements used to preserve the eligibility of disabled people to certain measures based on income, such as provincial social assistance programs. These accommodative measures aim to grant a tax advantage - by the taxation of the trust at progressive rates - only in circumstances where the disabled beneficiary benefits from after-tax income of the trust. In tax policy terms, the tax advantage conferred by such accommodative measures should not be granted where the beneficiary has not benefited from after-tax income of the trust and the amounts of the trust can be distributed to other taxpayers. The recovery tax under paragraph 122(1)(c) helps achieve the objectives of the tax policy for the accommodative measures.

Paragraph (a)

Subparagraph (a)(i)

Administrative Policy

7 June 2019 STEP Roundtable Q. 11, 2019-0805771C6 - Estate as Qualified Disability Trust

a GRE likely cannot be continued indefinitely as a QDT

During its first 36 months, an estate with a single residuary beneficiary qualified as a graduated rate estate (GRE) and was not able to convert some of the estate property into cash until late in the third year after the death. During the 36 month GRE period, the residuary beneficiary becomes disabled. Can the estate continue indefinitely and elect to be treated as a qualified disability trust each year such that the graduated tax rates will continue to apply?

CRA indicated that where an estate and a particular beneficiary meet the requirements of the definition of “qualified disability trust” in s. 122(3), the estate can be a QDT notwithstanding that the estate made a GRE designation.

However, there is nothing to indicate that there is anything preventing the executor from paying the residue of the estate to the beneficiary. Thus, if the estate administration is complete, and beneficial ownership has passed to the residuary beneficiaries who are entitled to the property, there would be no income earned in the estate. Alternatively, to the extent that the beneficiary was able to enforce payment of the income earned within the estate, there would be no income taxable in the estate, as it would all be considered to be payable to the beneficiary under s. 104(13), consistently with s. 104(24).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(13) estate ceases to generate income when it is fully administered 144

Paragraph (b)

Administrative Policy

7 October 2016 APFF Financial Strategies and Instruments Roundtable Q. 6, 2016-0651741C6 F - Named beneficiary

beneficiary must be specifically named

Does a will designating the testator’s children or descendants as beneficiaries of the testamentary trust satisfy the “named as a beneficiary” requirement even though they are not designated by name? CRA responded:

The term "named" in paragraph (b) of the definition of QDT in subsection 122(3) means a beneficiary who is identified by his or her name. This term refers to a beneficiary whose name is specifically stated in the instrument under which the trust was created.

Consequently, a beneficiary who is part of a class of persons described in the instrument under which the testamentary trust has been established, such as children or descendants of the deceased individual, as well as a beneficiary who is not yet born, would not be considered as a named beneficiary.

Words and Phrases
named