Trusts: A Family Affair
A trust is an arrangement by which a person (the settlor) entrusts specific assets to one or several persons (the trustees) to hold and administer for a given period of time, for the benefit of designated persons (the beneficiaries). A trust can be used to hold assets for a minor child, to protect the interests of a handicapped person, or to ensure the financial security of a family member. In the case of family trusts, if the trust was created during the lifetime of the settlor, it is an inter vivos trust; if it was created upon the settlor’s death, it is a testamentary trust. Revenue Canada considers a trust to be an individual for tax purposes, but an inter vivos trust is not entitled to progressive tax rates, and its income is taxed at the highest rate applicable to individuals. However, the income paid or payable to the beneficiaries can be deducted from the trust’s income and taxed in the hands of the beneficiaries. To prevent taxpayers from indefinitely deferring capital gains on property transferred to a trust, the trust is deemed to have disposed of all its property at fair market value every 21 years. A trust is often liquidated in the 20 thyear in order to avoid the deemed disposition. When creating an inter vivos trust, you must take into account attribution rules. The income payable to a minor or to the settlor’s spouse can be attributed to the settlor when the income is taxable in the hands of the beneficiary only. If the income is taxed to the trust, the maximum tax rate applies and it is not in the interest of the tax authorities to invoke attribution rules. It is wise to study carefully the tax rules that apply to trusts before deciding to set up a family trust.
[ TOP ]