Tax Tip[] Trusts

The Deceased’s Estate Will Be Required To Pay The Tax Instead of The Trust

“We encourage you to speak with your tax advisor regarding the significant impact of these new rules”

New Legislation Will Affect Traditional Estate Planning (Part I)

New tax rules that received Royal Assent on December 17, 2014 will significantly impact past, present and future estate planning.  This week we will address one change and next week, another, just to ring in the holidays on a cheerful note!

The new rules will significantly change the taxation of alter ego trusts, joint partner trusts and testamentary spousal / common law partner trusts, after 2015 (even if they were created prior to 2016).   We last discussed alter ego trusts in Tax Tip 10-29 and previously discussed the tax implications upon death of the spouse or the last to die spouse in Tax Tip 10-16

The current rules deem these trusts to have disposed of their assets on the date of the death of:

  1. The sole beneficiary for an alter ego trust;
  2. The last to die spouse or common law partner for a joint partner trust; and
  3. The spouse beneficiary for a testamentary spousal trust;

Currently, each of these types of trusts report the deemed disposition and include such income or loss  at the end of the affected taxation year.  The new rules will deem the affected trust(s) to have a new taxation year end at the end of the day of death. 

In addition, the affected trust will be deemed to have paid out the income (including the deemed dispositions referred to above) to the deceased individual.  Accordingly, instead of being taxed in the trust, the income from the deemed disposition and other items will be included in the deceased’s final income tax return instead of the trust’s. 

What does this mean?  Most notably, it means the deceased’s estate will be required to pay the tax instead of the trust (although the trust will be jointly and severally liable for the payment of the tax).

These changes are significant and traditional estate planning will now have to be reconsidered.  For example:

  1. If the beneficiaries of the affected trust(s) are different than the beneficiaries of the estate of the deceased, inequities could arise.  Will the executors be able to reconcile the two without breaching their fiduciary duties?
  2. If the province of residency of the deceased individual is different than the affected trust such disparity could increase the overall tax liability that was previously planned for.  Will these changes require revision to a Taxpayer’s current planning and insurance strategies?
  3. In some cases, the affected trusts may own private corporation shares.  Traditional planning involving such cases would ensure that the deemed disposition, upon death, of the trust’s assets would not result in double taxation when the corporation ultimately distributed funds to its shareholder, the trust.  Will such traditional planning still work?  This answer can only be determined on a case by case basis.

The Joint Committee on Taxation (of the Chartered Professional Accountants of Canada and the Canadian Bar Association) as well as STEP Canada raised these issues with the Department of Finance when the new rules were first proposed.  At the Canadian Tax Foundation’s recent Annual Conference, the Department of Finance acknowledged the concerns but stated that no changes will be forthcoming.   With the granting of Royal Assent to the unadjusted rules, this statement has been confirmed.

Stay tuned.  There’s more to come next week.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Immigrant Trusts

“the immigrant trust exemption was withdrawn.”

For forty years, Canada allowed an exemption from tax for a non-resident trust. As a general rule, if a Canadian resident person transfers property to a foreign trust, the trust will be deemed Canadian resident, and therefore taxable on its world income. An exemption from this deemed residence (and tax on world income) was allowed for a trust where contributions were only made by an individual or individuals who had not been resident in Canada for 60 months. The exemption was limited to the 60 months and was often used by a person immigrating to Canada.  These types of trusts are typically referred to as immigrant trusts.

In the February, 2014 Federal Budget, the immigrant trust exemption was withdrawn for all immigrant trusts, even if they were already created. If no contributions were made on or after the budget date, an immigrant trust will be taxable on its world income starting January 1, 2015. Otherwise, the trust became taxable on its world income from January 1, 2014 onwards.

All persons with immigrant trusts will benefit from professional advice concerning various tax planning options which are available. Also, if the trust is going to be wound up, or made Canadian resident by a change of trustees, a variety of considerations apply. These include:

  • How exactly to wind up the trust and any underlying corporate restructuring.
  • When to wind up the trust (before the end of 2014 or in 2015).
  • When to change the trustee, if this is the preferred course of action (in 2014 or early in 2015).

It is very important to note that while some immigrant trusts will be exempt from Canadian tax until the end of 2014, a distribution of income from the immigrant trust to a Canadian resident beneficiary will be taxable. Because of this, the tax planning will not be as straight forward as it might first appear.

If you require assistance in dealing with the change in the taxation of an immigrant trust, we would be happy to assist you.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Residence of Trusts

“Residence of Trusts.”

The Supreme Court of Canada recently confirmed the decisions of two lower courts and ruled that a trust is resident where its central management and control is located. (The case is variously reported as Garron, St. Michael Trust Corp. and Fundy Settlement.) The Supreme Court held that the principles used in determining the residency of corporations should be applied to trusts. While this decision related to the residence of two Barbados trusts, it has implications for domestic trusts. Before this case, it was generally accepted that a trust is resident where the trustee is resident.

In arriving at its decision, the Supreme Court found that the management and control of the two Barbados trusts was exercised by the main beneficiaries, who were Canadian residents, and that the Barbados-resident trustee provided little more than administrative services.

Clearly, this decision has serious tax implications for both domestic and offshore trusts. A trust with Canadian resident beneficiaries, who effectively manage the trust by giving “directions” to the trustee, may come under attack by the CRA, who will assert that the trust has its central management and control in the Canadian province where the beneficiaries are resident and is consequently subject to Canadian federal tax and tax in that province.

Tax problems can be anticipated where a trustee is resident offshore, or where a domestic trust has a trustee resident in a lower-tax province such as Alberta, and the main beneficiaries, resident elsewhere, are accustomed to giving directions to the trustee.

Beneficiaries with interests in domestic or offshore trusts should be made aware of this important decision and its potential consequences. If the beneficiaries have been relying on the earlier understanding, that the trust was resident where the trustee was resident, they should immediately take action to ensure that the trustee exercises, and is seen to exercise, central management and control of the trust.

If the beneficiaries wish to provide advice and suggestions to the trustee, this must not appear to be any type of direction. If a beneficiary frequently offers “advice” or “suggestions” that are always accepted by the trustee, the CRA may succeed in asserting that the advice and suggestions are really directions and that the trust is resident where the beneficiary is resident.

As a result of this decision, the CRA may look back at earlier years that can still be assessed and question the residence of a trust where it is evident that the trustee was not managing the trust, but was merely providing administrative services.

Note also that non-resident trusts can be deemed resident in Canada under a complex set of rules (proposed section 94 of the Income Tax Act) which have not yet been enacted but which will be retroactive to 2007 if they are enacted in their current form. Where these rules apply, the beneficiary is generally liable for the trust’s Canadian tax that results from the trust being deemed resident in Canada.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Spousal Trust Strategy

“”asset-building” can be particularly effective.”

A “spouse trust” can be used in a taxpayer’s Will to defer capital gains on death. As long as all the income of the trust is paid or payable to the surviving spouse (or common-law partner) and none of the capital is payable to anyone else until after the surviving spouse’s death, capital gains are not triggered on the assets left to the trust until the surviving spouse dies (or the trust sells the assets).

As noted, all the trust’s income must be paid or payable to the surviving spouse. However, the parties may wish to build up the capital of a spouse trust by retaining income, rather than paying out the annual income to the surviving spouse.

For example, the surviving spouse may have sufficient personal income and/or capital to meet their needs, or there may be a desire to “re-capitalize” the trust’s income for the children on the surviving spouse’s death. Recapitalization or “asset-building” can be particularly effective if the terms of the spouse trust provide for the creation of subsequent “springing” trusts for the children’s benefit, on the death of the surviving spouse.

The trustees can make a designation to tax income within the trust, but this will not really solve the problem. The designated trust income must be payable to the surviving spouse and will not form part of the capital of the trust.

A solution to this conundrum is to “trap” the trust’s income in a holding corporation, owned by the trust. Investments otherwise held by the spouse trust can be transferred to a corporation on a tax-deferred basis in exchange for shares of the holding corporation (using a section 85 rollover). All future investment income would then be earned within the holding corporation. The corporate taxes payable would include a portion Refundable Dividend Tax on Hand, eligible for the dividend refund (“RDTOH”).

If this strategy is employed, dividends from the holding company need not be paid to the spousal trust. The result will be the “re-capitalization” within the holding corporation. RDTOH can be recovered on the payment of dividends. If these dividends are not required during the surviving spouse’s lifetime, they can be paid out after the surviving spouse’s death, with less tax, if testamentary trusts for the children “spring-up” in the surviving spouse’s will.

This strategy enhances the capital that can potentially be passed down to the next generation, while optimizing the overall tax considerations through recovery of RDTOH and the ability to “income-split” by using successive “springing-trusts.” However, this planning is not suggested for Canadian residents who are U.S. citizens or green card holders, due to the US tax consequences.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Alter Ego And Joint Partner Trusts

“Such a trust can provide estate planning benefits”

Canadian residents who are 65 or older can transfer assets into an “Alter Ego Trust” (AET) or a “joint spousal or common-law partner trust” (JPT) without triggering gains for tax purposes.

In order for the trust to qualify as an AET or JPT, the person contributing assets to the trust (called the “settlor”) or the settlor’s spouse or common-law partner (for a JPT) must be entitled to receive all of the income earned by the trust during their lifetime and no one other than the settlor (or, for a JPT, the spouse or common-law partner), is able to receive or use any of the trust assets.

All the assets of an AET or JPT are deemed to be disposed of by the trust, for tax purposes, at fair market value on the death of the settlor (or the later of the death of the settlor and their spouse or common-law partner, for a JPT). Any gains or losses accrued in the trust assets are thus triggered at that time.

Such a trust can provide estate planning benefits, avoid power of attorney problems if mental incapacity issues arise, eliminate probate fees, mitigate wills variation exposure, and provide confidentiality with respect to assets held in the trust at the time of death, since they will not be part of the estate.

However, there are also various costs, traps and pitfalls, including the following:

  1. Gains triggered on the trust assets on the settlor’s death will be taxed in the trust at top marginal tax rates rather than at personal marginal tax rates, since a non-testamentary trust pays federal tax at the highest rate on all of its income.
  2. The settlor’s capital gains exemption and loss carryforward balances are not available to shelter capital gains realized in the trust.
  3. Any charitable bequests required to be made by the trust on the settlor’s death must be made by December 31 of the year of death in order to shelter tax from the deemed disposition of trust assets resulting from the settlor’s death. There is no provision for the carryback of donations to the year before death as there is for charitable gifts made under an individual’s will.
  4. An annual T3 trust income tax return must be filed even though any income, gain or loss of the trust is normally included in the settlor’s personal income tax so there is usually no tax to pay.
  5. Foreign tax credits do not flow through from the trust to the settlor. As a result, double tax can arise on foreign income earned by the trust. The settlor pays the tax on the foreign income, and the trust cannot claim a foreign tax credit for foreign withholding tax because it has no foreign income against which to claim it.

Overall, Alter Ego and Joint Partner Trusts can be useful planning tools, but only if the practical and tax issues arising from their use are anticipated and planned for effectively.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Subsection 75(2) – Planning To Avoid

“It is important to carefully draft trusts to avoid unwanted results.”

Trusts can be a very useful vehicle in achieving tax and estate planning objectives. In many instances, the objective is to ensure that income realized from the trust property is not taxable to the settlor or transferor. Instead, the objective is to tax the income in the trust or allocate it to the beneficiaries of the trust.

Subsection 75(2) of the Income Tax Act can cause problems to the extent that the trust is not settled or drafted correctly. Subsection 75(2) of the Act is commonly called the “reversionary trust” rule. Very generally, it is designed to tax all income (or losses) or capital gains (or capital losses) that are realized from the trust property back to the settlor/transferor of the trust property to the extent that the trust property is held on condition that it may revert to the person from whom the property was directly or indirectly received, or pass to persons to be determined by the person at a time subsequent to the creation of a trust. Such a provision is very broad and can result in undesirable tax consequences.

As a rule of thumb, in order to avoid subsection 75(2) from applying, it is usually required that the creator of the trust (i.e., the settlor) not be able to make decisions related to the trust (i.e., is not a trustee), or cannot benefit from the trust property (i.e., is not a beneficiary).

In some cases, the result of a subsection 75(2) attribution of income back to the settlor may not cause adverse problems. However, to the extent that it is desirable to avoid attribution of income from a trust, the general rules of thumb should be followed.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Alternative To Alter-Ego Trusts

“Self Benefit trusts may help those under 65 in dealing with probate fees.”

In our February 7, 2003 Tax Tip, the usefulness of an alter-ego trust in probate planning and estate protection was reviewed. Since the release of the alter-ego trust rules commencing in year 2000, such a tool has become very useful in helping to achieve estate planning objectives.

One of the restrictions on the use of an alter-ego trust is that the person transferring property to the trust must be 65 years of age or older at such time. This limits planning for people that have not met the age restriction. However, for persons who have not met the age restriction, one could consider the use of a “self-benefit” trust. Such a trust does not have an age limit restriction. However, a self-benefit trust has other restrictive conditions that would need to be carefully reviewed before utilizing such a tool.

Very generally, to the extent that property of a taxpayer who is less than 65 is transferred to a self-benefit trust where there is no change in beneficial ownership of the property, and there is no absolute or contingent right of any person, other than the person who transferred the property to the trust, then the transfer of such property to a self-benefit trust will not trigger a capital gain. Normally, such transfers of property to a trust result in a disposition at fair market value of the trust property. However, to the extent that the conditions as previously stated are met, no income tax payable would result.

The use of a self-benefit trust would usually not assist in income tax savings since any income generated from the self-benefit trust property would attribute back to the transferor. However, such a trust may be useful in probate planning in provinces where probate would otherwise be a significant cost to the deceased.

Any member of TSG would be pleased to assist in analyzing whether or not a self-benefit trust is appropriate in your circumstances.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Planning For the 21-Year Deemed Disposition Rule

“Planning is required before the deemed disposition rules apply.”

Most inter-vivos trusts (trusts created during the creator’s lifetime), with certain exceptions, are subject to the so-called “21-year deemed disposition” rule. In general, such a rule requires that the trust property be deemed to be disposed of at fair market value every 21 years from the anniversary date of the creation of the trust. To the extent that the trust property has appreciated significantly in value, such a rule can cause significant tax payable by the trust.

In planning with respect to a pending deemed disposition, one must look to see whether or not such trust property can be transferred to the capital beneficiaries of the trust on a tax-deferred basis. In many cases, such trust property can be transferred to the beneficiaries without any income taxes being payable. Accordingly, the 21-year deemed disposition rule can be avoided by the transfer of property to the underlying capital beneficiaries of the trust. A careful review of the trust deed must be done in order to ensure that such planning can be done.

One must also examine whether or not the trust has any capital losses that are being carried forward. To the extent that such losses exist within the trust, prudent planning may suggest a partial application of the 21-year deemed disposition rule so as to utilize such losses. The result would be that the trust’s adjusted cost base of its properties could be increased as a result of the utilization of such losses thereby reducing income tax in the future when the property is actually disposed of.

Careful planning should be done well in advance of a potential application of the 21-year deemed disposition rule.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.