TAXX 401|TAXX 401v35: Practice Assignment 4 - Solutions 2026-
2027Canadian Tax Principles Athabasca University
Not for Credit
Recommended Completion Date: after you complete the readings and learning activities
for Lesson 10 and before the fina
l exam
Solution to AP 19-3
The first concern is that since the trust is an inter vivos trust, any income not allocated to
beneficiaries will be subject to the maximum federal income tax rate of 33%. As this is the
same rate that would apply to both Hana and her spouse, there is no income tax
advantage to contributing property to the trust without ensuring that all trust income will
be distributed to the beneficiaries.
The second concern is that, while the trust can be used to split family income, all of the
income will have to be distributed to her 19-year-old son Habib. As her other son, Carl, is
under 18 years of age, any amounts distributed to him or used to provide benefits for him
will be attributed back to Hana.
This presents something of a problem in that the trust will have annual income of $65,000,
an amount that exceeds the $55,000 estimated to meet Habib’s needs. Since Hana
wishes to limit any income allocations to Habib’s needs only she will either have to reduce
the number of investments she wishes to contribute to the trust to reduce trust income to
$55,000 and then use the remaining $10,000 of retained income to meet the needs of
Carl, or alternatively to leave the additional $10,000 of income in the trust where it will be
subject to federal income tax at a rate of 33%.
There are a few advantages to leaving the additional income in the trust. First, as it
accumulates there will be compound earnings to the extent that after tax trust funds are
reinvested. The attribution rules do not apply to compound earnings. In addition, the
accumulation becomes part of the capital of the trust which can be distributed tax free to
meet Carl’s additional needs when he reaches 18 years of age and attribution is no longer
a concern.
This suggests that, until Carl reaches 18, $55,000 of the annual income should be used
to meet Habib’s needs, with the remainder included in the net income of the trust. When
compound earnings begin to accrue, they can be used to contribute to Carl’s needs.
The trust should be discretionary which provides Hana with the opportunity to adjust the
income and capital distributions from the trust when Carl reaches 18 and to adjust to
changing circumstances should Habib’s plans change where he no longer needs $55,000
in annual income allocations.
TAXX401v35_PracticeAssignment4_Solutions 1 © Athabasca University, February 2026
, When Carl reaches 18, the income attribution rules will no longer apply and she may wish
to allocate some additional amounts to him depending upon his future financial needs. It
is unlikely that the trust will be able to meet the needs of both children if Habib is still in
school or is unemployed.
A final concern is that the life of the trust is likely to extend beyond 21 years (until Carl
reaches 30 years of age). The ITA provides for a deemed disposition of most trust property
every 21 years. If the trust continues to invest in interest earning investments, the deemed
disposition should not be a serious problem as such property does not generally increase
significantly in value. However, if the trust invests in other property with accrued capital
gains, the deemed disposition will require recognition of these capital gains at that time.
Discretionary powers to allow a trustee to make capital distributions of property with
accrued gains prior to that time would be essential to avoid any income tax consequences.
Solution to AP 1-7
Case A
In general the CRA administratively accepts that residency terminates at the latest of:
• the date the individual leaves Canada;
• the date the individual’s family leaves Canada; and
• the date that individual establishes residency elsewhere.
As Gary’s family did not leave Canada until June 30, 2025, Gary would administratively be
considered a Canadian resident until that date. Provided he has no intention of returning to
Canada, he would be a Canadian resident for the period January 1, 2025, through June 30,
2025. He would be subject to Part I tax on his worldwide income during this period. He would
not be subject to Part I tax on his rental income since the rental only occurred after he
became a non-resident of Canada. Rather than accept the CRA administrative position, Gary
would factually be considered to have become a non-resident on February 1, 2025. This
would alleviate being subject to income tax in both Canada and Australia on the employment
income earned in Australia between February 1, 2025, and June 30, 2025.
Note to Instructors As will be discussed in Chapter 20, the income tax on the rental
income would not be subject to Part I tax unless an election was filed. The rental
income, by default, would be subject to withholding tax under Part XIII.
Case B
As noted in Folio S5-F1-C1, “Determining an Individual’s Residence Status”, commuting from
the U.S. for employment purposes does not make an individual a deemed resident under the
sojourner rules. Therefore, Sarah would not be deemed to be a Canadian resident for income
tax purposes. She would be a resident of the U.S. and a non-resident of Canada.
Sarah would, as a non-resident, be subject to Canadian Part I tax on her 2025 Canadian
employment income. She would not be subject to Canadian income tax on the interest
income she earned in her U.S. savings account.
Case C
Byron’s cruise would be considered a temporary absence from Canada. Given the facts, it
appears his intent is not to permanently sever residential ties with Canada. This position is
TAXX401v35_PracticeAssignment4_Solutions 2 © Athabasca University, February 2026
2027Canadian Tax Principles Athabasca University
Not for Credit
Recommended Completion Date: after you complete the readings and learning activities
for Lesson 10 and before the fina
l exam
Solution to AP 19-3
The first concern is that since the trust is an inter vivos trust, any income not allocated to
beneficiaries will be subject to the maximum federal income tax rate of 33%. As this is the
same rate that would apply to both Hana and her spouse, there is no income tax
advantage to contributing property to the trust without ensuring that all trust income will
be distributed to the beneficiaries.
The second concern is that, while the trust can be used to split family income, all of the
income will have to be distributed to her 19-year-old son Habib. As her other son, Carl, is
under 18 years of age, any amounts distributed to him or used to provide benefits for him
will be attributed back to Hana.
This presents something of a problem in that the trust will have annual income of $65,000,
an amount that exceeds the $55,000 estimated to meet Habib’s needs. Since Hana
wishes to limit any income allocations to Habib’s needs only she will either have to reduce
the number of investments she wishes to contribute to the trust to reduce trust income to
$55,000 and then use the remaining $10,000 of retained income to meet the needs of
Carl, or alternatively to leave the additional $10,000 of income in the trust where it will be
subject to federal income tax at a rate of 33%.
There are a few advantages to leaving the additional income in the trust. First, as it
accumulates there will be compound earnings to the extent that after tax trust funds are
reinvested. The attribution rules do not apply to compound earnings. In addition, the
accumulation becomes part of the capital of the trust which can be distributed tax free to
meet Carl’s additional needs when he reaches 18 years of age and attribution is no longer
a concern.
This suggests that, until Carl reaches 18, $55,000 of the annual income should be used
to meet Habib’s needs, with the remainder included in the net income of the trust. When
compound earnings begin to accrue, they can be used to contribute to Carl’s needs.
The trust should be discretionary which provides Hana with the opportunity to adjust the
income and capital distributions from the trust when Carl reaches 18 and to adjust to
changing circumstances should Habib’s plans change where he no longer needs $55,000
in annual income allocations.
TAXX401v35_PracticeAssignment4_Solutions 1 © Athabasca University, February 2026
, When Carl reaches 18, the income attribution rules will no longer apply and she may wish
to allocate some additional amounts to him depending upon his future financial needs. It
is unlikely that the trust will be able to meet the needs of both children if Habib is still in
school or is unemployed.
A final concern is that the life of the trust is likely to extend beyond 21 years (until Carl
reaches 30 years of age). The ITA provides for a deemed disposition of most trust property
every 21 years. If the trust continues to invest in interest earning investments, the deemed
disposition should not be a serious problem as such property does not generally increase
significantly in value. However, if the trust invests in other property with accrued capital
gains, the deemed disposition will require recognition of these capital gains at that time.
Discretionary powers to allow a trustee to make capital distributions of property with
accrued gains prior to that time would be essential to avoid any income tax consequences.
Solution to AP 1-7
Case A
In general the CRA administratively accepts that residency terminates at the latest of:
• the date the individual leaves Canada;
• the date the individual’s family leaves Canada; and
• the date that individual establishes residency elsewhere.
As Gary’s family did not leave Canada until June 30, 2025, Gary would administratively be
considered a Canadian resident until that date. Provided he has no intention of returning to
Canada, he would be a Canadian resident for the period January 1, 2025, through June 30,
2025. He would be subject to Part I tax on his worldwide income during this period. He would
not be subject to Part I tax on his rental income since the rental only occurred after he
became a non-resident of Canada. Rather than accept the CRA administrative position, Gary
would factually be considered to have become a non-resident on February 1, 2025. This
would alleviate being subject to income tax in both Canada and Australia on the employment
income earned in Australia between February 1, 2025, and June 30, 2025.
Note to Instructors As will be discussed in Chapter 20, the income tax on the rental
income would not be subject to Part I tax unless an election was filed. The rental
income, by default, would be subject to withholding tax under Part XIII.
Case B
As noted in Folio S5-F1-C1, “Determining an Individual’s Residence Status”, commuting from
the U.S. for employment purposes does not make an individual a deemed resident under the
sojourner rules. Therefore, Sarah would not be deemed to be a Canadian resident for income
tax purposes. She would be a resident of the U.S. and a non-resident of Canada.
Sarah would, as a non-resident, be subject to Canadian Part I tax on her 2025 Canadian
employment income. She would not be subject to Canadian income tax on the interest
income she earned in her U.S. savings account.
Case C
Byron’s cruise would be considered a temporary absence from Canada. Given the facts, it
appears his intent is not to permanently sever residential ties with Canada. This position is
TAXX401v35_PracticeAssignment4_Solutions 2 © Athabasca University, February 2026
