What is a SIFT trust?

This is a trust (other than a trust that is a real estate investment trust for the tax year or an entity that is an excluded subsidiary entity) that meets all of the following conditions at any time during the tax year:

  • the trust is resident in Canada;
  • investments in the trust are listed or traded on a stock exchange or other public market; and
  • the trust holds one or more non-portfolio properties.

Subparagraph 104(6)(b)(iv) of the Income Tax 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. These amendments apply to tax years that end after 2006. However, they do not apply for tax years that end before 2011, if on October 31, 2006, the trust met all the conditions (see above), and the trust does not exceed the normal growth guidelines at any time after October 31, 2006.

Note

For additional information on normal growth guidelines, see 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 located on the Department of Finance Canada website below.

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 "excluded subsidiary entity" is relevant to determining whether a trust or partnership will be a SIFT trust or SIFT partnership for a tax year. In brief, a trust or partnership that is an excluded subsidiary entity is not a SIFT trust or SIFT partnership.

As defined, an excluded subsidiary entity for a tax year is an entity the equity (as defined in subsection 122.1(1) of the Income Tax Act) of which meets two conditions at all times in the tax year. The first condition is that the equity not be listed or traded on a stock exchange or other public market. The second condition is that the equity not be held by any person or partnership other than: 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"), another excluded subsidiary entity for the tax year, or any combination of these qualifying interest holders.

General corporate income tax rate

The definition of the "general corporate income tax rate" in subsection 414(1) of the Income Tax Act Regulations (the Regulations) is relevant for applying the allocation formula in subsection 414(3) of the Regulations, in particular, variable D of the formula in paragraph 414(3)(c).

Under the definition, for the province of Quebec, the general corporate income tax rate is set at 0%. This will ensure that a SIFT trust or SIFT partnership that has a permanent establishment (as defined in Part IV of the Regulations) in Quebec and that is subject to Quebec's provincial SIFT tax in respect of amounts attributable to that permanent establishment, will not be subject to the provincial component of the federal tax in respect of those amounts.

For each other province, the general corporate income tax rate for a tax year means the highest corporate income tax rate applicable to public corporations in that province for that tax year. (Note that for the Newfoundland offshore area, the laws of Newfoundland and Labrador apply and that, for the Nova Scotia offshore area, the laws of Nova Scotia apply.)

Non-deductible distributions amount

This amount is determined by the following formula:

A − (B − C)

where

A is the trust's amount payable to beneficiaries,

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

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; and
  • the amount, if any, by which all taxable capital gains of the SIFT trust from dispositions of non-portfolio properties (including half of the capital gain allocated to the SIFT trust from a mutual fund corporation) during the tax year, exceeds allowable capital losses of the SIFT trust from dispositions of non-portfolio properties during the tax year.

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:

  1. 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; or
    • 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;
  2. a Canadian real, immovable or resource property, if at any time in the tax year the total fair market value of all properties held by the trust that are Canadian real, immovable or resource properties is greater than 50% of the equity value of the trust; or
  3. any property that the trust, or a person or partnership with whom the trust does not deal at arm's length, uses at that time in the course of carrying on business in Canada.

Amendment

Effective October 31, 2006, paragraph 1 above is amended so that securities of a subject entity that is a portfolio investment entity are excluded from that paragraph. As a result, that paragraph will not apply to make these securities non-portfolio property. However, securities of a portfolio investment entity may still be non-portfolio property of a trust or partnership under the remaining two types of non-portfolio property described in paragraphs 2 and 3 of the definition "non-portfolio property". For more information see, "portfolio investment entity" below.

A portfolio investment entity at any time, is an entity that does not at that time, hold any non-portfolio property.

SIFT trusts and SIFT partnerships

Section 122.1 of the Income Tax Act sets out rules that apply in respect of the taxation of SIFT trusts and, in some cases, SIFT partnerships. "SIFT trust" is defined in subsection 122.1(1), and "SIFT partnership" is defined in section 197 of the Income Tax Act.

SIFT trust wind-up event

A SIFT trust wind-up 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 Income Tax Act.

Deemed settlement on SIFT trust wind-up event

SIFT trust wind-up entity 80.01(5.1) election

When a SIFT wind-up entity chooses to elect under subsection 80.01(5.1) of the Income Tax Act (the Act), the SIFT wind-up 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 both the SIFT wind-up entity and the subsidiary trust; and
  • the following details of the subsidiary trust's obligation, which is the subject of the election:
    • the date of the SIFT trust wind-up event;
    • the principal amount of the obligation;
    • the payment (if any) of an amount by the subsidiary trust to the SIFT wind-up entity in satisfaction of the obligation; and
    • the adjusted cost base to the SIFT wind-up entity of the subsidiary trust's obligation before the obligation is settled.

For more information on the election under subsection 80.01(5.1) of the Act, go to
Explanatory Notes relating to the Income Tax Act, the Excise Act, 2001 and the Excise Tax Act
, dated February, 2009.

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

Forms and publications

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