A recent statement from CRA regarding “phantom income” shows how important it is to cover seemingly obscure tax issues when drafting a Family Trust. Including this Trust provision could save you a great deal of tax when the “21-year rule” takes effect.

In administering an estate that holds private corporation shares, a “pipeline” strategy can be used to limit the tax on the shares to the relatively low capital gains rate, instead of the higher dividend tax rate. But certain tax rules, and the CRA’s interpretations of the rules, try to stick the estate with a higher dividend tax rate. If it’s done incorrectly, the tax result may be punitive.