Income Tax – Simplifying taxes for individuals, private businesses and trusts

Trevor McGowan
Associate Assistant Deputy Minister
Tax Policy Branch
Department of Finance Canada
90 Elgin Street, Ottawa, ON K1A 0G5

Email: Trevor.McGowan@fin.gc.ca

Dear Mr. McGowan:

Subject: Joint Committee Submission on Tax Simplification for Canadian Individuals, Private Businesses and Trusts

The Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada (“Joint Committee”) is supportive of the Government’s on-going initiative to make the tax system easier to administer and understand, thus supporting the broader efforts to build a stronger, more competitive economy. Further to our various discussions on this topic, a sub-committee of the Joint Committee has formulated a series of proposals intended to simplify the administration and operation of the Income Tax Act (Canada) (the “Act”) in areas that primarily affect individuals, private businesses, and trusts. The common objective of each proposal is to reduce unnecessary complexity, compliance costs, unwarranted technical traps, and interpretive uncertainty for taxpayers, advisors, and the Canada Revenue Agency (the “CRA”). The proposals focus on areas where simplification can be achieved without compromising the integrity of the tax system or materially reducing fiscal revenue.

Members of the Joint Committee and other members of the tax community participated in the discussion concerning this submission and contributed to its preparation, including:

• Alexander Demner – Thorsteinssons LLP
• Daniel Dwyer – KPMG LLP
• Manu Kakkar - Kakkar CPA Professional Corporation
• Kenneth Keung – Doane Grant Thornton LLP
• Ryan Minor – CPA Canada
• Gavin Miranda – MNP LLP

We would be pleased to discuss this submission with you in further detail at your convenience. We acknowledge that many of these proposals may require further study and analysis and would be pleased to work with you on such matters, including legislative drafting.

The Joint Committee also expects to provide additional submissions on other tax simplification matters in due course.

Yours truly,

Joint Committee on Taxation of The Canadian Bar Association and CPA Canada

Submission to the Department of Finance

Submission on Tax Simplification for Canadian Individuals, Private Businesses and Trusts

A. Standard Amount Regime

The Canadian personal income tax system is increasingly difficult for ordinary taxpayers to understand and navigate. A significant source of this complexity is the large number of personal non-refundable tax credits, each with its own eligibility criteria, calculations, and documentation requirements. The complexity is difficult to justify particularly where the credits ultimately provide only modest or no tax relief.

This complexity undermines confidence in the tax system, increases compliance costs, and creates barriers to broader use of automated tax filing. In our view, there is a strong case for a simplification measure that would allow many Canadians to file on a more straightforward basis.

Proposal: Elective Standard Personal Amount Regime

Consideration could be given to the introduction of an elective standard personal amount regime for individuals which would replace a myriad of claims under the existing credit regime.

Under this proposed regime, a taxpayer could choose to claim a prescribed standard personal amount in lieu of a specified group of existing non-refundable tax credits. The purpose would be to provide a simpler and more predictable alternative for taxpayers who prefer ease of compliance over annual tracking of multiple credits.

To preserve simplicity, the regime could be built around three standard amounts:

1. Single Individual Standard Amount: For taxpayers who are neither married nor in a common-law partnership.
2. Married/Common-Law Partner Standard Amount: For taxpayers who are married or in a common-law partnership.
3. Age Supplement: For taxpayers aged 65 or older, as an additional amount to recognize increased costs associated with aging.

Changes in age, marital status, or common-law status would automatically affect the amount available to the taxpayer.

Non-Refundable Tax Credits Replaced by the Standard Amount Election

A taxpayer who elects into the regime would forgo the ability to claim specified non-refundable tax credits, including:

• Basic personal amount (subsection 118(1)(c))
• Age amount (subsection 118(2))
• Spouse or common-law partner amount (subsection 118(1)(a))
• Amount for an eligible dependant (subsection 118(1)(b))
• Canada caregiver amounts (including for spouse, eligible dependant, and other infirm dependants) (subsection 118(1)(d), (e), (b.1))
• Volunteer firefighters’ amount (subsection 118.06)
• Search and rescue volunteers’ amount (subsection 118.07)
• Canada employment amount (subsection 118(10))
• Medical expense tax credit (section 118.2)
• Pension income amount (subsection 118(3))
• Donations and gifts (section 118.1) under $200
• Federal political contribution tax credit (section 127(3)) under $200

These credits often require separate calculations, thresholds, or supporting records and, collectively, contribute materially to the perceived complexity of the personal tax system.

Under one approach, the standard personal amount would replace any charitable donation credits below a specified threshold. Charitable giving may be substantial, irregular, and difficult to anticipate. To avoid discouraging significant donations, an individual who elects the standard amount should remain entitled to claim the donations and gifts tax credit to the extent that donations made in the year exceed a prescribed threshold, such as $200, which is the threshold above which the higher federal credit rate generally applies under the existing rules. The standard amount would therefore replace the tax benefit associated with donations up to that threshold, while preserving the existing credit for the excess. Similar considerations apply to the federal political contribution tax credit. Alternatively, the elective regime could operate independently of the existing charitable donation and political contribution tax credit rules, so that the existing credit remains fully available to electing taxpayers.

Non-Refundable Tax Credits That Should Remain Available

Under the proposed regime, certain credits should remain available even where a taxpayer elects the standard amount. These are credits that are either readily administered through existing information reporting or that advance distinct policy objectives that should not be displaced by a simplification election. These would include:

• Canada Pension Plan/Quebec Pension Plan (CPP/QPP) contributions and Employment Insurance (EI) premium credits (section 118.7)
• Home buyers’ amount (section 118.05)
• Home accessibility expense (section 118.041)
• Adoption expense (section 118.01)
• Disability amount (section 118.3)
• Tuition expense (section 118.5)
• Interest paid on student loans (section 118.62)

In particular, disability and adoption relate to circumstances that may not be foreseeable when an election is made and should therefore remain outside the standard amount trade-off. Tuition expenses and interest paid on student loans often arise from decisions made before a taxpayer elects into the regime and may generate tax benefits over multiple years. Accordingly, they should remain available notwithstanding the election.

Election Design Alternatives

A permanently irrevocable election may be difficult to justify as a matter of policy. A taxpayer may make a reasonable choice earlier in life and later find that the election no longer reflects their circumstances. For example, a taxpayer may subsequently incur significant medical expenses or assume caregiving responsibilities.

The election may be designed with some flexibility while limiting year-by-year switching between regimes. A possible approach would be to require the election to remain in place for a fixed period, such as three years, but permit a one-time revocation election.

Alternatively, taxpayers could be permitted to choose each year between the standard amount and the regular credit regime. Under that approach, the standard amount would replace all non-refundable tax credits for that year, without exception. While some taxpayers may compare the two regimes annually to determine which is more favourable, others may simply elect the standard amount in lieu of tracking and calculating multiple credits. This approach would maximize simplicity and flexibility, albeit at the expense of some fiscal certainty.

Setting the Standard Amount

The standard amount amounts should be informed by government data on the aggregate claims and average tax benefit associated with the credits being replaced. The amounts should be high enough that taxpayers are reasonably compensated for giving up access to those credits for the duration of the election period.

If the amounts are set too low, the regime will attract little uptake and will fail to achieve its simplification objective. If set appropriately, however, the regime could provide a genuine alternative for a large segment of taxpayers with relatively ordinary filing profiles.

Policy Rationale

This proposal is grounded in three principal considerations. First, it would reduce compliance burdens for individuals who currently must track receipts and supporting documents for numerous modest-value credits. Second, it would support the government’s broader movement toward automated and simplified tax filing by reducing reliance on information that cannot be captured through T-slips alone. Third, it would improve public understanding of the tax system by offering a simpler filing pathway that is easier to explain and use.

We recognize that any standard amount regime necessarily sacrifices some degree of precision in favour of simplicity. The proposal is based on the premise that many taxpayers would prefer a straightforward and predictable tax calculation, even if it does not perfectly reflect their individual expenditures or circumstances in every year.

Such a reform could also reduce administrative burdens for the CRA by decreasing the volume of claims requiring verification and review.

B. Simplifying Corporate Tax Rates

The small business deduction (“SBD”) adds significant complexity to the Act. Numerous anti-avoidance rules are required to prevent inappropriate multiplication of the SBD among related but non-associated corporations, including the specified corporate income and specified partnership income rules. The taxable capital and adjusted aggregate investment income grinds add further complexity.

The existence of two federal tax rates for active business income also creates a host of consequential rules and accounts. In particular, corporations must track GRIP and LRIP balances, distinguish between eligible and other-than-eligible dividends, and separately maintain eligible and non-eligible RDTOH accounts. Much of this complexity exists solely because of the dual-rate system.

We recommend that Finance consider replacing the current two-rate system for active business income with a single federal corporate income tax rate set between the existing small business rate (9%) and general corporate rate (15%). A single-rate system would substantially simplify the corporate tax regime by eliminating, or significantly reducing, the need for many of the provisions associated with the SBD and the dual-rate structure.

The Committee recognizes that the small business deduction is intended to provide meaningful support to Canadian small businesses and that any move away from the current dual-rate system would require consideration of how that support should be maintained. Finance estimates that the preferential tax rate for small businesses has a federal fiscal cost exceeding $6 billion annually.¹ In considering whether the complexity associated with the current small business deduction regime remains justified, policymakers may wish to consider whether some or all of that support could be delivered through simpler measures tied to objectively measurable business activity. For example, a measure linked to Canadian employment expenditures could potentially provide support to small businesses while eliminating much of the complexity associated with the current small business deduction regime and the dual-rate corporate tax system. The design of any such measure would involve broader policy considerations beyond the scope of this submission.

While this proposal would represent a broader policy reform rather than a pure simplification measure, it has the potential to materially reduce complexity for private businesses and their advisors while preserving incentives for productive business investment.

C. Expand the Excluded Entity Definition for EIFEL

The excessive interest and financing expenses limitation (“EIFEL”) rules were introduced to address base erosion and profit shifting concerns and to align Canada with international recommendations. Unfortunately, the current excluded entity thresholds are too restrictive for many Canadian private business groups. The rules can apply to businesses with no material international tax planning concerns merely because they fail to satisfy one of the myriad technical conditions of the excluded entity definition.

Particular concern has been expressed regarding the exception for groups whose aggregate net interest and financing expenses do not exceed $1,000,000. Although intended as a safe harbour for smaller businesses, that amount is unrealistically low for many capital-intensive Canadian enterprises. A private business group with taxable capital approaching the $50 million threshold can readily incur more than $1,000,000 of annual financing costs in the ordinary course of carrying on business. As a result, businesses that are not the intended target of the EIFEL regime may become subject to extensive compliance obligations despite presenting little risk of base erosion or profit shifting.

Consideration should be given to the following:

1. The $1,000,000 aggregate net interest and financing expense threshold in the excluded entity definition be increased to reflect a reasonable cost of capital for a private business group with taxable capital of approximately $50 million. For example, the current prescribed interest rate applicable to pertinent loans or indebtedness is 6.29%. The threshold should also be indexed for inflation and reviewed periodically to ensure it continues to reflect prevailing economic conditions. If the taxable capital threshold is increased, a corresponding increase to the net interest and financing expense threshold should also be considered; and
2. The $50 million taxable capital threshold in the excluded entity definition should be increased to provide meaningful relief for Canadian private groups who are not the intended target of the EIFEL regime. Finance has recognized the need to adjust similar thresholds over time to reflect economic growth and inflationary pressures. For example, the taxable capital phase-out range for the SR&ED expenditure limit was recently expanded and now extends to $75 million.

D. Repealing the Corporate Attribution Rule

Section 74.4 contains the so-called corporate attribution rule. It applies where property is transferred or loaned to a corporation that is not a small business corporation for the benefit of a spouse or non-arm’s length minors (including nieces and nephews). Originally, it was enacted to prevent income splitting through corporations.

The tax on split income (“TOSI”) regime was significantly expanded in 2018 and now addresses many of the arrangements that the corporate attribution rule was originally intended to prevent. In particular, where one individual transfers property to a corporation and family members participate in the returns generated by that corporation, the same arrangement may require consideration of both the TOSI regime and the corporate attribution rule. Maintaining both regimes thus creates unnecessary complexity and raises a host of practical and interpretive issues while providing little, if any, additional protection against income splitting or tax revenue.

Moreover, the TOSI regime is both broader and more nuanced than the corporate attribution rule. Whereas subsection 74.4(2) is generally limited to benefits conferred on a spouse, common-law partner, or certain minors, the TOSI regime may apply to benefits received by a much wider range of related individuals. In addition, TOSI contains detailed rules that distinguish between situations based on factors such as labour contributions, capital contributions, ownership interests, age, and the nature of the business. As a result, TOSI is capable of targeting inappropriate income splitting with considerably greater precision and scope than the relatively blunt framework in subsection 74.4(2).

Consideration should be given to the repeal of section 74.4.

The corporate attribution rule has largely been overtaken by the expanded TOSI regime, which now addresses many of the income-splitting arrangements the rule was originally intended to prevent. Repealing section 74.4 eliminates an overlapping anti-avoidance provision that has been rendered redundant through more recent, comprehensive legislative amendments. Accepting this recommendation would simplify the Act without materially impairing the integrity of the income-splitting regime or reducing fiscal revenues.

E. Lifetime Capital Gains Exemption – Simplifying Historical Asset Tests

An individual may claim the capital gains deduction under subsection 110.6(2.1) on the disposition of a qualified small business corporation share (“QSBC share”), subject to the limitations in section 110.6. A share is a QSBC share only if it satisfies the definition in subsection 110.6(1).

In broad terms, a QSBC share must satisfy three requirements: (i) the corporation must be a small business corporation at the time of disposition, (ii) the share must generally not have been owned by anyone other than the individual or a related person or partnership during the preceding 24 months, and (iii) throughout that same period, more than 50% of the fair market value of the corporation’s assets must have been attributable to qualifying active-business assets.

Similar historical and sale-time asset-use tests apply to a “share of the capital stock of a family farm or fishing corporation” (“FFFC share”).

Concerns

1. The current rules test asset composition rather than business activity

The policy objective of the LCGE is to support entrepreneurship and investment in active Canadian businesses. Similar policy considerations underlie the favourable treatment afforded to FFFC shares. However, the current statutory framework determines eligibility largely by reference to asset composition, rather than the nature and continuity of the business itself.

This approach often produces results that are disconnected from commercial reality. A corporation may carry on the same active business continuously for many years, yet temporary accumulations of cash, investment assets, redundant assets, sale proceeds, or working capital held for future expansion can jeopardize LCGE eligibility. In many cases, the underlying business has not changed at all; only the composition of the balance sheet has changed.

2. The rules drive continuous purification planning

Because the tests are based on asset composition and fair market value, taxpayers are often required to undertake ongoing “purification” planning to preserve LCGE eligibility.

This planning can involve dividends, debt repayments, asset transfers to holding corporations, and internal reorganizations undertaken primarily to satisfy technical asset-use tests rather than to achieve commercial objectives. The resulting costs can be significant, particularly for smaller owner-managed businesses, and eligibility often depends on uncertain valuation judgments throughout the historical testing period.

While the 24-month ownership rule serves an important anti-avoidance function by preventing shares from being newly issued or acquired immediately before a sale solely to access the LCGE, a business that has been carried on in Canada throughout the relevant period should not be required to engage in repeated purification transactions merely to ensure that active-business assets continuously exceed the statutory fair market value thresholds during that period. The relevant policy concern is whether the shares represent a genuine long-term investment in an active Canadian business, not whether a particular asset ratio was continuously maintained throughout the 24-month period.

Consideration should be given to simplifying the LCGE qualifying-share rules by replacing the 24-month historical active-asset test with a business-activity test.

Specifically, for QSBC shares and shares of a family farm corporation or family fishing corporation:

• the existing 24-month ownership requirement should be retained;
• the existing sale-time qualifying test should be retained, including the requirement that the corporation satisfy the applicable all-or-substantially-all asset test at the time of disposition; and
• the existing 24-month historical active-asset test should be replaced with a requirement that the corporation carry on an active business in Canada on a regular and continuous basis throughout the period.

Such an approach would better align the legislation with the policy objective of the LCGE: supporting gains realized on investments in active Canadian businesses. A business-activity test would focus the historical inquiry on whether the corporation was genuinely carrying on an active business in Canada, rather than on continuous balance-sheet testing. Replacing the 24-month historical active-asset test would also negate the need of the complex ‘stacking’ rule in paragraph (d) of the QSBC share definition in subsection 110.6(1).

Additionally, such an approach would preserve the principal integrity features of the existing regime. The 24-month ownership requirement would continue to prevent newly issued or acquired shares from qualifying, while the sale-time all-or-substantially-all asset test would continue to prevent the LCGE from applying to corporations holding excessive passive assets at the time of disposition.

Separately, we recommend that Finance consider whether a targeted enhancement to the LCGE may be appropriate where the purchaser is a Canadian-resident purchaser controlled by Canadians.

Unlike the principal recommendation above, this would represent a substantive policy incentive rather than a simplification measure. The Act already contains targeted capital gains relief tied to specified purchaser structures, including employee ownership trusts and worker cooperatives. This demonstrates that purchaser-based incentives can be implemented where Parliament considers them appropriate.

A targeted incentive for sales to Canadian-controlled purchasers could be considered as part of a broader policy discussion regarding business succession, domestic ownership, and the retention of Canadian-owned businesses. We do not make any specific recommendation regarding the design of such a measure. Rather, we suggest that it may warrant further study as a distinct policy initiative separate from the simplification measures discussed in this submission.

F. Eligible Dividend Designations – Simplifying the Subsection 89(14) Notification Requirement

For a dividend to qualify as an eligible dividend, subsection 89(14) requires the dividend-paying corporation to notify each shareholder, at the time the dividend is paid, that the dividend (or a portion thereof) is an eligible dividend.

This contemporaneous notification requirement imposes an onerous burden on private businesses and often serves little practical purpose. Individual shareholders generally rely on T5 slips to determine the character of dividends received, whereas corporate recipients are frequently related to, or under common control with, the dividend payer such that they already possess the information required to prepare their own GRIP calculation and tax returns.

In addition, a corporation may designate a dividend as “eligible” only to the extent of its GRIP. Since GRIP is determined at year-end, the amount ultimately available may be affected by events after the dividend, including operating losses. This uncertainty is compounded by CRA’s position that formulaic designations of the eligible portion of a larger dividend are not permitted.²

As a result, subsection 89(14) often operates as a technical compliance trap. A corporation may intend to pay an eligible dividend, reasonably believe it has sufficient GRIP, and report the dividend as eligible on the relevant T5 slip, yet still fail to satisfy the legislation because contemporaneous notification of the eligible portion was not provided.

We submit that such rigidity was not intended. Three items, in particular, indicate as much:

• The transitional rules underlying the eligible dividend regime provided the following grace periods: (a) for eligible dividends paid prior to enactment of that regime, a notification within 90 days after Royal Assent thereof was deemed to be timely made; and (b) for other eligible dividends paid after 2005, identification on applicable T3 and T5 slips sufficed.
• No other dividend type carries a special notification requirement. Capital dividends are effected through unilateral elections, and ineligible dividends (even if subjecting the recipient to Part IV tax) do not require bespoke notifications.
• The late-designation relief provision in subsection 89(14.1) shows Parliament’s recognition of the potential inequity associated with contemporaneous notifications. Indeed, unlike other late-filing provisions (e.g., subsections 84(3) and (4) for capital dividends), no penalty needs to be paid for a late eligible notification to be accepted; this strengthens the notion that Parliament did not intend to proscribe or penalize late notifiers.

These features indicate that the principal purpose of subsection 89(14) is to ensure that eligible dividends are identified and communicated to shareholders within a reasonable period, rather than to require notification at the precise time of payment.

Consideration should be given to amending subsection 89(14) to give dividend-paying non-listed corporations at least 60 days to notify shareholders of eligible dividend treatment and to permit notification through T5 reporting, electronic communication, publication on a publicly accessible website, or another prescribed method.

One example of how subsection 89(14) could be amended to reflect this revised approach is as follows:

89(14) A corporation designates a portion of a dividend it pays at any time to be an eligible dividend by providing notification, in a prescribed manner, to:

(a) each individual to whom the dividend is paid on or before the last day of February of the calendar year following the year in which the dividend was paid; and

(b) each other person or partnership to whom the dividend is paid no later than 60 days after the day on which the dividend was paid,

that such portion of the dividend is an eligible dividend.

For individual recipients, paragraph (a) would align with the T5 filing deadline under Regulation 205. For other recipients, a 60-day notification requirement would preserve timely notification rights without necessitating immediate action. The Income Tax Regulations could prescribe that acceptable methods of notification include T5 reporting, electronic communication, and publication on a publicly accessible website. Subsection 89(14.1) would be retained to ensure relief is provided in appropriate circumstances.

Recognizing website publication as an acceptable notification method would also be consistent with existing public-company practices.

G. Capital Dividend Elections – Simplifying the Subsection 83(2) Election Process

Subsection 83(2) permits a private corporation to elect for a dividend to be a capital dividend (to the extent of the corporation’s capital dividend account (“CDA”) balance immediately beforehand).

Currently, the election may be made only in respect of the full amount of a dividend. This requirement is counterintuitive and frequently misunderstood, particularly given the partial designation approach available for eligible dividends. Many taxpayers reasonably assume that a corporation should be able to elect for any portion of a dividend up to its CDA balance. Requiring a dividend to be artificially split into two separate dividends solely to satisfy the election rules adds unnecessary complexity.

No compelling policy rationale for the full-dividend requirement is apparent. Part III already acts as a strong integrity measure for excessive elections (along with the other anti-avoidance rules in section 83) and could readily apply to over-elected portions of a dividend instead. Consideration should be given to amending subsection 83(2) to permit a corporation to elect in respect of all or any portion of a dividend.

H. Simplifying Sibling Relatedness for Butterfly Transactions

Subparagraph 55(5)(e)(i) is a targeted related-person rule for purposes of section 55. It can preserve the ordinary related-person treatment of siblings, who are otherwise deemed not to be related for purposes of the section, where a dividend is paid or received by a corporation having at least one share of its capital stock that is a QSBC share or FFFC share.

We understand that subparagraph 55(5)(e)(i) was intended to facilitate divisions of active Canadian family businesses between siblings. However, the current wording effectively requires that an individual directly own at least one QSBC share or FFFC share. As a result, relief is unavailable where an active business is held through a holding company structure.

For example, two siblings may each own a holding corporation, with those holding corporations each owning 50% of an operating corporation carrying on an active business in Canada. Although the operating corporation could otherwise satisfy the substantive requirements of a QSBC or FFFC, relief may be unavailable solely because no shares of the operating corporation are owned directly by an individual.

Consideration should be given to amending subparagraph 55(5)(e)(i) so that the QSBC and FFFC determinations may be made without requiring direct individual ownership of a share. Alternatively, relevant holding corporations could be deemed to be individuals solely for this purpose.

I. Simplifying the Shareholder Loan Rules

Subsection 15(2) generally requires a shareholder loan to be included in a shareholder’s income. However, subsection 15(2.6) provides an exception where the loan is repaid within one year after the end of the corporation’s taxation year in which the loan arose.

Although a loan may ultimately qualify for the subsection 15(2.6) exception, subsection 80.4(2) generally requires the shareholder to include a deemed interest benefit while the loan remains outstanding. The interaction of these provisions creates unnecessary complexity and timing issues. The examples in CRA Folio S3-F1-C2 describe situations where tax returns may need to be amended to either retroactively include or remove a deemed interest benefit. In many cases, the resulting adjustment is relatively minor and the compliance costs associated with filing an amended return may be difficult to justify.

Consideration should be given to amendments to permit taxpayers to elect to include or deduct any subsection 80.4(2) deemed interest benefit in the taxation year that includes the expiry of the repayment period described in subsection 15(2.6). This would simplify administration, reduce the need for amended returns, and ease compliance and administrative burdens for both taxpayers and the CRA. A taxpayer making such an election would forgo the benefit of marginal tax rates associated with recognizing the benefit over a two-year period.

J. Aligning Graduated Rate Estates and Life Interest Trusts

Life interest trusts (“LITs”) – including alter ego trusts (“AETs”), joint partner trusts (“JPTs”), self-benefit trusts, and spousal trusts – have become common estate planning vehicles. They are frequently promoted as alternatives to managing assets through a will. The benefits to such trusts are clear: they serve as “will substitutes”, facilitating continuity of ownership, incapacity planning, testamentary certainty, and privacy.

The Act generally allows individuals to hold assets through a LIT in a tax-neutral manner. However, such neutrality often ends at death. The Act contains numerous provisions that provide favourable treatment to a “graduated rate estate” (“GRE”) following the death of the relevant individual that do not extend to LITs or their lifetime beneficiaries. As a result, taxpayers who choose to utilize a LIT frequently face a more complicated and unfavourable tax landscape than those who retain direct ownership and have assets pass through their estate.

In many cases, these differences appear inconsistent with the policy intent underlying the Act’s various post-mortem tax regimes and create complexity, inequity, and unintended tax results. Consideration should be given to simplify the Act by aligning the treatment of LITs with GREs wherever no tax policy concern justifies a distinction.

Background and overall recommendation

The Act accommodates the use of LITs by, among other things, permitting taxpayers to transfer property on a tax-deferred basis to a LIT (provided the lifetime beneficiary’s entitlement to income and enjoyment of trust property is maintained). Similarly, the following occurs upon death of the lifetime beneficiary:

• the LIT is generally deemed by subsection 104(4) to dispose of its property at fair market value;
• the resulting gains are taxed in the trust itself and generally can neither be taxed in the deceased individual’s terminal return nor allocated out to a beneficiary, and
• the LIT’s taxation year is deemed to end at the end of day of death.

From a tax policy perspective, it is well-established that post-mortem planning undertaken to mitigate double taxation arising on the death of an individual holding private company shares is generally appropriate and non-abusive. The Act reflects that policy through various relieving provisions applicable to estates and GREs which facilitate the integration of corporate and shareholder-level taxation following death.

Where identical assets are held through a LIT, however, many of those relieving provisions are unavailable. As a result, taxpayers are exposed to significantly higher tax liabilities and increased risk of double taxation solely because their assets are held through a LIT rather than directly. The below is a brief summary of certain key areas of dissonance and the issues which consequently arise.

For ease, we have included recommended amendments to address such issues. In our view, such amendments may be most simply effected by deeming a LIT to be, for the purpose of various enumerated provisions, a GRE for the first three taxation years following the lifetime beneficiary’s death (i.e., the day on which paragraph 104(4)(a) deemed the applicable LIT’s taxation year to end). Alternatively, expanding any relieving rule to expressly include “Post-Death LITs” (i.e., a trust that was subject to the application of paragraph 104(4)(a) for the three ensuing taxation years) could be straightforward and unambiguous.

Issue 1: No Relief Comparable to Subsection 40(3.61)

GREs benefit from relief under subsection 40(3.61) in the context of the affiliated person loss restriction rules. Broadly, that subsection permits a GRE to claim a capital loss on corporate shares even if it remains affiliated with the underlying corporation post-disposition.

Those relieving rules do not apply to LITs. As a result, LITs often face an unavoidable double-tax issue even where the economics are identical to those of an estate. While complicated tax planning steps (sanctioned by the CRA) may provide a viable workaround, such planning may be inaccessible or raise avoidance concerns in certain circumstances.

This distinction between GREs and LITs does not appear to advance any identifiable anti-avoidance objective and may result in materially different tax outcomes despite equivalent economic circumstances.

This concern could be addressed through extending subsection 40(3.61) to LITs for its first three taxation years following the death of the lifetime beneficiary.

Issue 2: Charitable Donation Rules

GREs enjoy favourable treatment for charitable donations, including:

• ability to allocate donations to the terminal return;
• ability to allocate donations to the year preceding the year of death;
• access to 100% income limits in the terminal year; and
• flexible allocation among years.

LITs generally do not receive comparable treatment. Instead, donations made by a LIT are generally subject to the normal 75% income limitation and, where a donation is made after the death of the life interest beneficiary, the ability to carry that donation back to offset the subsection 104(4) gain is subject to a much narrower timing rule. In particular, a post-death gift by the LIT may be included in the trust’s death-triggered taxation year only if the gift is made on or before the trust’s filing-due date for that year (i.e. March 31st of the year following the year of death).

This creates a significant mismatch. A GRE or former GRE may generally make qualifying donations within 60 months after death and, where subsection 118.1(5.1) applies, allocate those donations with substantial flexibility, including to the deceased’s terminal return or immediately preceding year. By contrast, a LIT may need to complete the relevant donation by the filing-due date for the trust’s death-triggered taxation year.

This compressed timing can materially impair giving by LITs. The current rules may therefore reduce the value ultimately available for charity, or leave donation credits stranded, solely because the relevant property was held through a LIT rather than directly by the deceased and administered through a GRE. The tax implications of charitable giving should not depend on whether assets are administered through a will or “will substitute” LIT.

This concern could be addressed through extending GRE charitable donation rules to LITs following the death of the life interest beneficiary, including:

• ability to allocate donations to the terminal return;
• donation limit of the LIT’s income (not 75% thereof); and
• flexible allocation among years.

Issue 3: Section 212.1

Section 212.1 is an anti-avoidance rule aimed at preventing cross-border surplus stripping. In essence, it aims to prevent non-resident shareholders from extracting, on a tax-free basis, corporate surplus of a Canadian-resident corporation beyond the aggregate PUC of such shareholder’s shares.

In 2018, the Act was amended to add “look-through” rules for partnerships and trusts (including estates). Under those rules, a Canadian-resident estate undertaking standard post-mortem tax planning may inadvertently trigger large Part XIII withholding tax if even one beneficiary is non-resident.

This concern had been recognized by Finance, and consequently paragraph 212.1(6)(b) was amended (with retroactive effect from February 26, 2018) to exclude Canadian GREs arising from the death of a Canadian-resident individual. However, comparable relief was not extended to LITs. No discernable reason for such discrepancy is apparent.

The exception in paragraph 212.1(6)(b) currently afforded GREs should be expanded to include LITs for which the lifetime beneficiary was resident in Canada immediately prior to death.

Issue 4: Alternative Minimum Tax (AMT) Exemption

Section 127.5 imposes the “alternative minimum tax” (“AMT”). Individuals and qualified disability trust, but not other trusts (including LITs), are entitled to an AMT exemption threshold (currently $181,440). Moreover, the AMT is generally intended to be recoverable in future years when regular tax exceeds minimum tax.

This policy is reflected in the AMT exclusion for GREs (see subparagraph 127.55(f)(i) and paragraph 150(1.2)(j)) and the exemptions applicable in the year of death, including for LITs when the lifetime beneficiary dies (subparagraph 127.55(e)). However, no comparable relief is available to a LIT after the year of death.

As a result, LITs may face sizeable AMT liabilities in taxation years following death. This issue is exacerbated by the absence of an AMT threshold, which can result in a LIT being subject to AMT on its first dollar of income.

We submit that no principled basis exists for denying LITs the same exclusions available to GREs. At minimum, a post-death LITs should be entitled to the AMT exemption threshold available to individuals.

Various mechanisms are available to alleviate this concern – for example:

• Paragraph 127.55(e) should be expanded to include LITs during its first three taxation years following death of the lifetime beneficiary.
• Alternatively, clause 127.51(C)(a) should be amended to include LITs for taxation years beginning after the death of the relevant lifetime beneficiary.

Additional Opportunities for Simplification

The above examples illustrate where LITs are materially disadvantaged in the post-death period as compared to GREs. They are not an exhaustive summary of all such situations (for example, the T3 filing exclusion for GREs in paragraph 150(1.2)(j)). The Joint Committee recommends that the Finance undertake a more comprehensive review of the Act to identify other provisions where the treatment of LITs and GREs may be aligned, except where a clear anti-avoidance concern or demonstrated policy rationale justifies a distinction. We would be pleased to assist in that process and provide further submissions if desired.

End Notes

¹ “Department of Finance Canada, Report on Federal Tax Expenditures – Concepts, Estimates and Evaluations 2025, Part 2, “Preferential tax rate for small businesses” (estimated federal fiscal cost of $6.53 billion in 2026).

² See, e.g., paragraph 2.63 of Income Tax Folio S3-F2-C2, “Taxable Dividends from Corporations Resident in Canada.”