Chapter 21

Chapter 21Chapter 21

Trusts And Estate PlanningTrusts And Estate Planning

© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 22

What is a Trust?What is a Trust?

Settlor Trustee Beneficiaries

Property Benefits

LegalOwnership


Legal Vs. TaxLegal Vs. Tax

A trust is not a A trust is not a separate legal entityseparate legal entity

Income Tax Act views Income Tax Act views a trust as a separate a trust as a separate taxable entitytaxable entity


Trust Vs. EstateTrust Vs. Estate

In general, the term estate refers to the In general, the term estate refers to the property and possessions of an individualproperty and possessions of an individual


Trust Vs. EstateTrust Vs. Estate

ITA 104(1)ITA 104(1) In this Act, a reference to a trust or In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") estate (in this subdivision referred to as a "trust") shall, ...shall, ...

ITA views “estate” as the property of a deceased ITA views “estate” as the property of a deceased individual prior to its distributionindividual prior to its distribution

ITA requires a “trust” return for the income of an ITA requires a “trust” return for the income of an individual’s estateindividual’s estate


Establishing a TrustEstablishing a Trust

Requires three certaintiesRequires three certainties

– Certainty of intentionCertainty of intention

– Certainty of propertyCertainty of property

– Certainty of beneficiariesCertainty of beneficiaries


Establishing a TrustEstablishing a Trust

Who Cares?

If a trust is not clearly established, there may be unexpected tax consequence (e.g., income taxed in hands of settlor

rather than beneficiaries).


Non-Tax Uses Of TrustsNon-Tax Uses Of Trusts

Administration of assetsAdministration of assets

Creditor proofingCreditor proofing

Privacy (wills require probate, trusts do Privacy (wills require probate, trusts do not)not)

Ascertaining beneficiariesAscertaining beneficiaries


Classification of Personal TrustsClassification of Personal Trusts

TestamentaryTestamentary Inter VivosInter Vivos

Spousal or common-law partner

Spousal or common-law partner

Other beneficiaries Alter ego

Joint spousal or common-law partner

Family


Taxation of TrustsTaxation of Trusts

Settlor CapitalBeneficiaries

IncomeBeneficiaries

TrustProperty

Property At FMV

Property At Trust’s Cost

TrustIncome

Retained Income

(taxed in trust)

Distributed Income

(beneficiaries taxed)


Rollovers to a TrustRollovers to a Trust

In general: Contributions are a disposition In general: Contributions are a disposition at fair market valueat fair market value

ExceptionsExceptions– Spouse or common-law partnerSpouse or common-law partner– Alter egoAlter ego– Joint spouse or common-law partnerJoint spouse or common-law partner


Rollovers to a TrustRollovers to a TrustSpouse or Common-Law PartnerSpouse or Common-Law Partner

Inter Vivos

ITA 73(1.01)(c)(i) The individual's spouse or common-law partner is entitled to receive all of the income of the trust that arises before the spouse's or common-law partner's death and no person except the spouse or common-law partner may, before the spouse's or common-law partner's death, receive or otherwise obtain the use of any of the income or capital of the trust.


Spouse or Common-Law PartnerSpouse or Common-Law Partner

Testamentary

ITA 70(6)(b) A trust, created by the taxpayer's will, that was resident in Canada immediately after the time the property vested indefeasibly in the trust and under which

(i) the taxpayer's spouse or common-law partner is entitled to receive all of the income of the trust that arises before the spouse's or common-law partner's death, and

(ii) no person except the spouse or common-law partner may, before the spouse's or common-law partner's death, receive or otherwise obtain the use of any of the income or capital of the trust.


Alter EgoAlter Ego

Only Inter Vivos

ITA 73(1.01)(c)(ii) The individual is entitled to receive all of the income of the trust that arises before the individual's death and no person except the individual may, before the individual's death, receive or otherwise obtain the use of any of the income or capital of the trust.


Joint Spousal or Joint Spousal or Common-Law PartnerCommon-Law Partner

ITA 73(1.01)(c)(iii)ITA 73(1.01)(c)(iii) either either– the individual or the individual's spouse is, in combination with the individual or the individual's spouse is, in combination with

the other, entitled to receive all of the income of the trust that the other, entitled to receive all of the income of the trust that arises before the later of the death of the individual and the arises before the later of the death of the individual and the death of the spouse and no other person may, before the later of death of the spouse and no other person may, before the later of those deaths, receive or otherwise obtain the use of any of the those deaths, receive or otherwise obtain the use of any of the income or capital of the trust, orincome or capital of the trust, or

– the individual or the individual's common-law partner is, in the individual or the individual's common-law partner is, in combination with the other, entitled to receive all of the income combination with the other, entitled to receive all of the income of the trust that arises before the later of the death of the of the trust that arises before the later of the death of the individual and the death of the common-law partner and no other individual and the death of the common-law partner and no other person may, before the later of those deaths, receive or person may, before the later of those deaths, receive or otherwise obtain the use of any of the income or capital of the otherwise obtain the use of any of the income or capital of the trust.trust.


Rollovers to a Capital BeneficiaryRollovers to a Capital Beneficiary

General Rule: Transfer at trust’s tax costGeneral Rule: Transfer at trust’s tax cost

Exceptions for transfers out of:Exceptions for transfers out of:– Spouse or common-law partner trustSpouse or common-law partner trust– Alter ego trustAlter ego trust– Joint spouse or common-law partner trustJoint spouse or common-law partner trust


21 Year Deemed Disposition21 Year Deemed Disposition

Deemed disposition/acquisition Deemed disposition/acquisition every 21 yearsevery 21 years

Limits the deferral of capital Limits the deferral of capital gains within the trustgains within the trust


Net Income of a TrustNet Income of a Trust

In general: In general: Follows the ITA 3 rules as Follows the ITA 3 rules as applied to an individualapplied to an individual

Additional adjustments Additional adjustments requiredrequired


Net Income AdjustmentsNet Income Adjustments

Deductions available for:Deductions available for:– Amounts paid or payable to beneficiariesAmounts paid or payable to beneficiaries– Trustee’s or executor’s feesTrustee’s or executor’s fees– Amounts paid by the trust on behalf of Amounts paid by the trust on behalf of

beneficiariesbeneficiaries



Preferred Beneficiary Preferred Beneficiary ElectionElection– Income retained in trust, Income retained in trust,

taxed in hands of beneficiarytaxed in hands of beneficiary– Only applicable to Only applicable to

beneficiariesbeneficiariesWho are eligible for the disability Who are eligible for the disability tax credit; ortax credit; orCan be claimed as an infirm Can be claimed as an infirm dependant over 17dependant over 17



Amounts deemed not to be paidAmounts deemed not to be paid– A distribution that is taxed in the trust rather A distribution that is taxed in the trust rather

than in the hands of the recipient beneficiarythan in the hands of the recipient beneficiary– Reasons for usingReasons for using

Lower ratesLower rates

Avoidance of instalmentsAvoidance of instalments

Use of trust lossesUse of trust losses



Amounts retained for a Amounts retained for a beneficiary under 21 years of beneficiary under 21 years of ageage– Retained in the trust but taxed in Retained in the trust but taxed in

the hands of the beneficiarythe hands of the beneficiary– Beneficiary must be under 21 Beneficiary must be under 21

during the yearduring the year– Amounts must vest irrevocably Amounts must vest irrevocably

with the beneficiary.with the beneficiary.


Taxable Income of a TrustTaxable Income of a Trust

Net Income of the trust

Taxable Income of the trust

Same deductions as those available to

individuals


Income Allocations to BeneficiariesIncome Allocations to Beneficiaries

To be deductible, amounts must be paid or payableTo be deductible, amounts must be paid or payable

Not considered payable if:Not considered payable if:

– A beneficiary can only enforce payment of an amount of A beneficiary can only enforce payment of an amount of income by forcing the trustee to wind up the trust.income by forcing the trustee to wind up the trust.

– The beneficiary’s right to income is subject to the approval The beneficiary’s right to income is subject to the approval of a third party.of a third party.

– Payment of income is at the trustee’s discretion.Payment of income is at the trustee’s discretion.

– The beneficiary has the power to amend the trust deed and The beneficiary has the power to amend the trust deed and must do so to cause the income to be payable.must do so to cause the income to be payable.


Determination of DistributionsDetermination of Distributions

DiscretionaryDiscretionary– Amounts Amounts

at the discretion of trusteeat the discretion of trustee– Timing Timing

at the discretion of trusteeat the discretion of trustee

Non-DiscretionaryNon-Discretionary– Amounts and their timing Amounts and their timing

specified in trust agreementspecified in trust agreement


Flow Through ProvisionsFlow Through Provisions

Dividends distributedDividends distributed– Beneficiary will gross upBeneficiary will gross up– Beneficiary will get creditBeneficiary will get credit

Retained in trustRetained in trust– Trust will gross upTrust will gross up– Trust will get creditTrust will get credit

Will retain eligible/non-Will retain eligible/non-eligible statuseligible status



Capital GainsCapital Gains– If distributedIf distributed

One-half taxedOne-half taxed

One-half tax freeOne-half tax free

– If retainedIf retainedOne-half taxedOne-half taxed

One-half becomes part of One-half becomes part of trust’s capitaltrust’s capital



Tax on split incomeTax on split income– A tax on specified types of A tax on specified types of

incomeincome– Applicable to those under 18Applicable to those under 18

If specified income earned in If specified income earned in trust:trust:– It will be subject to this tax if It will be subject to this tax if

beneficiary is under 18beneficiary is under 18



Business IncomeBusiness Income– Must be calculated at trust Must be calculated at trust

levellevel– Will include CCA, recapture, Will include CCA, recapture,

and terminal lossesand terminal losses



Principal Residence ExemptionPrincipal Residence Exemption– Owned by trustOwned by trust– Ordinarily inhabited by beneficiaryOrdinarily inhabited by beneficiary– Exemption availableExemption available


Trust Tax PayableTrust Tax PayableTestamentary TrustsTestamentary Trusts

Taxed the progressive rates Taxed the progressive rates applicable to individualsapplicable to individuals

Multiple testamentary trustsMultiple testamentary trusts

– If same beneficiariesIf same beneficiaries

– May be taxed as one trustMay be taxed as one trust

TaintingTainting

– May lose testamentary status if May lose testamentary status if contributions by living personcontributions by living person


Trust Tax PayableTrust Tax PayableInter Vivos TrustsInter Vivos Trusts

Undistributed income Undistributed income taxed at maximum rate of taxed at maximum rate of 29 percent29 percent


Tax CreditsTax Credits

Many not available Many not available (e.g., medical expenses)(e.g., medical expenses)

AvailableAvailable– Donation tax creditsDonation tax credits– Dividend tax creditsDividend tax credits– Foreign tax creditsForeign tax credits– Investment tax creditsInvestment tax credits– Political contributions tax creditPolitical contributions tax credit


Alternative Minimum TaxAlternative Minimum Tax

Applicable To TrustsApplicable To Trusts

The $40,000 exemption is The $40,000 exemption is only available to only available to testamentary truststestamentary trusts


Income AttributionIncome Attribution

Applicable to spouses, common-law Applicable to spouses, common-law partners and related minorspartners and related minors

Applicable to transfers to a trust where the Applicable to transfers to a trust where the beneficiary is a spouse, common-law beneficiary is a spouse, common-law partner, or related minorpartner, or related minor

Occurs when income is allocated to such Occurs when income is allocated to such individualsindividuals


Reversionary TrustsReversionary Trusts

Attribution to settlor:Attribution to settlor:– If the transferred property can If the transferred property can

revert to settlorrevert to settlor– If the settlor can determine the If the settlor can determine the

persons that will receive the persons that will receive the transferred propertytransferred property

– The transferred property cannot The transferred property cannot be disposed of except with be disposed of except with transferor’s consenttransferor’s consent


Purchase or Sale of an Purchase or Sale of an Interest in a TrustInterest in a Trust

Income InterestIncome Interest– Cost usually nilCost usually nil– Gain will be property incomeGain will be property income

Capital InterestCapital Interest– May have a costMay have a cost– Gain or loss will be capitalGain or loss will be capital


Tax PlanningTax PlanningFamily TrustFamily Trust

Trust established for family Trust established for family membersmembers

Can be used to enforce Can be used to enforce behaviour (e.g., showing up behaviour (e.g., showing up for family dinners)for family dinners)

Can be used for income Can be used for income

splittingsplitting


Tax PlanningTax PlanningSpousal TrustsSpousal Trusts

Can provide for management of Can provide for management of assetsassets

Can ensure appropriate Can ensure appropriate distribution of assets subsequent distribution of assets subsequent to death of spouse to death of spouse (settlor’s children in the event of (settlor’s children in the event of

spouse re-marriagespouse re-marriage))


Tax PlanningTax PlanningAlter Ego and JointAlter Ego and Joint

Avoidance of ProbateAvoidance of Probate– CostlyCostly– Time consumingTime consuming– Multiple jurisdictionsMultiple jurisdictions– Probate in public domainProbate in public domain

Establishment in low tax Establishment in low tax jurisdiction (e.g., Alberta)jurisdiction (e.g., Alberta)


Estate PlanningEstate Planning

Non-Tax ConsiderationsNon-Tax Considerations– Intent of testatorIntent of testator– Preparation of final willPreparation of final will– Preparation of living willPreparation of living will– Ensuring liquidityEnsuring liquidity– Avoiding family disputesAvoiding family disputes– Expediting the transitionExpediting the transition


Estate PlanningEstate Planning

Tax considerationsTax considerations– Pre-death planningPre-death planning– Planning in the year of deathPlanning in the year of death– Income splittingIncome splitting– Foreign jurisdictionsForeign jurisdictions– AdministrationAdministration


Estate FreezeEstate Freeze

ObjectivesObjectives

– Transfer income to low tax Transfer income to low tax beneficiariesbeneficiaries

– Freeze value of assetsFreeze value of assets

– Avoid immediate taxationAvoid immediate taxation

– Transfer future growthTransfer future growth

– Retain control of assetsRetain control of assets

Not always possible to achieve Not always possible to achieve all of these goalsall of these goals


Estate Freeze TechniquesEstate Freeze Techniques

GiftsGifts– Transfers growth and incomeTransfers growth and income

– Generates current income Generates current income unless transferee is a spouse unless transferee is a spouse or common-law partneror common-law partner

– Attribution rules could applyAttribution rules could apply

– Tax on split income could applyTax on split income could apply

– Transferor loses control over Transferor loses control over assetsassets



Instalment salesInstalment sales– Could use capital gains reservesCould use capital gains reserves– Would require payment at FMV to avoid Would require payment at FMV to avoid

attributionattribution– Loss of controlLoss of control



Establishing an inter vivos trustEstablishing an inter vivos trust– Transfers income and future growthTransfers income and future growth– Will attract immediate taxation unless it is a Will attract immediate taxation unless it is a

spousal trustspousal trust– Can result in income attribution and tax on Can result in income attribution and tax on

split incomesplit income



Holding companyHolding company– Can accomplish most objectivesCan accomplish most objectives– Without rollover, will result in immediate Without rollover, will result in immediate

taxation on transfertaxation on transfer



Rollover under ITA 85 or Rollover under ITA 85 or ITA 86ITA 86– Can accomplish all Can accomplish all

objectivesobjectives– ITA 86 requires an existing ITA 86 requires an existing

corporationcorporation– ITA 86 is simpler in that is ITA 86 is simpler in that is

does not require an electiondoes not require an election


GST and TrustsGST and Trusts

A trust is a person under the Excise Tax A trust is a person under the Excise Tax ActAct

Distributions of non-commercial property Distributions of non-commercial property are exemptare exempt

Distributions of financial assets are Distributions of financial assets are exemptexempt

Chapter 21

Documents

Transcript of Chapter 21