All About Estates


In my last blog I noted that at the recent STEP conference, representatives of the Canada Revenue Agency confirmed that the introduction of the new qualified disability trust (“QDT”) rules had not restricted the ability to use the preferred beneficiary election, provided the requirements for the preferred beneficiary election are otherwise met. In this blog I will outline in more detail the elements of the preferred beneficiary election.

The definition of “preferred beneficiary” is set out in subsection 108(1) of the Income Tax Act (Canada) (“ITA”). To qualify as a preferred beneficiary, the beneficiary must be resident in Canada at the end of the trust’s taxation year and must either: (1) qualify for the disability tax credit; or (2) be 18 years of age, dependant on another person within the meaning of subsection 118(6) of the ITA because of mental or physical infirmity, and not have income in the beneficiary’s taxation year that exceeds the basic personal amount. A “dependant” of an individual for purposes of subsection 118(6) includes a child or grandchild of the individual or the individuals’ spouse/common-law partner. It also includes a parent, grandparent, sibling, aunt/uncle, niece/nephew of the individual or the individual’s spouse/common-law partner if such person was resident in Canada at any time during the year. Of course, in all cases the person must be dependent on the individual for support.

In addition to the above requirements, the preferred beneficiary must be: (1) the settlor of the trust; (2) the spouse/common-law partner or former spouse/common-law partner of the settlor; or (3) a child, grandchild, great-grandchild of the settlor or a spouse/common-law partner of such persons.

To make the election, subsection 104(14) of the ITA provides that the trust and the preferred beneficiary must file a joint election within 90 days of the end of the trust’s taxation year in the prescribed form (see Regulation 2800 for the prescribed statement to make the election). The election may designate any portion of the accumulating income of the trust up to the preferred beneficiary’s “allocable amount”. The preferred beneficiary’s “allocable amount” is defined in subsection 104(15). The allocable amount is equal to the “accumulating income” of the trust except in two circumstances. First, in the case of a trust where there is a deemed disposition on the death of a particular beneficiary (i.e. alter ego trust, spousal/common-law partner trust, joint spousal/common-law partner trust, pre-1972 spousal trust), the allocable amount is deemed to be nil in the year of that beneficiary’s death, such that the preferred beneficiary election is not available in that year. Second, the allocable amount is also deemed to be nil where the preferred beneficiary’s interest in the trust is solely contingent on the death of another beneficiary who has a capital interest in the trust but does not have an income interest in the trust.

Where a preferred beneficiary election is made, the portion of the accumulating income so designated is included in the income of the preferred beneficiary. Subsection 104(12) of the ITA permits the trust to deduct from its income the lesser of the accumulating income of the trust for the year and the total of all amounts designated under subsection 104(14). “Accumulating income” is defined in subsection 108(1) of the ITA and contains an important anti-avoidance provision. The accumulating income of the trust is determined as if the greatest deduction the trust was entitled to claim under subsection 104(6) was claimed. In other words, if an amount is paid or made payable to a beneficiary of the trust, that amount is deducted from the income of the trust when calculating the accumulating income. This anti-avoidance provision prevents a trust from distributing income to beneficiaries other than the preferred beneficiary (paying tax at a higher marginal rate) without claiming a deduction and then claiming the preferred beneficiary election on that distributed income.

In light of the CRA’s position that the new QDT rules have not restricted the ability to use the preferred beneficiary election, the preferred beneficiary election may experience something of a renaissance as a valuable planning tool in scenarios where more than one trust is established for a beneficiary who qualifies as both a preferred beneficiary and an “electing beneficiary” for purposes of the QDT rules.

About Darren Lund
Darren Lund is a member of the Trust, Wills, Estates and Charities at Fasken, Toronto office. Darren has expertise in a broad range of estate planning matters, including multiple wills, inter vivos trusts, disability planning, estate freezing, and planning for beneficiaries and assets outside Canada. Darren advises trustees and beneficiaries on all aspects of estate administration, both contentious and non-contentious, and his experience includes passing of fiduciary accounts, trust variations, post-mortem tax planning, and administering the Canadian estates of non-residents. He also speaks and writes on a variety of related topics such as estate planning for spouses and couples, inheriting overseas property and estate planning for persons with disabilities. He previously practised estates law at a large national law firm. Email: