If you transfer property to a personal trust, such as a trust for your benefit or that of your family members, you are deemed to have sold the property at its fair market value. As a result, any accumulated capital gain will be realized, and half of it will be included in your income as a taxable capital gain. The trust will be deemed to acquire the property at a cost equal to its fair market value.
What is a bearing?
However, in certain cases, a tax-free “rollover” is permitted for transfers to trusts. By “rollover”, we mean that you are deemed to have sold the property at your tax cost (so you have no gain for tax purposes), and the trust inherits that same cost.
3 examples of rolling trusts :
1. Spousal trusts (spouse or common-law partner)
A rollover is allowed for property transferred to this type of trust. In general, the trust must meet the following criteria:
- She is a resident of Canada;
- Your spouse is a beneficiary of the trust;
- During his or her lifetime, your spouse is entitled to the entire income of the trust, and no one else can receive or use the trust capital. However, the trust may provide that your children or other beneficiaries are entitled to the income or capital after your spouse’s death; and
- If the trust is created on your death, i.e., under your will, the property must be “indefeasibly vested” in the trust within 36 months of your death, or any longer period acceptable to CRA. “Irrevocably vested” generally means that the trust becomes the owner of the property without any special conditions.
Upon your spouse’s death, the trust will have a deemed disposition of his or her assets at fair market value, realizing all accrued capital gains and losses. This may result in a tax liability for the trust at that time.
2. Joint spousal trusts (spouse or common-law partner)
The criteria are similar to those described above, except that you and your spouse are joint beneficiaries of the trust. Income entitlement and capital utilization requirements apply to each of you during your lifetime, until the death of the last of you. It is also at the time of the latter death that the deemed disposition occurs.
In addition, you must be at least 65 years of age at the time of transfer to the trust.
3. Self-benefiting trusts
Again, the criteria are similar, except that you are a beneficiary of the trust. Income entitlement and capital utilization requirements apply to you during your lifetime. The deemed disposition occurs at the time of your death.
You must be at least 65 years of age at the time of transfer to the trust.
Caution! There are other restrictions!
Naturally, the tax-free rollover is an attractive feature of the above-mentioned trusts. However, certain restrictions are likely to have a negative effect.
For example, if the trust pays income to a beneficiary other than the lifetime beneficiary described above (you and/or your spouse, as the case may be) during his or her lifetime, the payment is not deductible to the trust even though it is included in the income of the other beneficiary. The result will be double taxation, since both the trust and the other beneficiary will be taxed on income.
If the trust gives property to the beneficiary for life, the distribution is usually tax-free. However, if the property is given to another beneficiary while the lifetime beneficiary is alive, it is deemed to have been sold at fair market value.
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