Subsection 75(2) – Planning To Avoid

“It is important to carefully draft trusts to avoid unwanted results.”

Trusts can be a very useful vehicle in achieving tax and estate planning objectives. In many instances, the objective is to ensure that income realized from the trust property is not taxable to the settlor or transferor. Instead, the objective is to tax the income in the trust or allocate it to the beneficiaries of the trust.

Subsection 75(2) of the Income Tax Act can cause problems to the extent that the trust is not settled or drafted correctly. Subsection 75(2) of the Act is commonly called the “reversionary trust” rule. Very generally, it is designed to tax all income (or losses) or capital gains (or capital losses) that are realized from the trust property back to the settlor/transferor of the trust property to the extent that the trust property is held on condition that it may revert to the person from whom the property was directly or indirectly received, or pass to persons to be determined by the person at a time subsequent to the creation of a trust. Such a provision is very broad and can result in undesirable tax consequences.

As a rule of thumb, in order to avoid subsection 75(2) from applying, it is usually required that the creator of the trust (i.e., the settlor) not be able to make decisions related to the trust (i.e., is not a trustee), or cannot benefit from the trust property (i.e., is not a beneficiary).

In some cases, the result of a subsection 75(2) attribution of income back to the settlor may not cause adverse problems. However, to the extent that it is desirable to avoid attribution of income from a trust, the general rules of thumb should be followed.

TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

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