A testator created a trust for the benefit of his mentally incapacitated son, with the trustees accorded the discretion to distribute income and encroach on capital. At the time of the beneficiary’s death, the trust holds a sum which it would be reasonable to consider had not become payable or been distributed out of the taxable income of the trust for a previous taxation year.
CRA confirmed that where the disabled beneficiary of a qualified disability trust dies during a year, this will result (in addition presumably to the QDT not qualifying as such in the year of death) in the imposition of “recovery” tax under s. 122(1)(c), based on the top marginal rate, on any undistributed income from previous years still in the hands of the trust at the time of the beneficiary’s death. In responding to the question, would the trustee of trust be personally liable for this tax, CRA responded:
If the legal representative proceeds with a distribution of property in his or her possession or control without obtaining a certificate under subsection 159(2), the legal representative could be personally liable for these amounts, up to the value of the property distributed. This rule is provided in subsection 159(3).
In the situation provided, the trustee of the QDT, in his or her capacity of legal representative as defined in subsection 248(1), is therefore subject to the above rules, and could be solidarily liable with the trust for the payment of the taxes imposed under paragraph 122(1)(c).