Canada: Family Trusts and Income Splitting

Last Updated: June 5 2017

Family Trusts and Income Splitting – Canadian Tax Lawyer Tax Planning Information

Although the use of family trusts for income splitting is no longer as effective as it was before the introductions of the “Kiddie Tax”, a family trust remains one of the premier tax planning vehicles recommended by our expert Canadian tax lawyers.

The Canadian income tax system imposes progressive rates of taxation. The higher the income the higher the tax rate. Income splitting is a tax planning tool that makes use of this progressive tax rate structure by shifting income from a high marginal tax rate taxpayer to a lower marginal tax rate family member, thereby reducing the overall amount of tax paid by the family. A trust is an equitable relationship between a person who legally owns assets, called the trustee, and one or more persons who are entitled to the benefits of those owners, called a beneficiary. In a family trust situation set up for income splitting the trust is normally set up by a third party who is neither a trustee nor a beneficiary, called the settlor.

The way in which is family trust is used to income split is by having multiple family members, typically the spouses and the children, as beneficiaries of the trust. The trust earns income and that income is allocated for tax purposes to the different beneficiaries. If one or more of the beneficiaries are in a lower marginal income tax bracket then others, income splitting has been achieved. The income splitting family trust is normally discretionary, which means that the trustee has discretion as to how much, if any, income or capital is allocated to each beneficiary.

Seems simple? Yes, but beware of numerous tax planning traps and make sure our top Canadian tax lawyers provide you with the tax planning help that you need. The most dangerous trap is subsection 75(2) of the Canadian Income Tax Act, which has the effect of attributing back to the settlor any income from property placed into the trust if they are also a beneficiary.

The Tax Act also contains specific anti-avoidance provisions designed to attribute back to parents, in their capacity as settlor or trustee, income that would normally be payable to them in order to prevent income splitting with their minor children. These attributions rules only apply to income derived from property, not to income from a business. Care must be taken to ensure that the attribution rules do not affect the ongoing distributions from the trust. The attribution rules, for example subsection 74.1(1) and section 74.2 which deal with spousal income splitting, contemplate the use of a trust to allow for what CRA views as “improper” income splitting. As mentioned the attribution rules only apply to income earned from property, or passive income, so to the extent that the funds have a source of active business there will be no concern with attribution. Further, even though dividend income paid to shareholders is typically considered income from property, Canadian income tax law characterizes income according to its original source, not by the method in which it is paid. This means that income from an active business will retain its character even if it is paid out as a dividend and that therefore the above-noted attribution rules will not apply to a dividend if the dividend is paid out of active business income.

Tax Traps in Family Trusts and Income Splitting – Canadian Tax Lawyer Tax Planning Information

Care must be taken to avoid another major tax planning trap, the application of the “kiddie tax” contained in Income Tax Act section 120.4. The kiddie tax operates to tax the “split income” of a minor at the highest marginal federal tax rate, in the hands of the minor, unless they are enrolled as a full-time student at a post-secondary institution or disabled. The definition of “split income” in subsection 120.4(1) of the Act is lengthy but it is important to note that “split income” includes any income for the minor from the trust that “can reasonably be considered” to be in respect of taxable dividends from privately-held corporations. The application of the “kiddie tax” is not predicated on the source of income, as in the case of the above-noted attribution rules in section 74 of the Tax Act.

One final tax planning trap to beware is corporate attribution in subsection 74.4(2). Subsection 74.4(2) of the Income Tax Act can potentially result in adverse income tax consequences where property is transferred by an individual to a corporation, whether directly or indirectly including via a trust, and CRA can reasonably conclude that one of the main purposes of the transfer is to benefit a “designated person”, which is defined in subsection 74.5(5) of the Act to include a spouse and minor children. The effect of subsection 74.2(2) of the Act would be to deem transferors (usually one of the parents) to receive interest at the prescribed rate calculated on the value of the property transferred, adjusted for certain statutory offsets in paragraphs 74.4(2)(e)-(g). 74.4(2) is defined to have a wide scope and it is CRA’s position that it can apply to rollover transactions, such as a section 86 estate freeze often used to transfer assets into an income splitting family trust. However, where the corporations involved are small business corporations, Income Tax Act paragraph 74.4(2)(c) functions to completely avoid the application of the corporate attribution rules.

A further income tax planning benefit of a family trust is the possible multiplication of the Lifetime Capital Gains Exemption (LCGE). The LCGE allows for a deduction on the capital gain realized by a shareholder who has disposed of shares in a Canadian Controlled Private Corporation up to a limit prescribed by Parliament. As of 2014, the Lifetime Capital Gains Exemption was set at $800,000 and indexed to inflation. In 2017 the current permitted deduction is $835,715. Each of the beneficiaries of a family trust that owns shares that qualify for the Lifetime Capital Gains Exemption has the potential to claim the LCGE on the sale of the shares.

Our experienced Canadian tax lawyers can assist you in the planning and implementation of an income splitting family trust.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions