CHAPTER 17:

Trusts

Prepared by

Kristie Dewald
University of Alberta
Electronic Presentations in Microsoft PowerPoint

Copyright 2016 McGraw-Hill Education Limited

Trusts
I.
II.
III.
IV.

The Trust Entity

Tax Treatment of Trusts
The Use of Personal Trusts
The Use of Commercial Trusts

I. The Trust Entity

A. Definition of a Trust:
Trust not defined in The ITA.
Merely outlines the tax treatment of the income

A trust is a legal arrangement whereby a person

(settlor) transfers property to another person
(trustee) to hold for the benefit of one or more
persons (beneficiaries)
Trustee

Beneficiary
Trust

Settler

Assets
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A. Definition of a Trust
Trust does not have status of a legal person
Format closer to a partnership
Existence is created by trust documents
Outline the obligations of the trust

Beneficiaries can be capital or income beneficiaries

B. Types of Trusts
Two types:

Inter Vivos
In Lifetime

Commercial
Purchased

Testamentary
On Death

Personal
Not Purchased
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B. Types of Trusts
Personal:
Used for estate and tax planning purposes
Includes inter vivos and testamentary trusts
Beneficiaries do not purchase trust interests
Receive trust interests from goodwill of others, typically a parent or
spouse

Commercial:
Beneficiaries purchase their trust interests
Typically, traded on the stock exchange
Examples include mutual funds, REITs and royalty trusts

II. Tax Treatment of Trusts

Considered an Individual
Therefore, represents a separate entity

Taxable in Canada if resident in Canada any time in the

year
Residency established jurisdiction where central management
and control of the trust resides, regardless of residence of the
trustees

A. Determination of Taxable Income and Tax

Use the net income formula (Chapters 3 and 9)
Converted to taxable income by applying rules covered in
Chapter 10 (loss carry-overs)
Exceptions in determining net income for tax
purposes:
Deduct any income payable to a beneficiary.

A. Determination of Taxable Income and Tax

Income considered payable if:
Paid in the year or
Beneficiary is entitled to enforce payment in the year.

Unallocated income is taxed in trust.

Losses incurred remain in the trust
Either non-capital or capital losses.

A. Determination of Taxable Income and Tax

Trust may allocate and deduct income even though
not payable to a beneficiary if:
Created for minor children, and
income is accumulated on their behalf until 21 years of age.

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A. Determination of Taxable Income and Tax

Taxation year:
All trusts are considered individuals, therefore, taxation year is
the calendar year
Exception: testamentary trusts that are designated a Graduate
Rate Estate
Graduated Rate Estate is a Testamentary trust that lasts no
longer than 36 months.

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A. Determination of Taxable Income and Tax

Taxation of Testamentary and Inter Vivos:
Highest personal tax rate both federally and provincially (33%
federal)
Forces most trusts to allocate income to beneficiaries to be
taxed at personal graduated rates

Two types of trusts are permitted to apply the graduated

tax rates to income:
1. Graduated Rate Estate (from previous)
2. Qualified Disability Trust
testamentary trust with a beneficiary that qualifies for the
disability tax credit
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B. Income Allocation and Beneficiaries

Trust may designate the source and characteristic of
income allocated to beneficiaries:
Capital gains eligible for capital gains deduction.
Taxable Dividends allocated as Eligible or Non-eligible for
purposes of the DTC.

May allocate to Beneficiaries in different proportion.

Overall allocation must be equitable.

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C. 21 Year Rule
Trust have limited life:
Deemed to sell assets on its 21st anniversary.
Means assets deemed sold at FMV, includes:

Capital property
Depreciable property
Land that is inventory
Resource Property

Exception is a spousal trust.

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C. 21 Year Rule
May be able to avoid deemed disposition at FMV if:
Transfer property to beneficiaries prior to 21 year anniversary,
Beneficiaries take over tax position of assets received

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D. Transaction with Settlors and Beneficiaries

Personal Trusts (excluding spousal trusts):

Settlor
Occurs at
FMV

Trust
Depends on
Type of Beneficiary

Beneficiary
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Transaction with Settlors and Beneficiaries

Income Beneficiary has right to the income
Property is deemed to be disposed of at FMV

Capital Beneficiary has right to the capital

Property is deemed to be disposed at Cost
Same treatment if beneficiary has both income and capital
interest.
Beneficiaries assume the tax position.

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E. Spousal Trusts
Spousal trust
Spouse is entitled to receive all the income and
No other person can use or receive the capital of the trust until
spouses death

Common use to ensure spouse is taken care of until

death but preserve assets for the children.

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E. Spousal Trusts
Three unique features:
Property transferred into trust at cost.
21 year rule is waived for the first 21 year anniversary.
Upon death of spouse assets are deemed to be disposed of
at FMV

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F. Estates
The administrative period between debt settlement
and asset distribution
Estate life is limited last until executor duties are
fulfilled.

Death of
Individual

Estate Period
Assets collected
Debts settled

Assets To
Individuals

END

Assets To
Testamentary
Trust

On
Going

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G. Other Trusts
Tax Deferred Income Trust Plans:

Registered Pension Plans (RPP)

Registered Retirement Savings Plans (RRSP)
Deferred Profit Sharing Plans (DPSP)
Registered Retirement Income Funds (RRIF)
Registered Education Savings Plans (RESP)

Not taxable and hold income for distribution to beneficiaries

at a later time
Tax is deferred on income until distributions are made
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G. Other Trusts
Bare Trusts:
Purpose is to hold property on behalf of others
Unit Investment Trusts:
Mutual Funds
REIT
Income trust
Royalty Trust

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III. The Use of Personal Trusts

A. Estate Freeze
Kids
Mom
and
Dad

Subscribe for
Common shares

Transfer common shares

For preferred shares
Family Co

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III. The Use of Personal Trusts

B. Income Splitting
Inter Vivos capital gains on property transferred to minor
children
Testamentary take advantage of the lower tax rates.
Income on Income interest earned on reinvestments not
subject to attribution.

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III. The Use of Personal Trusts

C. Administrative Benefits:
1.
2.
3.
4.

Provide a vehicle to manage property for those who

cannot.
Provide direction on how to use the property after a
persons death
Preserve the asset
Hold property for persons not yet born ie. future
grandchildren

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IV. The Use of Commercial Trusts

Purpose - allow smaller investors to:
Participate in variety of investments
Spread risk
Gain access to professional investment management

Income trust - primary purpose was to avoid two-tier

tax format and possible double taxation.
Recent tax changes have changed this

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IV. The Use of Commercial Trusts

Primary Incentive for using income trusts, prior to
changes:
Trust income was not taxable income could be allocated to
unit holders and taxed as part of their income.
Allocation to unit holders retained its source and characteristics
Capital gains and dividends.

Three types of Income trusts:

Investment trusts
Royalty trusts
Real estate investment trusts (REITs)

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A. Investment Trust and Royalty Trusts

Created After October 31, 2006
Investment trust operates an active business
Royalty trust used in the resource industry (oil and gas
resources are a dominant role)
Both trusts distribute all, or substantially all, of their
income to the trust beneficiaries or unit holders

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A. Investment Trust and Royalty Trusts

Created After October 31, 2006
Unit Holders

Trust
Loan to
OpCo

Interest
To Trust
Operating
Company
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A. Investment Trust and Royalty Trusts

Created After October 31, 2006
These types of trusts are now referred to as Specified
Investment Flow-throughs (SIFTs):
Cannot deduct most distributions
Must pay a special tax on distribution
Distribution does not retain characteristics,
Deemed to be an eligible dividends

Result is that there is little, if any, benefit to structuring a

business as an investment or royalty trust

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B. Investment and Royalty Trusts

before October 31, 2006
Trust created before can retain their status until end of
the 2010 taxation year.
During this period:
Can deduct distribution eliminating tax at trust level
Distributions retain their characteristics
Beneficiary can be any type of entity

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C. Real Estate Investment Trust

Not considered a SIFT entity
Continues to be treated for tax purposes as an inter vivos
trust with all the related benefits
Normally owns income producing property directly
Creates a tax shelter by claiming CCA non-cash item

Permits trust to distribute more than taxable amount

Distribution > taxable amount is considered a return of capital
not taxable.

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