A typical family trust is drafted as a discretionary trust for the benefit
of a class of beneficiaries. Beneficiaries could include yourself, your
spouse, and your issue (children, grandchildren, great grandchildren,
etc.). In fact, a family trust can include as many family or friends as you
would like (subject, of course, to certain tax considerations). Some trusts
often include a class of secondary beneficiaries, such as further-removed
family members or registered charities. These secondary beneficiaries would
typically kick in if none of the primary beneficiaries were alive at the
time the trust is wound up and the assets distributed.
Using a corporate beneficiary
One tax-planning tool I use is to allow for a corporate beneficiary. This
could include a corporation to be incorporated (even at a later date), the
shares of which are owned by any one or more of the primary beneficiaries.
The use of a corporate beneficiary allows for some tax planning on the
eventual distribution out of the trust, for example, if a beneficiary
becomes a non-resident of Canada (more on that later).
If you want to set up a family trust, and you also want to contribute
property to the family trust, then you cannot be a beneficiary of the
trust. There is an attribution rule under the Income Tax Act that
would be triggered if property that is transferred to the trust by an
individual could potentially revert back to the individual (i.e., by virtue
of your being a beneficiary of the trust). This attribution rule will also
kick in if the individual who contributes property to the trust is able to
determine how the trust property is to be distributed (i.e., if he or she
is the sale trustee or has a veto power as a trustee). In this instance, it
does not matter if that individual is a beneficiary or not.
So, the general rule is that if you or someone else contributes or gifts
funds or property to a trust, you or that particular person is not allowed
to be a beneficiary or cannot make decisions on their own as to how the
trust distributes the property. And to make matters worse, if this
attribution rule is triggered for any moment in time (even if the situation
is cured after the rule has applied), a second tax rule jumps in to prevent
the distribution of the capital of the trust to a Canadian resident
beneficiary without triggering capital gains tax.
There are, of course, certain ways to get around this rule. For example,
case law has held that if you were to lend money (even without interest) or
sell property to the trust at fair market value, this attribution rule will
not apply. So if you are gifting funds or property to a trust, be very
careful about whether you are included as a beneficiary (or even as a
contingent beneficiary) or if you have too much control in determining who
gets what out of the trust.
A second event that could trigger capital gains tax on a distribution of
capital out of a family trust is if the beneficiary is no longer a Canadian
resident. The general rule is that distributions of capital out of a family
trust will not trigger any capital gains tax on the increase in value of
any trust assets, provided that the beneficiary receiving the distribution
is a resident of Canada at that time.
These days, this problem can arise more often than not, what with kids
going to school in the U.S. and then staying south of the border
permanently. Hence, the use of a corporate beneficiary would allow you to
get around this problem: Simply incorporate a Canadian resident company of
which the non-resident child is a shareholder, and distribute the trust
capital to the company. Note that it would be important for the
non-resident child to get proper tax advice in the country where they live,
just in case there are other rules triggered under their jurisdiction.
Next time: Who should be a trustee and how to ensure a trust is
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a
Meritas Law Firm Worldwide affiliate, and specializes in corporate,
estate, and international tax planning. She writes frequently on tax
issues, and is the co-author of
Tax and Family Business Succession Planning, 3rd Edition. She is also
co-editor of various Wolters Kluwer Ltd. tax publications.
Portions of this article first appeared in The TaxLetter, © 2018 by MPL
Communications Ltd. Used
© 2018 by Fund Library. All rights reserved. Reproduction in whole or in
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The foregoing is for general information purposes only and is the opinion
of the writer. This information is not intended to provide specific
personalized advice including, without limitation, investment, financial,
legal, accounting or tax advice.