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Distributions to beneficiaries

Trustees benefit beneficiaries by making distributions of of a trust’s income or capital.  Most modern trusts are discretionary trusts, which means that how much income or capital a beneficiary receives is at the trustee’s discretion.  However, some trust deeds provide that different beneficiaries have varying entitlements to income and / or capital.

Distributions are not always obvious

Letting a beneficiary live in a home owned by a trustee is a capital distribution.  Generally no tax consequences arise when capital distributions are made from a complying trust.  However, there can be tax consequnces when capital distributions are made from non-complying or foreign trusts.

Tax consequences of capital distributions

The tax consequences of a capital distribution depends on the trust’s classification for tax purposes.  Distributions, other than distributions of beneficiary income from complying trusts are tax-free.  However, distributions other than beneficiary income from non-complying and foreign trusts can be taxable.  Taxable distributions from non-complying trusts are taxed at the rate of 45%.  Taxable distributions from foreign trusts are taxed at the beneficiary’s marginal rate.

References:

  • Income Tax Act 2007, s HC 15
  • Vicki Ammundsen, Taxation of Trusts, ed 2 (2011), chapter 5

Discussion

2 thoughts on “Distributions to beneficiaries

  1. Hi Vicki, can you point me to case law that supports your statement, “Letting a beneficiary live in a home owned by a trustee is a capital distribution”. I have been told by a partner that it is not, however it would be helpful in a case I am working on if your statement is correct. Thanks

    Posted by leowhare | September 19, 2017, 1:02 am

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