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Trusts
Tina L. Franzius, CA
Partner, T
P t
Taxation S i
ti Services
BDO Canada LLP
tfranzius@bdo.ca
604 532 4766
604-532-4...
Topics
•

Basics of a trust

•

Types of trusts

•

75(2)

•

Trust formation issues and other considerations

•

Annual t...
Trusts
Legal nature of a trust:
• A relationship or arrangement (not an independent legal entity)
“a trust is an equitable...
Essentials of a Trust
1.
1 Certainty of intention on part of settlor
2. Certainty of the subject matter of the trust
3. Ce...
Roles
SETTLOR

- Places asset/property in the trust
- Sets up rules for operating the trust
- Sets up rules for winding up...
Trusts
Reasons for a trust:
• Protection
• Control
• Flexibility
• Confidentiality
• Avoid probate, succession fees
• T pl...
Types of Trusts
•

Testamentary (created due to the death of an individual)

•

Inter-vivos (created during the life of th...
Types of Trusts
Spouse/Partner Trust
• Trust established for benefit of spouse under which
-

All income must be payable t...
Types of Trusts
Joint Spousal/Partner Trust
• A trust:
-

created after 1999
by an individual who is at least 65 years of ...
Types of Trusts
Alter Ego Trust
• A trust where the following conditions are met
-

It was created after 1999
It was creat...
Types of Trusts
“Self Benefit” Trust
Self-Benefit
• The trust was created after 1999,
• The trust is an inter vivos trust,...
Types of Trusts – Alter Ego Trust
Advantages & Uses:
• Probate fee elimination
• Potentially avoiding claims under wills v...
Types of Trusts – Alter Ego Trusts
Issues and Problems:
• Farm property rollover rules for spousal trusts do not extend to...
75(2) Reversionary Trust Rules
•

Likely the most important rule to consider when setting up a trust

•

Can apply where:
...
75(2) Reversionary Trust Rules
•

Sommerer case may restrict application of 75(2) in certain cases
•

•

Beneficiary sold ...
Trust Formation Issues
•

Ideally settlor settles the trust and not otherwise involved afterward
(to avoid 75(2)); parent ...
Trust Formation Issues
•

Family Law Act (BC) in effect as of March 2013

•

Concern about application of legislation to d...
Trust Formation Issues
•

Rules to Consider for Trust Document:
•

Specifically define trust income and capital (consider ...
Trust Formation Issues
•

Spousal Trusts/Second Marriages:
•
•

Care required to determine what is income and what is capi...
Association Considerations
•

Always consider association rules when trust holds shares
•

For discretionary trusts, each ...
Residency of a Trust
•

Historically based on residence of trustee(s) (Thibodeau)

•

Now “mind and management” test must ...
Annual Considerations and Taxation
•

Taxed as individual – tax year is calendar year for inter-vivos but may
be off calen...
Calculation of Trust Taxable Income
•

Starting point is net income determined under usual rules for
individuals

•

Add a...
Trust – Allocated income
•

Beneficiary – income from trust is generally property income;
exceptions include dividends (ta...
Trust Distributions and the 21-Year Rule
21 Year
Deemed Realization of Assets
Deemed Disposition Dates:
• Spousal trust - ...
Trust Distributions and the 21-Year Rule
21 Year
Deemed Realization of Assets
No 21 Year Deemed Disposition:
• Deferred in...
Trust Distributions and the 21-Year Rule
21 Year
Deemed Realization of Assets
For Spousal (Partner) Trusts Only:
• Trust c...
Trust Distributions and the 21-Year Rule
21 Year
•

When planning for 21st anniversary:
•

Plan early - remind client of u...
Trust Distributions and the 21-Year Rule
21 Year
Distribution of Assets to capital beneficiaries
• Main tool to avoid deem...
Trust Distributions and the 21-Year Rule
21 Year
Distribution of Assets
S.107(4.1)
Where the conditions necessary for the ...
Trust Distributions and the 21-Year Rule
21 Year
Distribution of Assets
FMV Rollout - S.107(2.001)
Elected FMV transfer av...
Trust Distributions and the 21-Year Rule
21 Year
Deemed Realization of Assets
If All of the Assets Can’t be Transferred
• ...
Trust Distributions and the 21-Year Rule
21 Year
Deemed Realization of Assets
• If decide to let the deemed disposition ru...
Consultation on Eliminating Graduated Rate
Taxation of Trusts and Estates
Key Dates
,
(Budget Day 2013) – Federal governme...
Consultation on Eliminating Graduated Rate
Taxation of Trusts and Estates
• Testamentary trusts and certain grandfathered ...
Consultation on Eliminating Graduated Rate
Taxation of Trusts and Estates
• Apply “flat top-rate taxation” to grandfathere...
Consultation on Eliminating Graduated Rate
Taxation of Trusts and Estates
Other Proposed Measures
• Calendar tax year requ...
Consultation on Eliminating Graduated Rate
Taxation of Trusts and Estates
Tax administration rules
• Currently, rules exte...
Consultation on Eliminating Graduated Rate
Taxation of Trusts and Estates
• Submissions were made to CRA by various partie...
Great Opportunities
•

University aged children (dividends from Jan 1 of the year child turns
18 not subject to kiddie tax...
QSBC Planning – A Better Structure

Trust
Beneficiaries: Mr &Mrs X,
children, holdco

X

Trustee Mr X

Common

Preferred

...
Final Happy Note
•

CRA has increased audit activity in regard to trusts in recent years
•
•

Where trust income has been ...
QUESTIONS?

Page 43
DISCLAIMER
This material is for educational purposes only. As it deals with technical matters
only
which have broad applic...
BIOGRAPHY
FRANZIUS,
TINA L. FRANZIUS CA
Partner, Taxation Services
tfranzius@bdo.ca
Direct: 604 532 4766

Page 45

Tina ha...
Thank you
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Trusts - All the Essentials

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FVCAA Presentationon Feb 6, 2014 by Tina Franzius, BDO Partner

Published in: Business, Economy & Finance

Trusts - All the Essentials

  1. 1. Trusts Tina L. Franzius, CA Partner, T P t Taxation S i ti Services BDO Canada LLP tfranzius@bdo.ca 604 532 4766 604-532-4766
  2. 2. Topics • Basics of a trust • Types of trusts • 75(2) • Trust formation issues and other considerations • Annual taxation • 21-Year Rule • Elimination of Graduated Rates • The big finish! Page 2
  3. 3. Trusts Legal nature of a trust: • A relationship or arrangement (not an independent legal entity) “a trust is an equitable obligation binding a person (who is called a trustee) to deal with property over which he has control (which is called the trust property) for the benefit of persons (who are called beneficiaries or cestui que trust), of whom he may be one, and anyone of whom may enforce the obligations” - Underhill’s Law of Trusts and Trustees Page 3
  4. 4. Essentials of a Trust 1. 1 Certainty of intention on part of settlor 2. Certainty of the subject matter of the trust 3. Certainty of beneficiaries- who they are Page 4
  5. 5. Roles SETTLOR - Places asset/property in the trust - Sets up rules for operating the trust - Sets up rules for winding up the trust - May establish trust while alive or in will TRUSTEE - Manages assets - Files income tax returns - Follows trust agreement THE TRUST Assets registered in trust May earn income BENEFICIARIES - May receive trust income y - May receive trust property/assets Page 5
  6. 6. Trusts Reasons for a trust: • Protection • Control • Flexibility • Confidentiality • Avoid probate, succession fees • T planning Tax l i Page 6
  7. 7. Types of Trusts • Testamentary (created due to the death of an individual) • Inter-vivos (created during the life of the settlor) • Discretionary vs. Non-discretionary vs • Personal Trust • Commercial Trust Page 7
  8. 8. Types of Trusts Spouse/Partner Trust • Trust established for benefit of spouse under which - All income must be payable to the spouse, during his/her lifetime No one but the spouse can access capital during the spouse’s lifetime Includes common-law spouses and same-sex partners Page 8
  9. 9. Types of Trusts Joint Spousal/Partner Trust • A trust: - created after 1999 by an individual who is at least 65 years of age the individual/individual's partner, are entitled to all income of the trust before the death of the surviving spouse and no one other than the individual and/or the partner may receive income or capital before the survivor's death Page 9
  10. 10. Types of Trusts Alter Ego Trust • A trust where the following conditions are met - It was created after 1999 It was created by an individual who was at least 65 years of age The individual is entitled to all of the income of the trust that arises before death No person besides the individual may receive or otherwise obtain any of the income or capital of the trust before the individual’s death Can elect out of alter ego treatment Page 10
  11. 11. Types of Trusts “Self Benefit” Trust Self-Benefit • The trust was created after 1999, • The trust is an inter vivos trust, • Income is payable to the individual individual, • No person except the individual can encroach on capital of the trust, and • No person (other than the individual) or partnership has any absolute or contingent right as a beneficiary under the trust Page 11
  12. 12. Types of Trusts – Alter Ego Trust Advantages & Uses: • Probate fee elimination • Potentially avoiding claims under wills variation rules • More practical/common use - asset management in the case of personal incapacity & potentially safer than a Power Of Attorney • Possible asset protection, marital/dependant relief claims • Confidentiality – when compared to probated will • Provincial tax planning (i.e. Alberta): - • Income/gains in general if S.75(2) doesn’t apply Gain on death in any case (S.75(2) can’t apply) Provides for continuous asset management Page 12
  13. 13. Types of Trusts – Alter Ego Trusts Issues and Problems: • Farm property rollover rules for spousal trusts do not extend to alter ego trusts and joint-partner trusts • Generally no testamentary trust Generally, • Deemed disposition on death cannot be allocated to deceased settlor or residual beneficiaries to utilize low marginal rates – all taxed at top rate - • • Can’t use CGE if deemed gain eligible No ability to apply loss to terminal return S.75(2) Page 13
  14. 14. 75(2) Reversionary Trust Rules • Likely the most important rule to consider when setting up a trust • Can apply where: • Property may revert to the person from whom it was received (i.e., settlor is beneficiary, trust acquires property from beneficiary, option to reacquire, person named as contingent beneficiary); • Property may pass to persons to be determined by the person at a time subsequent to creation of trust; or • Property cannot be disposed of except with person’s consent or in accordance with the person’s direction (i.e., settlor should not be trustee). Page 14
  15. 15. 75(2) Reversionary Trust Rules • Sommerer case may restrict application of 75(2) in certain cases • • Beneficiary sold property to trust for FMV consideration – per judge no 75(2) as was not settlor Genuine loans do not attract 75(2) – see Howson Howson. • Property returns to lender by virtue of the loan itself and through creditor rights. Page 15
  16. 16. Trust Formation Issues • Ideally settlor settles the trust and not otherwise involved afterward (to avoid 75(2)); parent or grandparent still a good idea • Settlement property should be easy to segregate and should not produce income • Discretionary or Non-discretionary • Consider potential changes in income levels of beneficiaries, family changes • Valuation of discretionary interests? Page 16
  17. 17. Trust Formation Issues • Family Law Act (BC) in effect as of March 2013 • Concern about application of legislation to discretionary interest in a family trust in the event of a marital breakdown – potential for increase in value of trust property to be considered in determination of value of family property for division purposes (multiple counting?) • Need to consider when a trust is being established Page 17
  18. 18. Trust Formation Issues • Rules to Consider for Trust Document: • Specifically define trust income and capital (consider taxable capital gains gains, distributions other than cash, share redemptions, stock dividends) – determined under trust law subject to terms of trust document • Generally broad powers granted to trustee and relieved of responsibility in certain situations i i • Ability to make tax elections and determinations (preferred beneficiary election) • Ability to pay tax on behalf of an income beneficiary and treat payment as allocation of income • Power to enter into reorganization, specific power to freeze or refreeze • Power to encroach on capital and distribute property in kind • Power to allocate “phantom income phantom income” • Allocating income to minors – in trust accounts, payments to third parties, necessities of life Page 18
  19. 19. Trust Formation Issues • Spousal Trusts/Second Marriages: • • Care required to determine what is income and what is capital (if no encroachment right) • • Right to encroach on capital is optional Appointment of trustee(s) – appointing children could lead to disagreements Choosing a trustee: • Consider potential association of corporations • Consider residence and potential changes (emigration) Page 19
  20. 20. Association Considerations • Always consider association rules when trust holds shares • For discretionary trusts, each beneficiary is deemed to own all the shares • For non-discretionary trusts, each beneficiary owns a pro rata number of shares based on FMV of beneficial interest in trust fb fi i l i i • Where a beneficiary is under 18 years of age, each parent is deemed to own shares • Also consider trustee Page 20
  21. 21. Residency of a Trust • Historically based on residence of trustee(s) (Thibodeau) • Now “mind and management” test must be considered (Garron) • First consider level of activity and knowledge of a trustee to determine where mind and management resides Page 21
  22. 22. Annual Considerations and Taxation • Taxed as individual – tax year is calendar year for inter-vivos but may be off calendar year for testamentary (currently) • T3 required if Trust: • • • • • Has tax H t payable; bl Has a capital gain or disposed of capital property; Holds property that is subject to subsection 75(2) of the Act; Has provided a benefit of more than $100 to a beneficiary for upkeep, etc for upkeep property maintained for the beneficiary’s use; or Has income/gain from trust property and: • • Income allocated to any beneficiary >$100; I ll t dt b fi i $100 • Capital was distributed to one or more beneficiaries; or • Page 22 Total income >$500; Any amount is allocated to a non-resident
  23. 23. Calculation of Trust Taxable Income • Starting point is net income determined under usual rules for individuals • Add any designated income – 104(13.1), (13.2) • Deductions for: • Income paid or made payable to beneficiaries – 104(6), (13) • Amounts included in income of beneficiary – 105(2) • Income to preferred beneficiaries – 104(12) • Loss carryover claims Page 23
  24. 24. Trust – Allocated income • Beneficiary – income from trust is generally property income; exceptions include dividends (taxable or non-taxable), taxable capital gains, certain pensions and certain resource income - retain character. • Taxable capital gains – only taxable portion needs to be made payable • Watch kiddie tax – high rate tax applies to certain income of minor children (17 and under) • Dividends • Section 15 income • Provision of property or services to related person/corporation with related specified shareholder • Capital gains on sale to person not dealing at arm’s length with minor Page 24
  25. 25. Trust Distributions and the 21-Year Rule 21 Year Deemed Realization of Assets Deemed Disposition Dates: • Spousal trust - end of the day on which the beneficiary spouse dies • Joint spousal trust - end of the day on which the settlor or beneficiary spouse dies (whichever is later) • Alter-ego and self-benefit trust - end of the day on which the settlor dies • Otherwise - 21st anniversary of the creation date of the trust • Realization of value “once a generation” Page 25
  26. 26. Trust Distributions and the 21-Year Rule 21 Year Deemed Realization of Assets No 21 Year Deemed Disposition: • Deferred income plan trusts • RCAs • Unit trusts • Most commercial trusts • A trust in which all interests have been permanently vested Page 26
  27. 27. Trust Distributions and the 21-Year Rule 21 Year Deemed Realization of Assets For Spousal (Partner) Trusts Only: • Trust can use remaining capital gains exemption of the beneficiary spouse/partner on the deemed disposition on death where the property held by the trust qualifies for the exemption • Rule does not apply for alter ego and joint partner trusts - Don’t use these trusts for QSBC shares or farming or fishing property unless Q g gp p y the exemption of the beneficiary (or the couple) have been utilized previously Page 27
  28. 28. Trust Distributions and the 21-Year Rule 21 Year • When planning for 21st anniversary: • Plan early - remind client of upcoming deadline on regular basis so thought given to planning; owner managers often underestimate how much growth will accrue and when they will be ready to retire • Review trust deed to determine options (can trust continue?) • Watch provisions in trust deed which may accelerate distribution date • Was 75(2) applicable? • Consider client motivations – desirable for trust to continue? Or ready to distribute? Page 28
  29. 29. Trust Distributions and the 21-Year Rule 21 Year Distribution of Assets to capital beneficiaries • Main tool to avoid deemed disposition - Roll assets out of trust at ACB prior to deemed disposition date • ITA 107(2) allows rollout at ACB • Trust instrument must allow for capital distribution of assets in kind • Distribution must be in satisfaction or partial satisfaction of a capital interest • Beneficiary picks up trust’s ACB for distributed asset Page 29
  30. 30. Trust Distributions and the 21-Year Rule 21 Year Distribution of Assets S.107(4.1) Where the conditions necessary for the application of S.75(2) have been met: y property y • Only rollover available for all p p y of the trust is a transfer to a beneficiary who is the settlor (or spouse/common-law partner/former spouse) - Application of S.107(4.1) not limited to assets received from settlor • S.107(4.1) will remain a problem until the settlor’s death • N necessary that S 75(2) actually resulted i the attribution of i Not h S.75(2) ll l d in h ib i f income Page 30
  31. 31. Trust Distributions and the 21-Year Rule 21 Year Distribution of Assets FMV Rollout - S.107(2.001) Elected FMV transfer available to: • All trusts resident in Canada • All trusts, for taxable Canadian property and certain other properties Why? • Trust has losses carried forward – trigger gains to utilize? • Property has accrued loss that can be applied in the trust to reduce gains? (watch affiliated beneficiaries) • Crystallize CGE Page 31
  32. 32. Trust Distributions and the 21-Year Rule 21 Year Deemed Realization of Assets If All of the Assets Can’t be Transferred • Freeze (or re-freeze if corporation held) the assets, and distribute preferred shares to beneficiaries - Minimizes value of assets that do need to be transferred - Retain control • Retain property eligible for capital gains exemption, and allocate gain exemption • Realize gain in stages if this lessens the impact • Reduce value of property held (i.e., redeem shares with eligible dividends) • Other available options Page 32
  33. 33. Trust Distributions and the 21-Year Rule 21 Year Deemed Realization of Assets • If decide to let the deemed disposition rules apply (i.e. do nothing) and this creates a capital gain in trust , it will be very important to have a provision in g g p trust agreement allowing the trustees to distribute phantom income • Consider liquidity issues re tax obligation • Manage potential for any double tax Page 33
  34. 34. Consultation on Eliminating Graduated Rate Taxation of Trusts and Estates Key Dates , (Budget Day 2013) – Federal government announces intent to g y ) g • March 21, 2013 ( eliminate tax benefits arising from taxing trusts and certain estates at graduated rates • June 3, 2013 – Department of Finance releases consultation paper with proposed measures to eliminate graduated rate taxation d li i d d i • December 2, 2013 – Deadline for stakeholders to submit input in writing to the Tax Policy Branch of the Department of Finance Page 34
  35. 35. Consultation on Eliminating Graduated Rate Taxation of Trusts and Estates • Testamentary trusts and certain grandfathered inter vivos trusts benefit from the application of graduated tax rates applicable to individuals • Oth trusts are subject t f d l tax at a fl t rate of 29% th hi h t f d l Other t t bj t to federal t t flat t f 29%, the highest federal tax rate for individuals • Proposed measures seek to eliminate tax benefits arising from taxing of grandfathered inter vivos trusts trusts created by will, and estates at trusts, will graduated rates • How will this be accomplished? Page 35
  36. 36. Consultation on Eliminating Graduated Rate Taxation of Trusts and Estates • Apply “flat top-rate taxation” to grandfathered inter vivos trusts and trusts created by will. • Fl t top-rate t Flat t t taxation t apply to estates after 36 ti to l t t t ft 36-month period f ll i th i d following death of individual - “Flat top-rate estates” - Estates of deceased individuals retain access to graduated rates for first 3 years of estate’s administration • Measures to apply to all existing and new arrangements for 2016 and subsequent taxation years Page 36
  37. 37. Consultation on Eliminating Graduated Rate Taxation of Trusts and Estates Other Proposed Measures • Calendar tax year required for testamentary trusts • Alternative minimum tax would apply • Income tax instalment rules would apply • Part XII.2 tax would apply Page 37
  38. 38. Consultation on Eliminating Graduated Rate Taxation of Trusts and Estates Tax administration rules • Currently, rules extend period: - That CRA may refund overpayment - For objecting to a tax assessment - For filing an agreement to transfer forgiven amounts under debt forgiveness rules, and l d - During which, at the trust’s request, CRA may reassess or make determination in respect of certain income tax liabilities • Limit relief to estates that have not yet become flat top rate estates top-rate Page 38
  39. 39. Consultation on Eliminating Graduated Rate Taxation of Trusts and Estates • Submissions were made to CRA by various parties • Feedback seems to be that significant changes seem unlikely… Page 39
  40. 40. Great Opportunities • University aged children (dividends from Jan 1 of the year child turns 18 not subject to kiddie tax) • Significant increase in value of shares anticipated - access to multiple capital gains deductions (retain flexibility) • Second marriages – children from 1st marriage • Taxpayers over 65 years of age with significant estates T f i h i ifi Page 40
  41. 41. QSBC Planning – A Better Structure Trust Beneficiaries: Mr &Mrs X, children, holdco X Trustee Mr X Common Preferred Common Holdco Beneficiary of trust Page 41 Opco SBC
  42. 42. Final Happy Note • CRA has increased audit activity in regard to trusts in recent years • • Where trust income has been allocated, was the income actually paid or is there a bona fide obligation to pay that i b fid bli i h income to a particular b i l beneficiary? fi i ? • Where the trustees make payments to third parties, was the payment made for the benefit of the beneficiary? (receipts for payments to parents) • • Has the trust been properly formed? Income calculated and reported properly? Care required when new trusts formed and when planning and reporting for existing trusts – timing of transactions and proper execution g g p p Page 42
  43. 43. QUESTIONS? Page 43
  44. 44. DISCLAIMER This material is for educational purposes only. As it deals with technical matters only which have broad applications, it is not practical to include all possible situations. For this reason a particular fact situation should be reviewed by a qualified professional. Although every effort has been taken to prepare this material, no organization or person involved with this material accepts any legal responsibility for its contents or any consequences f from i use. its Page 44
  45. 45. BIOGRAPHY FRANZIUS, TINA L. FRANZIUS CA Partner, Taxation Services tfranzius@bdo.ca Direct: 604 532 4766 Page 45 Tina has more than 20 years of experience in public accounting , with more than ten of those years spent specializing in income tax for owner managed business and professionals. Her professionals experience includes involvement in corporate and partnership reorganizations, the tax aspects of sale and purchase of businesses, business businesses succession, estate and trust planning and both personal and corporate tax planning. Tina has worked with entrepreneurial businesses across various industry lines lines, including manufacturing, construction and real estate and agriculture.
  46. 46. Thank you

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