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Transcript of Chapter 21
Chapter 21Chapter 21
Trusts And Estate PlanningTrusts And Estate Planning
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 22
What is a Trust?What is a Trust?
Settlor Trustee Beneficiaries
Property Benefits
LegalOwnership
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 33
Legal Vs. TaxLegal Vs. Tax
A trust is not a A trust is not a separate legal entityseparate legal entity
Income Tax Act views Income Tax Act views a trust as a separate a trust as a separate taxable entitytaxable entity
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 44
Trust Vs. EstateTrust Vs. Estate
In general, the term estate refers to the In general, the term estate refers to the property and possessions of an individualproperty and possessions of an individual
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 55
Trust Vs. EstateTrust Vs. Estate
ITA 104(1)ITA 104(1) In this Act, a reference to a trust or In this Act, a reference to a trust or estate (in this subdivision referred to as a "trust") estate (in this subdivision referred to as a "trust") shall, ...shall, ...
ITA views “estate” as the property of a deceased ITA views “estate” as the property of a deceased individual prior to its distributionindividual prior to its distribution
ITA requires a “trust” return for the income of an ITA requires a “trust” return for the income of an individual’s estateindividual’s estate
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 66
Establishing a TrustEstablishing a Trust
Requires three certaintiesRequires three certainties
– Certainty of intentionCertainty of intention
– Certainty of propertyCertainty of property
– Certainty of beneficiariesCertainty of beneficiaries
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 77
Establishing a TrustEstablishing a Trust
Who Cares?
If a trust is not clearly established, there may be unexpected tax consequence (e.g., income taxed in hands of settlor
rather than beneficiaries).
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 88
Non-Tax Uses Of TrustsNon-Tax Uses Of Trusts
Administration of assetsAdministration of assets
Creditor proofingCreditor proofing
Privacy (wills require probate, trusts do Privacy (wills require probate, trusts do not)not)
Ascertaining beneficiariesAscertaining beneficiaries
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 99
Classification of Personal TrustsClassification 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
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1010
Taxation of TrustsTaxation of Trusts
Settlor CapitalBeneficiaries
IncomeBeneficiaries
TrustProperty
Property At FMV
Property At Trust’s Cost
TrustIncome
Retained Income
(taxed in trust)
Distributed Income
(beneficiaries taxed)
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1111
Rollovers to a TrustRollovers to a Trust
In general: Contributions are a disposition In general: Contributions are a disposition at fair market valueat fair market value
ExceptionsExceptions– Spouse or common-law partnerSpouse or common-law partner– Alter egoAlter ego– Joint spouse or common-law partnerJoint spouse or common-law partner
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1212
Rollovers to a TrustRollovers to a TrustSpouse or Common-Law PartnerSpouse 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.
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1313
Spouse or Common-Law PartnerSpouse 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.
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1414
Alter EgoAlter 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.
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1515
Joint Spousal or Joint Spousal or Common-Law PartnerCommon-Law Partner
ITA 73(1.01)(c)(iii)ITA 73(1.01)(c)(iii) either either– the individual or the individual's spouse is, in combination with the individual or the individual's spouse is, in combination with
the other, entitled to receive all of the income of the trust that 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 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 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 those deaths, receive or otherwise obtain the use of any of the income or capital of the trust, orincome or capital of the trust, or
– the individual or the individual's common-law partner is, in the individual or the individual's common-law partner is, in combination with the other, entitled to receive all of the income combination with the other, entitled to receive all of the income of the trust that arises before the later of the death of the 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 individual and the death of the common-law partner and no other person may, before the later of those deaths, receive or person may, before the later of those deaths, receive or otherwise obtain the use of any of the income or capital of the otherwise obtain the use of any of the income or capital of the trust.trust.
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1616
Rollovers to a Capital BeneficiaryRollovers to a Capital Beneficiary
General Rule: Transfer at trust’s tax costGeneral Rule: Transfer at trust’s tax cost
Exceptions for transfers out of:Exceptions for transfers out of:– Spouse or common-law partner trustSpouse or common-law partner trust– Alter ego trustAlter ego trust– Joint spouse or common-law partner trustJoint spouse or common-law partner trust
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1717
21 Year Deemed Disposition21 Year Deemed Disposition
Deemed disposition/acquisition Deemed disposition/acquisition every 21 yearsevery 21 years
Limits the deferral of capital Limits the deferral of capital gains within the trustgains within the trust
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1818
Net Income of a TrustNet Income of a Trust
In general: In general: Follows the ITA 3 rules as Follows the ITA 3 rules as applied to an individualapplied to an individual
Additional adjustments Additional adjustments requiredrequired
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 1919
Net Income AdjustmentsNet Income Adjustments
Deductions available for:Deductions available for:– Amounts paid or payable to beneficiariesAmounts paid or payable to beneficiaries– Trustee’s or executor’s feesTrustee’s or executor’s fees– Amounts paid by the trust on behalf of Amounts paid by the trust on behalf of
beneficiariesbeneficiaries
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2020
Net Income AdjustmentsNet Income Adjustments
Preferred Beneficiary Preferred Beneficiary ElectionElection– Income retained in trust, Income retained in trust,
taxed in hands of beneficiarytaxed in hands of beneficiary– Only applicable to Only applicable to
beneficiariesbeneficiariesWho are eligible for the disability Who are eligible for the disability tax credit; ortax credit; orCan be claimed as an infirm Can be claimed as an infirm dependant over 17dependant over 17
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2121
Net Income AdjustmentsNet Income Adjustments
Amounts deemed not to be paidAmounts deemed not to be paid– A distribution that is taxed in the trust rather A distribution that is taxed in the trust rather
than in the hands of the recipient beneficiarythan in the hands of the recipient beneficiary– Reasons for usingReasons for using
Lower ratesLower rates
Avoidance of instalmentsAvoidance of instalments
Use of trust lossesUse of trust losses
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2222
Net Income AdjustmentsNet Income Adjustments
Amounts retained for a Amounts retained for a beneficiary under 21 years of beneficiary under 21 years of ageage– Retained in the trust but taxed in Retained in the trust but taxed in
the hands of the beneficiarythe hands of the beneficiary– Beneficiary must be under 21 Beneficiary must be under 21
during the yearduring the year– Amounts must vest irrevocably Amounts must vest irrevocably
with the beneficiary.with the beneficiary.
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2323
Taxable Income of a TrustTaxable Income of a Trust
Net Income of the trust
Taxable Income of the trust
Same deductions as those available to
individuals
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2424
Income Allocations to BeneficiariesIncome Allocations to Beneficiaries
To be deductible, amounts must be paid or payableTo be deductible, amounts must be paid or payable
Not considered payable if:Not considered payable if:
– A beneficiary can only enforce payment of an amount of A beneficiary can only enforce payment of an amount of income by forcing the trustee to wind up the trust.income by forcing the trustee to wind up the trust.
– The beneficiary’s right to income is subject to the approval The beneficiary’s right to income is subject to the approval of a third party.of a third party.
– Payment of income is at the trustee’s discretion.Payment of income is at the trustee’s discretion.
– The beneficiary has the power to amend the trust deed and The beneficiary has the power to amend the trust deed and must do so to cause the income to be payable.must do so to cause the income to be payable.
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2525
Determination of DistributionsDetermination of Distributions
DiscretionaryDiscretionary– Amounts Amounts
at the discretion of trusteeat the discretion of trustee– Timing Timing
at the discretion of trusteeat the discretion of trustee
Non-DiscretionaryNon-Discretionary– Amounts and their timing Amounts and their timing
specified in trust agreementspecified in trust agreement
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2626
Flow Through ProvisionsFlow Through Provisions
Dividends distributedDividends distributed– Beneficiary will gross upBeneficiary will gross up– Beneficiary will get creditBeneficiary will get credit
Retained in trustRetained in trust– Trust will gross upTrust will gross up– Trust will get creditTrust will get credit
Will retain eligible/non-Will retain eligible/non-eligible statuseligible status
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2727
Flow Through ProvisionsFlow Through Provisions
Capital GainsCapital Gains– If distributedIf distributed
One-half taxedOne-half taxed
One-half tax freeOne-half tax free
– If retainedIf retainedOne-half taxedOne-half taxed
One-half becomes part of One-half becomes part of trust’s capitaltrust’s capital
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2828
Flow Through ProvisionsFlow Through Provisions
Tax on split incomeTax on split income– A tax on specified types of A tax on specified types of
incomeincome– Applicable to those under 18Applicable to those under 18
If specified income earned in If specified income earned in trust:trust:– It will be subject to this tax if It will be subject to this tax if
beneficiary is under 18beneficiary is under 18
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 2929
Flow Through ProvisionsFlow Through Provisions
Business IncomeBusiness Income– Must be calculated at trust Must be calculated at trust
levellevel– Will include CCA, recapture, Will include CCA, recapture,
and terminal lossesand terminal losses
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3030
Flow Through ProvisionsFlow Through Provisions
Principal Residence ExemptionPrincipal Residence Exemption– Owned by trustOwned by trust– Ordinarily inhabited by beneficiaryOrdinarily inhabited by beneficiary– Exemption availableExemption available
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3131
Trust Tax PayableTrust Tax PayableTestamentary TrustsTestamentary Trusts
Taxed the progressive rates Taxed the progressive rates applicable to individualsapplicable to individuals
Multiple testamentary trustsMultiple testamentary trusts
– If same beneficiariesIf same beneficiaries
– May be taxed as one trustMay be taxed as one trust
TaintingTainting
– May lose testamentary status if May lose testamentary status if contributions by living personcontributions by living person
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3232
Trust Tax PayableTrust Tax PayableInter Vivos TrustsInter Vivos Trusts
Undistributed income Undistributed income taxed at maximum rate of taxed at maximum rate of 29 percent29 percent
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3333
Tax CreditsTax Credits
Many not available Many not available (e.g., medical expenses)(e.g., medical expenses)
AvailableAvailable– Donation tax creditsDonation tax credits– Dividend tax creditsDividend tax credits– Foreign tax creditsForeign tax credits– Investment tax creditsInvestment tax credits– Political contributions tax creditPolitical contributions tax credit
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3434
Alternative Minimum TaxAlternative Minimum Tax
Applicable To TrustsApplicable To Trusts
The $40,000 exemption is The $40,000 exemption is only available to only available to testamentary truststestamentary trusts
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3535
Income AttributionIncome Attribution
Applicable to spouses, common-law Applicable to spouses, common-law partners and related minorspartners and related minors
Applicable to transfers to a trust where the Applicable to transfers to a trust where the beneficiary is a spouse, common-law beneficiary is a spouse, common-law partner, or related minorpartner, or related minor
Occurs when income is allocated to such Occurs when income is allocated to such individualsindividuals
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3636
Reversionary TrustsReversionary Trusts
Attribution to settlor:Attribution to settlor:– If the transferred property can If the transferred property can
revert to settlorrevert to settlor– If the settlor can determine the If the settlor can determine the
persons that will receive the persons that will receive the transferred propertytransferred property
– The transferred property cannot The transferred property cannot be disposed of except with be disposed of except with transferor’s consenttransferor’s consent
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3737
Purchase or Sale of an Purchase or Sale of an Interest in a TrustInterest in a Trust
Income InterestIncome Interest– Cost usually nilCost usually nil– Gain will be property incomeGain will be property income
Capital InterestCapital Interest– May have a costMay have a cost– Gain or loss will be capitalGain or loss will be capital
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3838
Tax PlanningTax PlanningFamily TrustFamily Trust
Trust established for family Trust established for family membersmembers
Can be used to enforce Can be used to enforce behaviour (e.g., showing up behaviour (e.g., showing up for family dinners)for family dinners)
Can be used for income Can be used for income
splittingsplitting
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 3939
Tax PlanningTax PlanningSpousal TrustsSpousal Trusts
Can provide for management of Can provide for management of assetsassets
Can ensure appropriate Can ensure appropriate distribution of assets subsequent distribution of assets subsequent to death of spouse to death of spouse (settlor’s children in the event of (settlor’s children in the event of
spouse re-marriagespouse re-marriage))
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4040
Tax PlanningTax PlanningAlter Ego and JointAlter Ego and Joint
Avoidance of ProbateAvoidance of Probate– CostlyCostly– Time consumingTime consuming– Multiple jurisdictionsMultiple jurisdictions– Probate in public domainProbate in public domain
Establishment in low tax Establishment in low tax jurisdiction (e.g., Alberta)jurisdiction (e.g., Alberta)
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4141
Estate PlanningEstate Planning
Non-Tax ConsiderationsNon-Tax Considerations– Intent of testatorIntent of testator– Preparation of final willPreparation of final will– Preparation of living willPreparation of living will– Ensuring liquidityEnsuring liquidity– Avoiding family disputesAvoiding family disputes– Expediting the transitionExpediting the transition
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4242
Estate PlanningEstate Planning
Tax considerationsTax considerations– Pre-death planningPre-death planning– Planning in the year of deathPlanning in the year of death– Income splittingIncome splitting– Foreign jurisdictionsForeign jurisdictions– AdministrationAdministration
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4343
Estate FreezeEstate Freeze
ObjectivesObjectives
– Transfer income to low tax Transfer income to low tax beneficiariesbeneficiaries
– Freeze value of assetsFreeze value of assets
– Avoid immediate taxationAvoid immediate taxation
– Transfer future growthTransfer future growth
– Retain control of assetsRetain control of assets
Not always possible to achieve Not always possible to achieve all of these goalsall of these goals
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4444
Estate Freeze TechniquesEstate Freeze Techniques
GiftsGifts– Transfers growth and incomeTransfers growth and income
– Generates current income Generates current income unless transferee is a spouse unless transferee is a spouse or common-law partneror common-law partner
– Attribution rules could applyAttribution rules could apply
– Tax on split income could applyTax on split income could apply
– Transferor loses control over Transferor loses control over assetsassets
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4545
Estate Freeze TechniquesEstate Freeze Techniques
Instalment salesInstalment sales– Could use capital gains reservesCould use capital gains reserves– Would require payment at FMV to avoid Would require payment at FMV to avoid
attributionattribution– Loss of controlLoss of control
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4646
Estate Freeze TechniquesEstate Freeze Techniques
Establishing an inter vivos trustEstablishing an inter vivos trust– Transfers income and future growthTransfers income and future growth– Will attract immediate taxation unless it is a Will attract immediate taxation unless it is a
spousal trustspousal trust– Can result in income attribution and tax on Can result in income attribution and tax on
split incomesplit income
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4747
Estate Freeze TechniquesEstate Freeze Techniques
Holding companyHolding company– Can accomplish most objectivesCan accomplish most objectives– Without rollover, will result in immediate Without rollover, will result in immediate
taxation on transfertaxation on transfer
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4848
Estate Freeze TechniquesEstate Freeze Techniques
Rollover under ITA 85 or Rollover under ITA 85 or ITA 86ITA 86– Can accomplish all Can accomplish all
objectivesobjectives– ITA 86 requires an existing ITA 86 requires an existing
corporationcorporation– ITA 86 is simpler in that is ITA 86 is simpler in that is
does not require an electiondoes not require an election
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 4949
GST and TrustsGST and Trusts
A trust is a person under the Excise Tax A trust is a person under the Excise Tax ActAct
Distributions of non-commercial property Distributions of non-commercial property are exemptare exempt
Distributions of financial assets are Distributions of financial assets are exemptexempt
© 2008 Clarence Byrd Inc.© 2008 Clarence Byrd Inc. 5050