Appendices:
A trust is a an arrangement under which an individual (the trustee) holds property for benefit of other persons (the beneficiaries). A trust provides a means for an individual (the settlor) to manage wealth for the benefit of a number of persons.
In the case of Quebec residents, a usufruct, a right of use or habitation and a substitution are deemed under subsection 248(3) to be a trust for the purposes of the Income Tax Act. These civil law institutions do not exist in the common law provinces.
The new Civil Code, which came into effect on January 1st, 1994, introduced the concept of trusts to Quebec law. Prior to this change, the institution of a "trust" did not exist under Quebec law. While there may be some legal differences between a trust under the common law and civil law systems, the basic tax concepts outlined in this section will be applicable in all provinces.
Yes. There are several different types of trusts. Depending on:
How the trust is established:
There are express trusts which are deliberately/expressly established by an agreement in writing for a particular purpose. There are trusts created due to the operation of law. When a client dies, with or without a will, the deceased's estate becomes a trust due to the operation of law. There are secret trusts whereby a beneficiary named in a will has secretly agreed to administer a trust in accordance with the wishes of the deceased individual.
When the trust is established:
Trusts can be established to take effect while a client is alive - an inter vivos trust. Trusts can also be established upon death through the will - a testamentary trust.
For Whom the trust is established:
If the trust is primarily for the benefit of a spouse - it is a spousal trust. Where the trust is primarily for the benefit of the settlor's spouse and children or other family members, it is a family trust. If the trust is established for specific individuals it is a private trust. Where it is established for charitable purposes, it is a public trust. This section deals with private trusts, rather than public trusts.
Where the trust is resident:
The residence of the majority of trustees normally dictates the residence of the trust. Where the majority of trustees reside in Canada you have a resident trust and where the majority of trustees reside outside Canada you have a non-resident trust. It is possible to have a resident trust with non-resident beneficiaries. Where a trust is resident in Canada all its income is subject to Canadian income tax. If the trust is not resident in Canada, it is taxable in Canada only on its Canadian source income.
Why the trust is established (tax or non-tax reasons):
Where the settlor maintains the ability to revoke, amend or recover trust property a revocable trust has been created and there are no income tax advantages as all income and capital gains are taxable to the settlor. The trust assets revert to the settlor upon death, so do not avoid probate. Where the settlor cannot revoke, amend or recover trust property, an irrevocable trust has been established. An irrevocable trust provides some income tax advantages that will become clear in the questions that follow.
Where the trust provides that the trustee has full discretionary powers over how and whether the income and capital will be distributed to the trust beneficiaries, it is a discretionary trust.
See Question 3 for further reasons why trusts are established.
Combinations:
The type of trust established may be an irrevocable, discretionary, inter vivos spousal trust, for example. Or you may have a revocable, discretionary, inter vivos trust, and so on.
For tax and non-tax reasons.
Tax reasons:
Non-tax reasons:
A spousal trust is primarily for the benefit of the spouse. In order to qualify as a spousal trust for Income Tax Act purposes:
A family trust is primarily for the benefit of family members.
No. Investors Group does not draft trust documents - that must be done by the client's lawyer. Investors does not provide the ongoing administrative/accounting/tax reporting services associated with a trust. Investors Group provides investment management services where the trustee of a trust wishes to invest trust assets with us. A trustee must have wide and discretionary investment powers to be able to use Investors investment products. Make sure any trust document or will provides for this if the settlor or testator expects to invest or to allow the executor/executrix to invest in vehicles other than deposit type accounts.
Note: The only Investors Group trust services provided relate to our Group Products, such as Pension Plans.
If the client (as the settlor of an inter vivos trust or as the testator or testatrix of a will establishing a testamentary trust) does not give the trustee of the inter vivos trust or the executor or executrix of the will, wide and discretionary powers to invest, the trustee/executor/executrix will only be able to invest in accordance with the provincial trust laws which are extremely restrictive. In other words, Investors mutual funds will be non-qualifying investments under most of the provincial trust statutes. Make sure your client's financial affairs can be appropriately managed by the trustee and/or executor/executrix. Make sure you can invest the trust assets in Investors' products (See "Mutual Funds as Qualified Investments for Trusts" from the June 9, 1995 Sales Bulletin at the end of this section).
It depends. If you establish an account for a client with the words "in trust" it may mean nothing, unless the client has taken other steps to create a trust. For income tax purposes, you would have to provide written evidence of the terms of the trust if Revenue Canada challenged whether a trust really existed, particularly if income splitting or the attribution rules were in issue. See question 15 in Section 4. Note that completing the Declaration For Trust Accounts Form CL2073 (a copy of which is at the end of this section), does not mean that a formal trust has been established. A formal trust is an agreement usually drawn by a lawyer for a client, which identifies the trustee, the trust property, and the terms and conditions under which the trust property is held. The Declaration for Trust Accounts form advises Investors Group that the named trustees have full authority to deal with the account. It does not contain the terms of the trust.
Property that can be vested in a trust includes:
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As mentioned above, Investors Group will invest the monies/assets of the trust on the directions of the trustee. The trustee of the trust signs a non-registered application form. The applicant is the trustee for the trust. The account can be opened in the name of the trustee in trust for the named trust or for a specific beneficiary using the Declaration for Trust Accounts form. Regular tax slips and semi-annual statements will be sent to the trustee of the trust. See Sales Information Bulletin No. 4667 dated December 8, 1993 and Declaration of Trust CL2073 at the end of this section.
No, but a Declaration for Trust Accounts form should be used, along with the Assignment to New Owner form normally used for transfers to new owners. See Question 9. (If the account is simply opened in the name of the trustee in trust, without showing the names of the trust or the beneficiary(ies), the Declaration for Trust Accounts form is not required.) Where a client personally holds Investors mutual fund units or shares that are being transferred to an inter vivos or testamentary trust, it is necessary to advise Investors Head Office in writing if the account owners (the personal account and the trust account) are in respect of the same client, to avoid any applicable acquisition and/or redemption fees.
The important parties are the settlor, trustee, capital and income beneficiaries who must be named in the trust indenture. Where a beneficiary has not been born, the trust document often refers to the "issue" of a specifically named individual.
The settlor is the person who transfers assets or cash to the trust. The person can be an individual, a corporation or partnership, and certain other trusts.
Yes, it is possible to have more than one settlor of an inter vivos trust - but not a testamentary trust. The deceased is the sole settlor of the testamentary trust.
It depends. The administration of the trust (such as keeping track of the attribution rules) may be complicated by the fact that there are two or more settlors. It may be simpler to have one settlor per trust.
A trustee may be a legal person or a corporation.
The trustee is chosen by the settlor. The majority of trustees should be Canadian residents, to have a Canadian resident trust. Where the majority of trustees are outside of Canada, you would have a foreign trust.
The settlor can be the sole trustee of a "revocable" trust. The settlor should not be the sole trustee of an "irrevocable" trust (see Questions 2, 18 and 19) that has been established for the purpose of income splitting, regardless of whether he/she is a beneficiary or not.
The executor named in the will is usually the trustee of the trust (estate) created upon death, but it is possible to name someone else as the trustee of the residuary estate under the will.
Yes.
This must be avoided, unless you are dealing with a close relative. The fiduciary responsibilities of a trustee can be cumbersome, potentially controversial, subject to conflict of interest allegations, and costly if the representative is held liable for the deceased's debts. To give an example, conflict of interest rules would prevent a trustee from earning sales commissions in connection with the trust assets. If a client has named a Representative as the trustee of an inter vivos or testamentary trust, the Representative can resign. See "Conflict of Interest Policy for Sales Representatives of Investors Group" from the December 8, 1995 Sales Bulletin at the end of this section.
Neither the settlor nor the trustee can revoke, amend or recover the property of an "irrevocable" trust. If all of the beneficiaries of the trust are of sound mind and legally capable, they may be able to terminate the trust, but this would normally require court involvement. If the trust indenture, however, provides for a "gift over" of trust property to a class of beneficiaries without legal capacity (for example because they are not yet born), it is impossible to have beneficiary consensus, so that the other living beneficiaries cannot alone terminate or amend the trust.
Yes, in accordance with the terms of the loan agreement/documentation. However, the settlor could not recover real estate or mutual funds gifted and now indefeasibly owned by the trust. If the settlor is a trust capital beneficiary, the trust could transfer trust assets to the settlor either by disposing of the asset (and triggering a gain/loss allocated to the capital beneficiary or the trust) or by transferring assets to the settlor in kind, at the trust's cost (thereby deferring the gain/loss in the hands of the recipient beneficiary).
It depends on the type of trust:
Spousal Inter Vivos or Spousal Testamentary Trust:
Transfers occur at Adjusted Cost Base (Undepreciated Capital Cost if a depreciable property), unless the settlor or the executor elects to have the spousal rollover not apply. In the case where the election is made, the transfer occurs at Fair Market Value.
Inter Vivos or Testamentary Family Trust:
Transfers occur at Fair Market Value, unless the Farm Rollover rules apply.
Yes, but only if the assets are being rolled to a spousal inter vivos or spousal testamentary trust as defined for Income Tax Act purposes. See the Spousal Rollover section.
Trust assets are deemed to be disposed of on certain dates (depending on the type of trust)
Spousal Trust
All assets of a spousal inter vivos or spousal testamentary trust are deemed to be disposed of on the death of the spousal beneficiary and every 21 years thereafter.
Other Trusts (like Inter Vivos or Testamentary Family Trust)
All assets of a trust (created after 1971) are deemed to be disposed of on the day of the trust's 21st anniversary and every 21 years thereafter.
If the terms of the trust permit, the trust could transfer the property of the trust to the capital beneficiaries at the trust's cost, immediately before the 21st anniversary, thereby deferring any gains to the capital beneficiaries. This planning idea would only be appropriate if the client no longer has a need for the trust.
If the trust has exempt beneficiaries, the trustee has been able to make an election within 6 months following the end of the trust's taxation year in which the first 21 year deemed disposition would otherwise occur, so that the deemed disposition will instead first occur on the first day there is no exempt beneficiary. If the election was made, the trustee will only be able to transfer property on a tax-deferred basis from the trust to an exempt beneficiary and the ability to allocate, but not distribute income to a Preferred Beneficiary, will no longer be permitted (see question 34 for a definition of Preferred Beneficiary).
An exempt beneficiary includes the spouse and grandparents, parents, brothers, sisters, children, nieces and nephews of the trust's designated contributor.
The trust's designated contributor is:
Note that the February 27th, 1995 Federal Budget eliminated the ability to make this election effective January 1, 1999. At that time, the 21-year deemed disposition rules will again apply, even to trusts for which the election had already been made.
For those trusts already in existence, trust property can be distributed at its cost valuation to an exempt beneficiary before 1999. The accrued capital gain will only be realized at the actual disposition of the property or the death of the exempt beneficiary, whichever occurs first.
See the "Federal Budget Overview" (Section 2 on Family Trusts) from the March 17, 1995 Sales Bulletin, which is at the end of this section, for further information.
An income beneficiary is a beneficiary who has a right to receive all or any part of the income of the trust. The income beneficiary can be one or more related or non-related, resident or non-resident persons that the settlor names in the trust document. The terms and conditions under which the income generated by the trust assets are allocated and/or distributed are provided for in the trust document. Income of the trust assets includes interest, dividends, rental income, recapture on depreciable property, and can also include realized capital gains, if provided for in the trust indenture.
The settlor can be the sole or one of many income beneficiaries. Under a discretionary trust, the trustee is given the power to allocate and distribute income at his/her total discretion - to the exclusion of one or more income beneficiaries. If the settlor is a beneficiary under a discretionary trust, generally all trust income will attribute to the settlor (as per section 75(2) of the Income Tax Act).
Under a spousal trust, only the settlor's spouse can be the income beneficiary while the spouse is alive.
A beneficiary's interest in the income of a trust is called an income interest.
A capital beneficiary is a beneficiary who has a right to receive all or any part of the capital of the trust. The capital beneficiary can be one or more related or non-related persons that the settlor names in the trust document The terms under which capital can transfer from the trust (in kind or as a realized capital gain upon the disposal by the trust of a capital property) to a capital beneficiary are detailed in the trust document. The settlor can be the sole or one of many capital beneficiaries. In a spousal trust, the capital cannot be allocated or distributed to anyone but the spouse, while the spouse is alive. The spousal trust document may provide that the capital can be used for the spouse's benefit (ie. to pay the spouse's tax bill) and the trust will still qualify as a spousal trust for Income Tax Act purposes.
A beneficiary's interest in the capital of the trust is called a capital interest.
It depends. If the income generated by the trust assets is not allocated and distributed in the year earned to the trust income beneficiaries, the trust will be taxable on the trust income. For 1995 and previous taxation years, if there were preferred beneficiaries, the trust did not have to actually distribute the trust income to the beneficiaries, but an allocation to one or more eligible preferred beneficiaries must have occurred to avoid having the trust taxed. If the trustee allocated income to a "preferred" beneficiary, but did not distribute the income to the preferred beneficiary, the preferred beneficiary would be taxed, not the trust (unless the attribution rules apply). The preferred beneficiary election is not available for tax years after 1995, unless the beneficiary is mentally or physically disabled. See more details on the preferred beneficiary election in questions 33 and 34.
It depends. If the realized capital gain is allocated to the capital beneficiaries in the year realized, the trust is not taxed.
It depends. A trust does not have to file a T3 Trust Tax Return if all of the following circumstances exist in the trust's taxation year:
(Note: The taxation year of an inter vivos trust is the calendar year. A testamentary trust may choose to end its taxation year at any time within the 12-month period following the death of the testator.)
Revenue Canada will treat the settlor's multiple trusts as one.
Yes. An inter vivos trust is taxed at the highest personal rate, i.e. 29% federal, plus provincial. A testamentary trust is taxed at the graduated federal rates - 17% on the first $29,590 of taxable income, 26% on the next $29,590 of taxable income and 29% on the rest, plus provincial taxes. In the questions that follow it will become clearer when and on what income trusts are taxed.
Yes. That means that the income beneficiary can use a dividend tax credit in respect of dividend income allocated by the trustee; and the capital beneficiary can use any available super capital gains exemption (if no CNIL) when a realized capital gain on qualified small business corporation shares or qualified farm property is allocated to the capital beneficiary.
It is possible to allocate capital gains to an income beneficiary where the trust agreement provides and/or allows for it.
In limited circumstances only. If there are preferred beneficiaries (as defined in the next question), the trustee and a preferred beneficiary may jointly elect (by filing a letter signed by both parties with the trust's tax return) to allocate part or all of the preferred beneficiary's share of the accumulating funds of the trust as taxable income of the preferred beneficiary rather than taxable income of the trust. The accumulating income (which retains its character in the hands of a preferred beneficiary) can be recognized for tax purposes by the preferred beneficiary (unless the attribution rules apply so that the settlor is taxed). Income taxes payable by the preferred beneficiary, if any, are therefore paid with funds from another source. It is possible to allow the trustee, under the terms of the trust agreement, to pay income taxes of a beneficiary arising from a preferred beneficiary election. The preferred beneficiary election has often been used when, under the terms of the trust, the beneficiaries are in a low tax bracket, and/or are not to have access to the monies (for whatever reason - the beneficiaries are too young, too immature, or the monies are to be used in the future for education or training). However, the new definition of a preferred beneficiary will be limited to beneficiaries who are mentally or physically disabled for tax years after 1995, so this planning technique will also be limited. See the "Federal Budget Overview" (Section 2 on Family Trusts) from the March 17, 1995 Sales Bulletin at the end of this section, for a complete discussion of the use of family trusts for income splitting.
Where a preferred beneficiary election can be made, it is not necessary that the income elected upon is payable ultimately to the preferred beneficiary who was taxed on the income, provided that the trust document gives the trustee the discretion to make such an allocation. The ultimate right to amounts that have been the subject of a preferred beneficiary election will be determined by the terms of the trust. For example, it is possible for the trust agreement to stipulate that a preferred beneficiary election will not affect the preferred beneficiary's or any other beneficiary's right to distributions from the trust and will not limit the trustee's discretion.
The amount of accumulating income which may be allocated to the beneficiaries by means of the preferred beneficiary election is determined based on rules found in the Income Tax Act. In a fully discretionay trust, the accumulating trust income must generally be allocated equally among the discretioning beneficiaries. Where the spouse of the settlor is a beneficiary, only the spouse can make a preferred beneficiary election.
For tax years commencing after 1995, a preferred beneficiary is a Canadian resident who is entitled to the tax credit for mental or physical impairment and is either:
(For tax years commencing prior to 1995, there was no requirement that the preferred beneficiary be mentally or physically disabled).
The 1997 Federal Budget proposes to expand the definition of preferred beneficiary (commencing for trust taxation years ending after February 18, 1997) so as to include adults who are dependent on others by reason of mental or physical infirmity (such individuals may no necessarily qualify for the disability tax credit). In order to qualify as a dependent, the beneficiary's income (computed without reference to any amount designated under the preferred beneficiary election) cannot exceed $6,456. This maximum amount of income will be indexed for inflation.
No. A trust can, however, notionally retain part of the trust income otherwise payable to the beneficiary which can be offset by trust losses. Also, trust capital losses cannot be allocated to beneficiaries. Trust capital losses can be used to offset trust capital gains only!
No.
A trust can use a charitable credit and a dividend tax credit. A trust cannot use a capital gains exemption, except under a spousal trust where the spouse beneficiary dies with an available capital gains exemption.
No.
Yes.
A testamentary trust is a trust created through the will of the deceased. For example, the will may state that the executor/executrix shall hold in trust the estate assets for the benefit of the children and that the assets of the estate shall be transferred to the children in graduated stages, upon reaching specific ages. The will would have created a family testamentary trust and the executor/executrix in this case would be the trustee.
Whether a spousal or family testamentary trust is created by the will of the deceased, it is possible for the surviving beneficiaries to enjoy an excellent income splitting opportunity. While alive, the client may have income split with a spouse (using a Spousal RRSP) to reduce the overall family tax bill. Now that the deceased is gone, there is only one remaining taxpayer - the surviving spouse. If the surviving spouse inherits an estate worth $1 million, the investment income generated by that estate will be taxed solely in the hands of the surviving spouse. If the client instead provides that the estate assets shall transfer directly to a spousal testamentary trust, and the $1 million testamentary trust assets generate $100,000 of investment income in the first year, the trustee can elect to have both the trust and the spouse claim some of the income, despite the fact that all of the income has been distributed to the surviving spouse. With two taxpayers, the overall tax bill will be reduced. Here is an example:
Assumptions:
$ 1 million trust assets generate $100,000
interest income, all of which is flowed out to the spouse. The
Trustee elects to include $50,000 in the trust's name and $50,000
in the surviving spouse beneficiary's name, instead of having the
surviving spouse include 100% in his/her hands
| No Testamentary Trust | |
| Spouse | Federal Tax |
| 17% of $30,000 | $ 5,100 |
| 26% of $30,000 | $ 7,800 |
| 29% of $40,000 | $11,600 |
| Total | $24,500 |
| With Spousal Testamentary Trust | |||
| Spouse | Federal Tax | Trust | Federal Tax |
| 17% of $30,000 | $ 5,100 | 17% of $30,000 | $ 5,100 |
| 26% of $20,000 | $ 5,200 | 26% of $20,000 | $ 5,200 |
| Total | $10,300 | Total | $10,300 |
As you can see from the table on the previous page, there would be a federal tax saving of $3,900 ($24,500 less (2 X $10,300)) before the deduction of any personal, age, pension or other credits that may be available to the surviving spouse. A trust cannot use any personal exemptions or a capital gains exemption, but is eligible for a dividend tax credit or a foreign tax credit. If you assume the provincial tax rate is 50% of federal taxes payable (50% of $3,900) then the total federal/provincial tax saved in this simplistic example would be $5,580. That is $5,580 more that can be invested rather than paid in taxes. For a comprehensive example of the income splitting opportunity for a spousal trust - see Chapter 12 of the Tax Library - pages 15 - 17.
A testamentary trust can be provided for under a will or by having a codicil (which provides for the trust) added to an existing will. Lawyers may charge $100 or more per hour. It is important that you develop a working relationship with a competent, reliable centre of influence. If you can work out a mutually beneficial relationship for your clients, yourself and your centre of influence, the trust work may be provided for on a cost-effective basis.
Once you know the size of a client's expected estate, and the surviving spouse's combined taxable income (from estate and personal earnings such as employment, OAS or other earnings), you will be able to determine whether the income splitting opportunity with the testamentary trust is appropriate.
If the client and the spouse jointly own most property, then the assets cannot transfer to a testamentary trust, as under right of survivorship, the assets will bypass the estate and are owned 100% by the surviving spouse upon death.
If a surviving spouse is a high income earner and is already in a 26% or 29% marginal tax rate, then establishing the testamentary trust (to be taxed at 17% on the first $29,590 of trust taxable income) could be a good idea.
Even if the spouse has no taxable income in her/his own name, but the estate will generate sufficient taxable income (more than $29,590), then the testamentary trust would make sense as each (the spouse and the trust) could divide the taxable income, so that up to $59,180 could be subject to a 17% federal tax rate.
An inter vivos trust is a trust that takes effect while the settlor is alive.
It depends. Because there are establishment and ongoing trust costs, it would be important to determine the benefits versus the costs. Where "control" over assets is critical to a client, the trust offers the ultimate in "control" while achieving estate planning goals.
It depends. See Question 42