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Bergen Bergen Presentation Transcript

  • RBC DS Family Trust
  • Canadians pay a lot of tax
    • You’re taxed when you earn
    • You’re taxed when you save
    • You’re taxed when you spend
    • You’re taxed when you die
    • So what options are there for you and your loved ones to save tax?
  • RBC DS Family Trust
    • Tax savings – takes advantage of the tax rule that each child in Canada with no other income can earn up to $18,000 of capital gains every year tax-free
    • Access to capital – parent loans monies to trust, thereby never losing access to loan capital
    • Fund children’s expenses – the investment income in the trust can be used by trustee to pay for expenses that directly benefit the child
    Three main benefits of RBC DS Family Trust: 1 2 3
  • Why do people use trusts?
    • Many reasons, such as:
    • Income splitting
    • Control
    • Creditor protection
    • To hold assets for disabled or spendthrift beneficiaries
    • To control the timing and amount of gifts/bequests
    • Part of an estate freeze of a business
    • Probate tax avoidance
    • Privacy
    • Etc, etc, etc
    RBC DS Family Trust is primarily used for income splitting
  • Two main types of trusts – Inter-vivos and testamentary trusts RBC DS Family Trust is an inter-vivos trust If income taxed in trust then taxed at graduated tax rates Income taxed in trust at top marginal tax rate unless paid or payable to beneficiary Taxation Established at death Established during lifetime of settlor Time of creation Executor can choose any 12 month period Calendar (Jan 1 – Dec 31) Taxation year Testamentary trust Inter-vivos trust No attribution after death Must consider attribution rules Attribution
  • Who is involved in a trust? Typically children and grandchildren – cannot be settlor/lender Persons that will ultimately benefit from the trust assets Beneficiary 1 Trustee – cannot be settlor/lender 3 Trustees – majority rule; settlor/lender can be one of the 3 trusees but cannot be Investment Trustee Individual and/or corporation that legally holds assets and makes decisions in the best interest of the beneficiaries Trustee Typically one parent or grandparent (“settlor”) will gift a $20 bill to the trustee(s). This person will then lend cash to the trustee for investment Person that legally creates the trust by gifting property to trust Settlor RBC DS Family Trust Definition
  • Comparing the trust options at DS – key differences $150 or $250 $150 or $250 NIL Annual DS administration fees 1 or 3 1 or 3 1 or 2 # of trustees 1 Unlimited 6 Maximum # of beneficiaries per trust Full access to loan capital Full access to loan capital None – must be used for beneficiary’s benefit Parent’s access to capital Loan - $50,000 minimum Loan - $50,000 minimum Irrevocable gifts Contributions RBC DS Family Trust – Age 40 RBC DS Family Trust - Discretionary RBC DS Formal Trust Yes Yes Yes Can trust income be used to pay beneficiary’s expenses If earned prior to age 21 then as late as age 40, if earned after age 21 then immediate Immediate Immediate Beneficiary’s rights to income that was payable to them but reinvested
  • RESP vs. RBC DS Family Trust – key differences Capital gains taxed to child (generally tax-free); interest/dividends attributed to parent if funded via interest-free loan Grows tax-deferred; withdrawals taxed to child Taxation $150 or $250 for DS admin fee plus tax return fees $50 for DS admin fee Annual fees No Yes - $7,200 maximum Government grant No maximum $50,000 Maximum lifetime contribution Full access to loan capital anytime Contributions can be returned to parent (not recommended until child in post secondary school) Parent’s access to capital RBC DS Family Trust RESP Yes – broader category; even while minor Yes but only for reasonable post secondary expenses Can earnings be used to pay beneficiary’s expenses At age of majority (later if Age 40 trust used) When enrolled in post-secondary education Beneficiary’s access to accumulated investment earnings
  • RBC DS Family Trust Candidates
    • Clients with surplus capital
    • High-income parents with minor children (i.e. executives, professionals, IAs, business owners, etc)
    • High-income grandparents that want to
    • provide funds to grandchildren
    • Children in private school or have other high expenses (sports, lessons, etc)
    • Parents that have no RESP or started it late
  • Benefits of income splitting Reason #1: Progressive tax rates 43% – 46% Over $75,000 $15,000 per year Potential annual tax savings by income splitting with one family member 31% $37,000 - $75,000 21% Under $37,000 Tax rate Annual taxable income
  • Reason #2: $9,000 basic exemption If taxable to parent $18,000 x 50%= $9,000 Tax payable = $4,000 If taxable to child $18,000 x 50%= $9,000 Less basic exemption = ($9,000) Tax payable = $0 $18,000 Capital gains Investment Account
  • Three strategies to split investment income with children * If trust is structured correctly
    • Attribution of interest and dividends regardless of age
    • Can call back loan capital
    • Capital gains taxed to child*
    • Parent declares no interest on loan
    Interest-free loan to RBC DS Family Trust Parent must declare 5% interest income
    • Can call back loan capital
    • Interest, dividends, capital gains* taxed to child
    Loan at CRA prescribed rate (currently 5%) to RBC DS Family Trust
    • Loss of capital
    • Attribution of interest and dividends if minor
    Capital gains taxed to child* Gift to RBC DS Formal Trust Cons Pros Strategy
  • Trust “super” attribution rule – subsection 75(2)
    • If trust is not set up properly then it is possible that even capital gains will be attributed back to lender thus achieving no income splitting!
    • To avoid capital gain attribution the following rules must be followed (confirm with tax advisor):
    • SETTLOR/LENDER CANNOT BE SOLE TRUSTEE, INVESTMENT TRUSTEE OR A BENEFICIARY
    • SETTLOR/LENDER CAN BE ONE OF 3 TRUSTEES WHERE DECISIONS MADE BY MAJORITY RULE
  • RBC DS Family Trust Structure Settlor/Lender 1 or 3 Trustee(s) Smith Family Trust Beneficiaries Gift $20 and then loan cash (not from joint account) Tax-free Capital gains $
  • Children are expensive
    • It can cost over $150,000 to raise one child from birth to age 18
    • Most of these costs are not tax-deductible by the parents
      • Schooling (i.e. private school)
      • Camps
      • Lessons
      • Sports equipment
      • Gifts
  • A strategy to pay for child’s expenses with tax-free capital gains
    • No strategy
    Family trust pays private school fees Parent’s T4 income $250,000 Tax (100,000) After-tax $150,000 Family expenses (100,000) Private school fees (2 kids) (30,000) Surplus $20,000 Parent’s cash assets $500,000 Capital gains earned (6%) $30,000 Tax (7,000) Net portfolio $523,000 Surplus $20,000 Total portfolio $543,000 Parent’s T4 income $250,000 Tax (100,000) After-tax $150,000 Family expenses (100,000) Surplus $50,000 Loan cash to family trust $500,000 Capital gains earned (6%) $30,000 Tax (split between 2 kids) NIL Private school fees (30,000) Net portfolio $500,000 Surplus $50,000 Total portfolio $550,000 Tax savings of $7,000 in first year and parent can get back $500,000 loaned to trust anytime
  • Using the trust income to pay for children expenses
    • Additional documentation and administration!
    • Inter-vivos trust – income and capital gains taxed in trust at top tax rate unless paid or payable to the beneficiary
    • CRA has long standing administrative policy (IT-NEWS No. 11) that income taxed to child even if trustee uses trust income to pay for expenses that directly benefit child
  • Using the trust income to pay for children expenses (continued)
    • No official list of approved expenses from the CRA
    • IT-NEWS No. 11 – “expenditure for the child’s benefit, i.e. amounts paid for the support, maintenance, care, education, enjoyment and advancement of the child, including the child's necessaries of life. “
    • Expenses must unequivocally benefit the child
    • Expenses used on ordinary household expenses or benefiting someone other than beneficiary will result in double taxation!
    • Clients should consult with tax advisor on this matter
  • RBC DS Family Trust Fees (*) RBC DS charges no set up fees, however client’s tax and legal advisors will likely charge fees to review legal agreements and provide advice to client and trustees at time of set up. Depends on investments chosen in family trust Investment fees Annual DS administration fee Annual trust tax return Set up fees NIL(*) $150 if RT prepares T3 $250 if RT not used $350 if using Royal Trust (RT) ($450 in Quebec) Alternatively can use own accountant
  • RBC DS Family Trust Considerations
    • Additional administration – documentation, trustee recordkeeping, etc
    • Renewal of demand promissory note
    • Investment risk and volatility of earning capital gains
    • Lender loses rights to future investment income
    • Lender should review Will re loans at death
    • Tax deductibility of investment management fees
    • Additional fees and tax returns
    • 21 year deemed disposition rule – can be mitigated
    • Meetings with tax and legal advisors
  • Thank you
    • This presentation has been prepared for use by RBC Dominion Securities Inc.*, Royal Mutual Funds Inc., RBC Private Counsel Inc. and RBC DS Financial Services Inc., Member Companies under RBC Investments. The Member Companies, Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by Royal Mutual Funds Inc. or RBC DS Financial Services Inc. and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc., Royal Mutual Funds Inc. or RBC Private Counsel Inc. Insurance products are only offered through RBC DS Financial Services Inc., RBC DS Financial Services Inc., RBC DS Financial Services Inc., subsidiaries of RBC Dominion Securities. *Member CIPF.
    • The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness.This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that their own circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change.
    • ™ Trademark of Royal Bank of Canada, used under licence. RBC Investments is a registered trademark of Royal Bank of Canada, used under licence. ©Royal Bank of Canada 2007.