Some mention has been made of Family Trust Elections, what they are and what they mean. This is an excerpt from some notes in a book of mine dealing with two issues, carry forward losses and imputation credits which people seem to get confused on.
Carry Forward Losses
A trust cannot carry forward losses unless it satisfies the tests contained in the "trust loss measures" located in the income tax act. You can look at them here at Part 23.
A family trust only has to pass one test, a modified version of the income injection test which is that an "outsider" of the family group does not receive or provide a "benefit" to the trust.
The Family Trust Election must have effect in the year that the trust makes the loss.
Imputation Credits
A taxpayer is generally unable to claim imputed credits unless they have held shares "at risk" for more than 30 days. For a beneficiary, "at risk" is defined as being exposed to more than 30% of the risks and opportunities of the trust's shareholding in order to satisfy this rule. While a fixed trust or a HDT (with issued units) allows this, a discretionary trust does not as the beneficiaries have no fixed entitlement and are not exposed. They can claim a 'small shareholder' exemption which allows them to claim no more than $5,000 in imputed credits, but thats about it.
A beneficiary of a trust that has made a family tax election is allowed to claim all the imputed credits paid across as long as the trust satisfies the 45 day rule.
A Family Trust Election restricts the distribution of the profits to people and related entities but generally it isn't too bad since most trusts would distribute only to the restricted group. Any distribution outside the group attracts family distribution tax. An election for a discretionary trust is irrevocable. There is a bit more but I do recommend that you speak to your accountant each year about whether your trust should make a Family Tax Election when you have your trust return prepared.
Carry Forward Losses
A trust cannot carry forward losses unless it satisfies the tests contained in the "trust loss measures" located in the income tax act. You can look at them here at Part 23.
A family trust only has to pass one test, a modified version of the income injection test which is that an "outsider" of the family group does not receive or provide a "benefit" to the trust.
The Family Trust Election must have effect in the year that the trust makes the loss.
Imputation Credits
A taxpayer is generally unable to claim imputed credits unless they have held shares "at risk" for more than 30 days. For a beneficiary, "at risk" is defined as being exposed to more than 30% of the risks and opportunities of the trust's shareholding in order to satisfy this rule. While a fixed trust or a HDT (with issued units) allows this, a discretionary trust does not as the beneficiaries have no fixed entitlement and are not exposed. They can claim a 'small shareholder' exemption which allows them to claim no more than $5,000 in imputed credits, but thats about it.
A beneficiary of a trust that has made a family tax election is allowed to claim all the imputed credits paid across as long as the trust satisfies the 45 day rule.
A Family Trust Election restricts the distribution of the profits to people and related entities but generally it isn't too bad since most trusts would distribute only to the restricted group. Any distribution outside the group attracts family distribution tax. An election for a discretionary trust is irrevocable. There is a bit more but I do recommend that you speak to your accountant each year about whether your trust should make a Family Tax Election when you have your trust return prepared.