Why does income I put in a trust for my spouse or kids get attributed back to me for tax?

The Income Tax Act contains attribution rules specifically designed to stop income splitting through a trust when you transfer or loan property to a trust for a spouse or a minor child. If you're the one who contributed the property, income the trust earns on it can be attributed back to you and taxed on your own return instead of the beneficiary's, even though the trust legally owns the property and the beneficiary may eventually receive it. Capital gains attribution works somewhat differently for a minor child than for a spouse, so the exact effect depends on who the beneficiary is.

The rule exists because, without it, a higher-income parent could simply move income-producing investments into a trust for a spouse or child in a lower tax bracket and shift the tax bill to them for little real economic change. Attribution generally continues for as long as the property, or property substituted for it, stays in the trust and the relationship continues to apply.

There are legitimate ways to reduce or avoid attribution, such as a properly structured loan at a prescribed rate, but they have to be set up correctly and followed precisely, so get advice before assuming a trust will split income the way you expect.