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How is a trust taxed?

A trust is deemed to be a separate taxpayer for income tax purposes and a separate tax return must be filed each year for a trust. Any income not paid or payable to beneficiaries is taxed within the trust. The trust generally computes its income in the same manner as any other individual. A trust’s income may include income from business, property, other income, as well as capital gains.

Income earned in a trust that is distributed to the beneficiaries is taxed in their hands. This income is taxed at the same rates that would apply to the income of an individual. For example, Canadian dividends are eligible for the dividend tax credit and capital gains are taxable at 50%.

One of the tax features of a trust that distinguishes it from living persons is that a trust may deduct amounts that are paid or are payable in the year to its beneficiaries. This deduction is claimed when calculating the income of the trust for the year in which the income was allocated to the beneficiaries.

Under current tax legislation, trusts are deemed to dispose of their capital properties, land inventories and resource properties at periodic intervals and, therefore, may realize capital gains or other income. Generally, the interval is every 21 years. Currently, certain personal trusts can defer the timing of the deemed disposition but this ability is being phased out.

There are two main differences between the tax paid by a beneficiary and the trust:

  • A personal trust may not claim personal credits when computing federal taxes payable; and,
  • A personal trust must file its income tax return within 90 days of its taxation year-end rather than the last day of April.