Canada proposes to deny trust rollovers through entities with non-resident owners

Restriction would extend through Canadian entities

Income Tax Act subsection 107(2) can allow certain personal and prescribed trusts to distribute property to a Canadian-resident beneficiary in satisfaction of a capital interest on a rollover basis. Current subsection 107(5) instead applies the fair-market-value treatment in subsection 107(2.1) to specified distributions to non-resident beneficiaries. Finance Canada says the existing restriction can be circumvented by distributing assets to a Canadian-resident corporation whose shares are held by a non-resident.^[2][3]

The Notice of Ways and Means Motion would replace subsection 107(5) so that the restriction also covers a distribution to a Canadian-resident corporation or partnership where a non-resident holds any share or partnership interest, directly or indirectly in any manner whatever. The draft states no de minimis ownership threshold for this corporate or partnership limb.^[2][3]

Affected distributions would use fair-market-value treatment

For an affected distribution, the proposal would displace the subsection 107(2) rollover. Subsection 107(2.1) generally deems the trust to dispose of the property at fair market value and the beneficiary to acquire it at that value. Trusts and advisers considering distributions through Canadian entities should therefore review ownership chains, beneficiary status and potential accrued gains before proceeding.^[2][3]

Budget Day application remains subject to enactment

The draft motion applies the amendment to distributions occurring on or after Budget Day, 5 November 2026. That proposed application date does not make the measure operative before Parliament enacts it. The published material does not resolve how the broad indirect-ownership test would apply to complex or tiered ownership chains, or whether the wording will be amended. Groups should retain distribution and ownership evidence, model the fair-market-value result, and monitor the enacting legislation and any Canada Revenue Agency guidance.^[1][2][3]