TRUST AND TAXES
One of the questions most frequently asked by customers concerns trusts. On the market, many people mention that they have a family trust and that this saves a lot of tax. Is this really the case? Inter vivos trusts have a single tax rate, the highest rate being 50%. So, if the income remains in the trust, there will be no tax savings. Here are a few points to help you understand the usefulness of trusts:
1. How an inter-vivos trust worksA trust is a separate, autonomous entity, and the assets held by the trust do not belong to you. Beneficiaries are among the trust’s key players. They are entitled to the income and/or capital of the trust, but have no decision-making rights in the management of the trust. They cannot demand the redemption of their share. Usually, the trust is discretionary, meaning that the trustees decide to whom the income or capital will be allocated. Trustees are those who manage the trust.2. Asset protection trustThis trust is also an inter-vivos trust, but its primary purpose is to protect the assets of one of the beneficiaries. This trust will be used when a person, in the course of his or her work, is at risk of being sued. Among other things, most professionals are personally liable for their actions. The asset protection trust protects the professional’s assets in the event of a lawsuit, since the trust will own any assets the professional may hold.3. Income splittingDiscretionary inter-vivos trusts are used for tax planning and to hold shares in your operating company. For example, if you are the sole shareholder of your company, it will be your trust. Therefore, when the operating company pays a dividend to the trust, it is possible that this income will be allocated to beneficiaries other than you, who usually have less income than you. For example, an adult child who is a full-time student and earns no other income can receive a dividend of about $20,000 tax-free. Since we know that the highest marginal rate for a dividend is 38%, this represents a savings of $7,600.4. Capital gains deductionAn individual is entitled to a capital gains deduction of $750,000 ($800,000 as of 2014, according to the latest federal budget) when he or she disposes of shares in a private active business corporation, subject to certain conditions. If the capital gain is realized by the trust, the trustees could then allocate the capital gain to each (individual) beneficiary and use their capital gains deduction. Each capital gains deduction saves $200,000 ($800,000 at a rate of almost 25%).5. FlexibilitySince the trust is discretionary, you don’t have to decide right away to whom to give the shares and/or other investments.
The use of a trust can be highly advantageous from a tax point of view. However, certain rules must be respected. To avoid unpleasant surprises, the trust must be set up by a specialist in the field.
Liliane Fortier, CPA, CA, LL.M. Fiscal authorities.
Partner, Canadian Taxation, SR&ED
Telephone: 514 878-0258
lfortier@demersbeaulne.com
Telephone: 514 878-0258
lfortier@demersbeaulne.com
