Tax planning is very important when drafting the trust agreement. In a
I discussed the tax trap that could be sprung on you if you want to want to
contribute property to a family trust but you are also 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). As if that weren’t
enough, there are some additional attribution rules that may apply in
If you transfer/gift property to the trust for no consideration, and that
property generates income that is to be allocated to your spouse or your
minor kids through the trust, that income could be attributed back to you.
There are exceptions to the application of these attribution rules – for
example, ensuring that the trust agreement contains an appropriate
anti-attribution clause that would prevent distributions of income to your
spouse or minor child. It is important to speak to your tax advisor to
ensure that the proper steps are taken or provisions included in the trust
agreement at the time that the trust is formed. It’s vitally important that
you speak to your advisor before you finalize the trust agreement, because
it is very difficult to amend a trust agreement once it’s executed. And in
some instances, simply fixing the problem after the fact won’t save you
from a tax problem.
It’s also important to keep in mind that a discretionary family trust has a
tax shelf life of only 21 years. The tax rules say that a discretionary
family trust is deemed to have sold all of its assets on its 21st
anniversary (and every 21st anniversary thereafter). So, if the
discretionary trust owns assets with a large pregnant gain, it could be
stuck with a huge tax bill if nothing is done. The rule of thumb with
discretionary family trusts, then, is to ensure that the trustees
distribute the trust capital to the beneficiaries just prior to the trust’s
Why a discretionary trust?
For tax purposes, a family trust can allow for income splitting with
minors. If you were to simply gift funds to your minor children, any
interest income would be taxed in your hands. However, if you were to lend
the funds at the prescribed rate (2% for the third quarter of 2018), then
the income can be taxed in your minor children’s hands at low rates.
However, legally, a minor child cannot borrow funds. Hence, a family trust
can provide the vehicle by which a loan at the prescribed rate can be made
for the benefit of your minor children.
Another benefit of a trust is that if you are not yet sure how certain
property is to be held among your family members, then having a family
trust hold the property in the meantime gives you the ability to control
how the property is managed. It also gives you at least 21 years before you
need to decide how the assets get hold by your family members.
As you can see, a family trust can provide some robust estate and
tax-planning tools and benefits to you and your family – even if you’re not
necessarily rich or famous. But because these things are legally quite
complicated, I’d highly recommend speaking to your financial, estate
planning, or tax advisor before you jump in.
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
part by any means without prior written permission is prohibited.
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.