If my family trust loans money to a beneficiary instead of distributing it, is that taxable?

A genuine loan from a family trust to a beneficiary isn't itself taxable income to the beneficiary, in the way an actual distribution of trust income or capital would be — a real loan has to be repaid, so it isn't treated as the beneficiary receiving income or capital from the trust. That said, the CRA and the courts look closely at whether something labelled a "loan" is actually one, based on whether there's a genuine obligation to repay, realistic terms, and consistent treatment on both the trust's and the beneficiary's records, rather than simply calling a distribution a loan to avoid tax on it.

If a "loan" has no real repayment terms, no interest, and is never actually repaid, the CRA can recharacterize it as a distribution, meaning the amount becomes taxable to the beneficiary despite the paperwork calling it something else. Interest-free or low-interest loans to a beneficiary can also raise the same attribution concerns that apply to loans to a spouse or minor child, depending on who the beneficiary is.

Because the line between a real loan and a disguised distribution is fact-specific, document genuine loan terms and get advice before treating a trust loan as automatically tax-free.