Trust Losses – will they still be available for the future?

Trustees and beneficiaries of trusts which have incurred tax losses in prior years should be wary of the stringent rules in Schedule 2F under the 1936 Tax Act. The rules are designed to prevent the trafficking and the transfer of the tax benefit of losses to persons who did not bear the economic loss when the tax losses were incurred by the trust. Despite receiving royal assent in April 1998, the legislation implementing these rules applies retrospectively from May 1995.

The rules relating to the carrying forward of trust losses ("the Trust Loss Rules") differ to the tests that apply to companies, reflecting the different characteristics of trusts. There are also different tests applicable to different types of trusts which makes it even more complicated. However, there is an exemption to the rules under Schedule 2F for family trusts that are eligible for and have made a "family trust election". Certain other trusts are also excluded from the Trust Loss Rules if the trusts are "excepted trusts" (ie, deceased estates, etc).

Depending on the type of trust or if a group of trusts exist, the structure of the group, a change in control or the beneficial interest of a trust will in most cases automatically cause the trust to lose all of its prior year tax losses. A change in control may include a change in trustee, a change in directorship of a corporate trustee, a change in beneficiaries or a change in the power of appointment. For example, control in a non-fixed trust may change simply by the resignation of a director of the corporate trustee. In such a case, if the non-fixed trust had incurred or accumulated millions of dollars worth of tax losses from prior years but because of a simple resignation of a director, all prior year tax losses would be unable to be carried forward for future tax benefits.