Maximizing your trust – other considerations

As we have been discussing trusts for the last couple of months you should have a good understanding of the basics of a trust. There are many uses for a trust and in this series of blogs we are mostly discussing the use of family trusts. There are numerous other types of trusts and they all operate similarly in the fact that they all have the 3 same factors: 1. Settlor 2. Trustee(s) 3. Beneficiaries. We will now do some recap on a few items and discuss some other considerations of having a trust.

Family Trusts are very effective when used to hold assets and distribute cash flow. We must remember that income that is left inside of the trust is taxed at the highest marginal tax rate, however the trust is allowed specific tax deductions and tax credits such as dividend tax credits, capital gains deductions, donation credits etc. Income can flow through a trust, however losses cannot typically be flowed through the trust. The losses can be used against income in the trust, carried forward, or carried back up to 3 years to apply against income of other years. If you have paid tax in the past and apply for a loss carryback you may receive a tax refund of the taxes you paid in the prior years you are applying the loss to. This is similar for individuals and corporations.

Also remember that a trust has a $750,000 Lifetime Capital Gains Exemption, which is the same as every Canadian individual taxpayer. This is key for the sale of small business shares, farm property or fishing property. Because all of the beneficiaries have the same exemption this could allow for millions of dollars in qualified capital gains which could be exempt from tax.

Another rule of most trusts that CRA has put into place is the 21 year deemed disposition rule. This rule means that 21 years after the asset was acquired you will have to claim the tax on the the current fair market value less the cost of the asset and improvements to the asset. This is done every 21 years. This rule can be avoided by distributing property to the beneficiaries before the 21^st year, or by providing in the trust that the property will indefeasibly vest in the beneficiaries prior to the disposition.

One last thing to discuss is the option of a trust acquiring a beneficiary’s principal residence. The sale should be a real sale with actual funds changing hands. There is typically no tax advantages to selling your principal residence to a trust as you do not pay capital gains tax when you sell your principal residence. The only reason you may want to sell your principal residence to the trust is for the potential of liability protection. Other real estate however should be sold to the trust or a corporation owned by the trust. This property that the trust acquires can be almost anywhere in the world as the trust can also have non resident beneficiaries.

There are so many ways to plan using a trust and we have discussed a lot of the basics. Please do inquire with questions on trusts, structuring and planning. We look forward to hearing from you!