Section 75(2) of the Income Tax Act attributes a trust’s property income, capital gains, and capital losses back to the person who transferred the property whenever that person kept a reversionary interest in the property, a power to decide who ultimately receives it, or a right to consent to or direct how the trustee deals with it. The rule looks at what the trust deed permits, not at what anyone actually does. If one of the three conditions exists on paper, the contributor reports the income on their own T1 at their own marginal rate, and the trust reports nothing on those amounts.
The rule applies to any trust resident in Canada that was created after 1934, and it stays in force for as long as the contributor is alive and remains a Canadian resident. Death or emigration ends attribution. Nothing else does — not the passage of time, not the trust selling the original asset, and not later amendments to the trust deed once the rule has already bitten.
The Three Triggers
Only one of the three conditions has to be present. Each describes a different way a contributor might have kept meaningful strings on the property.
Reversionary Interest
Paragraph 75(2)(a)(i) catches trusts where the property, or anything bought with the proceeds of the property, could come back to the person who provided it. The probability does not matter. A clause saying the assets return to the contributor after a fixed period, on a stated event, or on the death of the last other beneficiary is enough to keep attribution running for as long as the possibility exists. The CRA’s Interpretation Bulletin IT-369R confirms the rule applies where property “may revert to the person from whom it was received as a consequence of the death of the last of all other beneficiaries under the trust.”1Canada Revenue Agency. Interpretation Bulletin IT-369R – Attribution of Trust Income to Settlor
A drafting example makes the point. “The remaining assets shall be distributed to the contributor’s children, and if none survive, to a registered charity” avoids the trigger. “The remaining assets shall revert to the contributor” does not.
Power to Determine Beneficiaries
Paragraph 75(2)(a)(ii) applies where trust property could pass to persons the contributor chooses at any time after the trust is created.2Department of Justice Canada. Income Tax Act – Section 75 A power of appointment held by the contributor — to add beneficiaries, to redirect shares among them, to change proportions — is enough. The power does not have to be exercised. Its existence in the trust documents is what counts.
This is the trap in family trusts where the parent who funded the trust also wants flexibility to adjust distributions as circumstances change. That flexibility triggers attribution unless it belongs solely to an independent trustee.
Consent or Direction Over Disposition
Paragraph 75(2)(b) applies where the trust cannot deal with the property without the contributor’s consent or direction.2Department of Justice Canada. Income Tax Act – Section 75 A veto over the sale of specific investments, a requirement that the contributor approve real estate transactions, or authority to direct how assets are deployed all bring the trust within the rule. A contributor who is one of several trustees can still trigger attribution if the trust documents require their personal consent for any transaction. Shared authority is enough when the contributor’s individual sign-off is needed.
What the Rule Attributes
When a trigger is met, all income, losses, capital gains, and capital losses from the affected property belong to the contributor for tax purposes.2Department of Justice Canada. Income Tax Act – Section 75 The trust ignores those amounts on its T3. Beneficiaries do not report them either, even if they receive distributions during the year. This treatment overrides the usual rules in sections 104 through 108 that would let the trust deduct income paid out and have it taxed in the beneficiaries’ hands.
There is one substantial carve-out. The CRA has confirmed that section 75(2) does not attribute business income or business losses, even when the business uses the very property the contributor transferred.1Canada Revenue Agency. Interpretation Bulletin IT-369R – Attribution of Trust Income to Settlor The provision reaches only property income (rent, interest, dividends) and capital gains or losses. Active business profits earned through the trust are taxed under the normal trust rules.
Substituted Property
Selling the original asset does not release the trust from attribution. The rule expressly follows substituted property, meaning anything the trust acquires by reinvesting the proceeds.1Canada Revenue Agency. Interpretation Bulletin IT-369R – Attribution of Trust Income to Settlor Shares become cash, cash becomes a rental property, the rental becomes bonds — every stage traces back.
Reinvested earnings are treated differently from reinvested proceeds. Income earned on the proceeds of the contributed property is attributed. Income earned on the earnings themselves — interest on interest, for example — is not. If contributed cash generates $10,000 of interest, that interest is attributed; if the $10,000 sits in the account and produces a further $300, that $300 is not.1Canada Revenue Agency. Interpretation Bulletin IT-369R – Attribution of Trust Income to Settlor Holding that line requires careful accounting.
The Distribution Trap Under 107(4.1)
The delayed consequence is the part most planners miss. Under subsection 107(4.1), if section 75(2) has ever applied to trust property, the ordinary tax-deferred rollout of that property to beneficiaries is denied.3Department of Justice Canada. Income Tax Act – Section 107 Instead of transferring at the trust’s cost, the trust is deemed to sell the property at fair market value, triggering an immediate capital gain.
The exception is narrow. A rollout still works when the property goes back to the contributor or to the contributor’s spouse or common-law partner. Any other distribution — to children, grandchildren, or other beneficiaries — attracts the deemed disposition. And this taint is permanent. Fixing the trust deed later to stop ongoing attribution does not undo the 107(4.1) consequence for property that was held while section 75(2) applied.3Department of Justice Canada. Income Tax Act – Section 107
The Sommerer Exception for Fair Market Value Sales
The Federal Court of Appeal’s 2012 decision in Canada v. Sommerer set an important boundary. The CRA had argued that shares purchased by an Austrian private foundation from Peter Sommerer should be attributed back to him. The court disagreed, holding that property acquired by a trust through a genuine sale at fair market value is not property “received from” the vendor for purposes of section 75(2). A real seller who receives full value is not a contributor.
The practical result: selling property to a trust at arm’s length for fair market value should not trigger attribution, even where the seller is also a beneficiary. The sale has to be genuine. Below-market pricing or terms that disguise a gift will not attract the same treatment. Section 75(2) is aimed at contributors who kept strings, not at commercial dealings between a trust and an outside party.
Trusts That Are Not Caught
Subsection 75(3) removes a long list of specialized trusts from the attribution rules, including RRSPs, RRIFs, TFSAs, RESPs, RDSPs, FHSAs, pooled registered pension plans, various employee and pension arrangements, registered private foundations, related segregated fund trusts, and qualifying environmental trusts.2Department of Justice Canada. Income Tax Act – Section 75 These vehicles have their own contribution and taxation rules, so section 75(2) stands aside. No comparable exemption exists for ordinary private family trusts. Their treatment depends entirely on the trust deed and the contributor’s continuing role.
Reporting and Penalties
Attributed income goes on the contributor’s personal T1 return and is taxed at their marginal rate. The 2026 federal top rate is 33% on taxable income above roughly $253,000, and combined federal-provincial rates can exceed 54% at the top.4Canada Revenue Agency. Tax Rates and Income Brackets for Individuals A trust producing meaningful property income can push the contributor into the top bracket on its own.
The trust still files a T3 return, due within 90 days of its tax year-end.5Canada Revenue Agency. When to File – Filing a Trust’s T3 Return The T3 reports the trust’s activity and identifies the settlor, but the attributed amounts are not taxed at the trust level. The two filings need to line up so that nothing is double-reported and nothing falls through.
Getting attribution wrong carries a real cost. Subsection 163(2) imposes a penalty equal to the greater of $100 or 50% of the understated tax where a false statement or omission is made through gross negligence.6Department of Justice Canada. Income Tax Act – Section 163 A contributor who lets the trust report the income separately, or who reports nothing, faces both the penalty and interest on the shortfall.
Drafting a Trust That Stays Outside Section 75(2)
Avoiding attribution comes down to keeping all three triggers out of the deed. The contributor should have no reversionary right, no power to select or change beneficiaries, and no consent or veto over how the trustee deals with the property. Beneficiaries are named when the trust is created. Discretion over investments and distributions rests with independent trustees.
Where a contributor wants trust property into their hands but not the rest of the rule with it, selling to the trust at fair market value is the route Sommerer opened. The trust needs its own funds — typically an initial contribution from someone else — to make the purchase. A loan from the contributor can work, but the terms must be genuinely arm’s-length and the contributor cannot retain indirect control over how the borrowed funds are used.
Trusts already caught by section 75(2) can be amended to stop future attribution, but the 107(4.1) taint on property held during the attribution period does not lift. The only clean way out for that property is a distribution back to the contributor or their spouse, which still qualifies for the tax-deferred rollout.3Department of Justice Canada. Income Tax Act – Section 107 Distributions to anyone else force a deemed sale at fair market value. That problem usually surfaces years after the trust was set up, which is why the drafting stage is where section 75(2) has to be handled.