Unfortunately, taxpayers sometimes play fast and loose with the legalities surrounding family trusts. Sometimes trustees will purport to make distributions from a trust to its beneficiaries. The beneficiaries treat the amounts received as income for tax purposes, but then those amounts end up in the hands of other individuals, often the parents of the beneficiaries in question, who are often also the trustees of the trust (fiduciary obligations be damned). The CRA, when it audits a trust, will look closely at its distributions to determine who actually enjoyed the benefit of them.
In Laplante c Canada, 2018 CAF 193 [French only], the taxpayer paid more attention to the legalities but then ran afoul of the civil law equivalent of the “sham” doctrine. The trust, pursuant to written resolutions, distributed gains realized on qualified small business corporation shares to family members of the trustee/taxpayer. The family members received cheques for the distributions from the trust but endorsed the cheques to the taxpayer and signed deeds of gift giving the money to him. The family members claimed the capital gain exemption; the taxpayer paid their resulting minimum tax liabilities. The Court held that the taxpayer was the true beneficiary of the payments in question. [Summary in English from taxinterpretations.com here.]