trusts and estate planning what is a trust? © 2009 clarence byrd inc.2 settlortrusteebeneficiaries...

Trusts And Estate Planning

What is a Trust?

© 2009 Clarence Byrd Inc. 2

Settlor Trustee Beneficiaries

Property Benefits

LegalOwnership

Legal Vs. Tax A trust is not a

separate legal entity

Income Tax Act views a trust as a separate taxable entity


Trust Vs. Estate

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


Trust Vs. Estate ITA 104(1) In this Act, a reference to a

trust or estate (in this subdivision referred to as a “trust”) shall, ...

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

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


Establishing a Trust

Requires three certainties

Certainty of intention

Certainty of property

Certainty of beneficiaries


Establishing a Trust


Who Cares?

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

rather than beneficiaries).

Non-Tax Uses Of Trusts

Administration of assets

Creditor proofing

Privacy (wills require probate, trusts do not)

Avoiding changes in beneficiaries


Classification 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 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 Trust

In general: Contributions are a disposition by the settlor at fair market value

ExceptionsSpouse or common-law

partner trustAlter ego trustJoint spouse or common-law

partner trust


Rollovers to a Trust- Spouse 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 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 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 Common-Law Partner ITA 73(1.01)(c)(iii) either

• the individual or the individual's spouse is, in combination with 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 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 income or capital of the trust, or

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


Rollovers to a Capital Beneficiary General Rule: Transfer at trust’s tax cost

Exceptions for transfers out of:

Spouse or common-law partner trust

Alter ego trust

Joint spouse or common-law partner trust


21 Year Deemed Disposition Deemed disposition/acquisition

every 21 years

Limits the deferral of capital gains within the trust


Net Income of a Trust

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

Additional adjustments required


Net Income Adjustments

Deductions available for:Amounts paid or payable to beneficiariesTrustee’s or executor’s feesAmounts paid by the trust on behalf of

beneficiaries


Net Income Adjustments Preferred Beneficiary Election

Income retained in trust, taxed in hands of beneficiary

Only applicable to beneficiaries○ Who are eligible for the disability

tax credit; or○ Can be claimed as an infirm

dependant over 17


Net Income Adjustments

Amounts deemed not to be paidA distribution that is taxed in the trust

rather than in the hands of the recipient beneficiary

Reasons for using○ Lower rates○ Avoidance of instalments○ Use of trust losses


Net Income Adjustments Amounts retained for a

beneficiary under 21 years of age

• Retained in the trust but taxed in the hands of the beneficiary

• Beneficiary must be under 21 during the year

• Amounts must vest irrevocably with the beneficiary.


Taxable Income of a Trust


Net Income of the trust

Taxable Income of the trust

Same deductions as those available to

individuals

Income Allocations to Beneficiaries To be deductible, amounts must be paid or payable Not considered payable if:

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

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

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

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


Determination of Distributions Discretionary

Amounts at the discretion of trustee

Timing at the discretion of trustee

Non-DiscretionaryAmounts and their timing

specified in trust agreement


Flow Through Provisions

Dividends distributedBeneficiary will gross upBeneficiary will get credit

Retained in trustTrust will gross upTrust will get credit

Will retain eligible/non-eligible status



Capital Gains If distributed

○ One-half taxed○ One-half tax free

If retained○ One-half taxed○ One-half becomes part of

trust’s capital



Tax on split incomeA tax on specified types of

income (see Chapter 10)Applicable to those under 18

If specified income earned in trust:

It will be subject to this tax if beneficiary is under 18



Business IncomeMust be calculated at trust

levelWill include CCA, recapture,

and terminal losses



Principal Residence ExemptionOwned by trust

Ordinarily inhabited by beneficiary

Exemption available


Trust Tax PayableTestamentary Trusts

Taxed using the progressive rates applicable to individuals

Multiple testamentary trustsIf same beneficiaries may be

taxed as one trust

TaintingMay lose testamentary status if

contributions by living person


Trust Tax PayableInter Vivos Trusts

Undistributed income taxed at maximum rate of 29 percent


Tax Credits

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

AvailableDonation tax creditsDividend tax credits (eligible and non-eligible)Foreign tax creditsInvestment tax credits


Alternative Minimum Tax

Applicable To Trusts

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


Income Attribution

Applicable to spouses, common-law partners and related minors

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

Occurs when income is allocated to such individuals


Reversionary Trusts

Attribution to settlor:If the transferred property can

revert to settlorIf the settlor can determine the

persons that will receive the transferred property

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


Purchase or Sale of an Interest in a Trust

Income InterestCost usually nilGain will be property income

Capital InterestMay have a costGain or loss will be capital


Tax PlanningFamily Trust

Trust established for family members

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

Can be used for income

splitting


Tax PlanningSpousal Trusts

Can provide for management of assets

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


Tax PlanningAlter Ego and Joint Spousal

Avoidance of ProbateCostlyTime consumingMultiple jurisdictionsProbate in public domain

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


Estate Planning

Non-Tax ConsiderationsIntent of testatorPreparation of final willPreparation of living willEnsuring liquidityAvoiding family disputesExpediting the transition


Estate Planning

Tax considerationsPre-death planningPlanning in the year of deathIncome splittingForeign jurisdictionsAdministration


Estate Freeze Objectives

Transfer income to low tax beneficiaries

Freeze value of assets

Avoid immediate taxation

Transfer future growth

Retain control of assets

Not always possible to achieve all of these goals


Estate Freeze Techniques Gifts

Transfers growth and income

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

Attribution rules could apply

Tax on split income could apply

Transferor loses control over assets


Estate Freeze Techniques Instalment sales

Could use capital gains reservesWould require payment at FMV to avoid

attributionLoss of control


Estate Freeze Techniques Establishing an inter vivos trust

Transfers income and future growthWill attract immediate taxation unless it is a

spousal trustCan result in income attribution and tax on

split income


Estate Freeze Techniques Holding company

Can accomplish most objectivesWithout rollover, will result in immediate

taxation on transfer


Estate Freeze Techniques Rollover under

ITA 85 or ITA 86Can accomplish all objectivesITA 86 requires an existing

corporationITA 86 is simpler in that it

does not require an election


Specified Investment Flow Through Entities (SIFTs) SIFT Partnership

Canadian residentSecurities publicly

tradedHolds non-portfolio

properties

SIFT TrustCanadian residentSecurities publicly

tradedHolds non-portfolio

properties


Specified Investment Flow Through Entities (SIFTs) The problem

High tax rates on publicly traded corporations

○ Integration doesn’t work○ Makes flow through income attractive

Non-residents and tax exempt entities○ Non-residents pay low rates○ Tax exempts pay no tax○ Makes flow through income attractive


Specified Investment Flow Through Entities (SIFTs) The solution

Tax income from non-portfolio propertiesNon-portfolio

○ SecuritiesGreater than 10 percent of equity of investeeGreater than 50 percent of the equity of the SIFT

○ Real and resource properties (more than 50 percent of the SIFT’s equity)

○ Property used to carry on a business


Specified Investment Flow Through Entities (SIFTs)


Applicable Rate

Basic Rate 38%

Abatement (10%)

General Rate Reduction ( 9%)

Provincial SIFT Factor (Varies) 13%

Total 32%

Specified Investment Flow Through Entities (SIFTs) Mechanics Of Tax – Partnerships

Part IX.1 tax on earnings of non-portfolio properties

After tax amount is deemed to be a dividend received from a taxable Canadian Corporation

Can be allocated to partners as dividends (generally eligible)


Specified Investment Flow Through Entities (SIFTs) Mechanics Of Tax – Trusts

Earnings from non-portfolio properties taxed at 19%, plus provincial factor

When after tax amount is distributed, it is deemed to be a dividend (generally eligible)


trusts and estate planning what is a trust? © 2009 clarence byrd inc.2 settlortrusteebeneficiaries...

Documents

trust spouse

clarence byrd

taxa trust

individuals spouse

individuals death

partners death

taxpayers spouse

individuals estate