What is a SIFT trust

Section 122.1 of the Income Tax Act states the rules that apply for taxing SIFT trusts and partnerships. In the Income Tax Act, a SIFT trust is defined in subsection 122.1(1) and a SIFT partnership is defined in section 197.

Transitional Rules

Subsection 122.1(2) of the Income Tax Act limits the application of the SIFT trust definition for the 2007 to 2010 tax years. Where a trust would, under the above definition, be a SIFT trust on October 31, 2006, subsection 122.1(2) provides that the SIFT trust definition will not apply until the earlier of the trust's 2011 tax year or the tax year in which the trust exceeds its normal growth (as determined by guidelines issued by the Department of Finance Canada).

For information on normal growth guidelines, see News Release 2008-100, Explanatory Notes relating to the Income Tax Act, the Excise Act, 2001 and the Excise Tax Act, subsection 122.1(2), dated December 4, 2008.

SIFT Trust – Income Payable to a Beneficiary

Subparagraph (ii) of the description of B of the formula in paragraph 104(6)(b) of the act limits the deduction that a SIFT trust can claim under subsection 104(6). The subparagraph generally prevents a SIFT trust from deducting its non-portfolio earnings that it has made payable to a beneficiary.

The non-deductible distributions amount is deemed to be a dividend received by the beneficiaries from a taxable Canadian corporation. The beneficiaries of a SIFT trust are deemed to have received an eligible dividend that qualifies for the enhanced dividend tax credit. The taxable SIFT trust distributions are subject to tax based on net corporate income tax rates.

The non-deductible distributions amount is deemed to be a dividend received by the beneficiaries from a taxable Canadian corporation. The beneficiaries of a SIFT trust are deemed to have received an eligible dividend that qualifies for the enhanced dividend tax credit. The taxable SIFT trust distributions are subject to tax based on net corporate income tax rates.

Definitions

Excluded subsidiary entity

The definition of an excluded subsidiary entity is relevant to determining whether a trust or partnership is a SIFT trust or partnership for a tax year. A trust or partnership that is an excluded subsidiary entity is not a SIFT trust or partnership.

To qualify as an excluded subsidiary entity for a tax year, an entity must meet two conditions at all times during the year:

• The first condition is that the entity's equity (including equity-like debt) is not listed or traded on a stock exchange or other public market at any time in the year
• The second condition is that the equity not be held by any person or partnership other than any of the following:
  • a real estate investment trust
  • a taxable Canadian corporation
  • a SIFT trust or a SIFT partnership (ignoring the transitional rules that otherwise suspend for a period the definitions SIFT trust and SIFT partnership)
  • a person or partnership that does not have, in connection with the holding of a security of the entity, property the value of which is determined, all or in part, by reference to a security that is listed or traded on a stock exchange or other public market
  • another excluded subsidiary entity for the tax year
  • any combination of the foregoing qualifying interest holders

  Non-deductible distributions amount

  This amount is determined by the following formula:

  A − (B − C)

  A is the trust's amount payable to beneficiaries

  B is the trust's income before any deduction under subsection 104(6) of the Act

  C is the trust's non-portfolio earnings

  Non-portfolio earnings

  Non-portfolio earnings of a SIFT trust for a tax year means the total of the following two amounts:

  • the amount, if any, by which:
    • the total of all amounts each of which is the SIFT trust's income for the tax year from a business carried on by it in Canada or from a non-portfolio property, other than income that is a taxable dividend received by the SIFT trust
      is greater than
    • the total of all of the SIFT trust's losses for the tax year from any business carried on by it in Canada and from any non-portfolio property

    Non-portfolio property

    Non-portfolio property of a trust for a tax year means a property, held by the trust at any time in the tax year, that is:

    • a security of a subject entity (other than a portfolio investment entity), if at that time the trust holds:
      • securities of the subject entity that have a total fair market value that is greater than 10% of the equity value of the subject entity
      • securities of the subject entity that, together with all of the securities that the trust holds of the entities affiliated with the subject entity, have a total fair market value that is greater than 50% of the equity value of the trust

      Note

      A corporation or a partnership can also hold non-portfolio property.

      Subject entity

      This is a person or partnership that is: a corporation resident in Canada; a trust resident in Canada; a Canadian resident partnership; or, a non-resident person, or a partnership that is not a Canadian resident partnership, the principal source of income of which is one or any combination of sources in Canada.

      Portfolio investment entity

      At any time, this is an entity that does not hold non-portfolio property.

      SIFT trust windup event

      A SIFT trust windup event is a distribution of property to a taxpayer by a SIFT trust resident in Canada, meeting the conditions outlined in section 248(1) of the act.

      Deemed settlement on SIFT trust windup event

      When a SIFT windup entity chooses to elect under subsection 80.01(5.1) of the act, the entity should attach a letter to its T3 Trust Income Tax and Information Return for the tax year in which the subsidiary trust's obligation is settled. The letter should include the following information:

      • a declaration to elect under subsection 80.01(5.1) of the act
      • the tax year for which the election applies
      • the name and trust account number for the SIFT windup entity and the subsidiary trust
      • the following details of the subsidiary trust's obligation, which is the subject of the election:
        • the date of the SIFT trust windup event
        • the principal amount of the obligation
        • the payment (if any) of an amount by the subsidiary trust to the SIFT windup entity in satisfaction of the obligation
        • the adjusted cost base to the SIFT windup entity of the subsidiary trust's obligation before the obligation is settled

        For the definition of taxable SIFT trust distributions, go to 414(1) of the Income Tax Act Regulations.

        Forms and publications

        • Guide T4013, T3 Trust Guide
        • Form T3RET, T3 Trust Income Tax and Information Return
        • Schedule, T3SCH11, Federal Income Tax

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