Understanding the Reversionary Trust Rule: Key Considerations and Guidelines

A trust is a legal relationship in which a person, known as the settlor, places cash or other assets into trust for the benefit of others, called beneficiaries. The reversionary trust rule in subsection 75(2) of the Income Tax Act is designed to prevent tax avoidance by disregarding trusts in which the settlor retains the ability to reclaim the assets or direct their distribution.

To avoid being caught by this rule, it's essential to follow these guidelines:

• Avoid Reversion Provisions: Ensure the trust does not include clauses that allow the assets to revert back to the settlor.

• Prevent Future Determination: Ensure that the settlor cannot determine who will receive the assets at a future date.

  
  

• Independent Disposition: Do not include provisions requiring the settlor's consent or direction for disposing of assets during their lifetime.

It's crucial to note that attempting to use complex strategies to obscure the identity of the settlor or the assets will not circumvent this rule. The rule applies not only to the original assets but also to any property substituted for them. Even if the settlor is listed as a beneficiary indirectly through other beneficiaries, the rule still applies.

There are exceptions to this rule, which will be addressed in a subsequent discussion.

Disclaimer

The information in this post is provided for general informational purposes only and may not reflect the current law in your jurisdiction. No information contained in this post should be construed as legal advice from our firm or the individual author, nor is it intended to be a substitute for legal counsel on any subject matter. No reader of this post should act or refrain from acting on the basis of any information included in, or accessible through, this post without seeking the appropriate legal or other professional advice on the particular facts and circumstances at issue from a lawyer licensed in the recipient’s state, country or other appropriate licensing jurisdiction.