If you`re hoping to get the most out of a family trust, you can`t just file it and forget about it. Rather, it is important to treat it as a living document and review it regularly. A trust remains an effective tool for multiplying the Lifetime Capital Gains Exemption (CGSA), as trusts can sell shares of corporations that qualify for the Qualifying Small Business Exemption (QSC). The tax payable is minimized because the profit can be shared between the beneficiaries of the trust (multiplication of LCGE). A family trust is considered a taxpayer for federal income tax purposes and pays the highest marginal tax rates. However, the trust`s tax liability can be reduced by allocating the income or capital gains to one or more of its beneficiaries, who would then pay at their own marginal tax rates, rather than those that would normally be levied on the trust. Trustees have the authority to decide which of the beneficiaries receives the income allowance each year. This practice is called income splitting. Capital assets may be held in a trust for up to 21 years without a taxable sale. Prior to the 21st birthday, property held by the Trust is generally distributed to one or more beneficiaries residing in Canada on a deferred tax basis.
In other words, the tax associated with profit on property can skip one generation and move on. This planning technique can result in a significant tax deferral and avoid a tax liability associated with a private corporation that may have little liquidity. Another advantage of contributing capital assets to a trust is that real estate transferred to a trust should not be subject to estate administration tax (called ”estate”) upon the death of the seller. While it is appropriate to allocate dividends from a family trust, two steps must be taken before the end of the trust`s taxation year: (c) U.S. citizens living in Canada may have reporting obligations as beneficiaries of a Canadian trust. There may also be U.S. taxes payable by a U.S. citizen or green card holder, depending on the activities of the Canadian business. In British Columbia, a trust can have a maximum legal life of 80 years from the date of its creation.
However, for its 21st anniversary, a trust is subject to the 21-year rule of the enacted provision, which should generally have sold all the capital assets for proceeds equal to the respective fair market value (FMV) of the assets. The good news is that there are tax planning strategies that can be used to prepare for the 21-year rule to avoid the supposed FMV provision and associated tax liability. A trust does not exist without property being transferred or, as it is called, regulated. The prospect or promise to make the transfer is not enough to create trust in advance. In addition, given the allocation rules, it may be unwise to settle a trust with the real property that provides income or capital to the beneficiaries, although the property that is taking place should have some value. For income tax purposes, a trust is considered a separate taxpayer. A trust must file its own tax return and report its own income. While there are a variety of tax benefits that make trusts attractive, three major tax benefits stand out. The first of these benefits is the income-sharing opportunity offered by trusts.
Although income from most trusts is taxed in the highest category, distributed income may be taxed in the hands of the beneficiaries to whom it has been paid or made due, rather than being taxed in the trust. Therefore, the distribution of income between children and spouses who otherwise have little or no income may allow for effective income splitting. Recent changes to the OPR system will limit the income splitting of a private corporation in certain cases. The second of these benefits is the ability to limit and defer capital gains tax that would otherwise be realized in the event of a taxpayer`s death. By transferring capital assets that are expected to increase in value to a trust, a taxpayer could limit the tax associated with the future value of those assets upon the taxpayer`s death. A third advantage is the possibility of multiplying the exemption of lifetime capital gains on the sale of shares in private companies eligible for the exemption. Currently, the exemption is set at $835,000 per person (as indicated for inflation up to a maximum of $1,000,000), including spouses and children (even if under the age of 18). A trust is a means of holding and transferring family property.
As such, it usually serves at least one of two purposes: it can reduce a family`s taxes by transferring income to members in the lower tax brackets, and it can meet the needs of less fortunate (or more impulsive) members by controlling how their money is paid. In practice, the constitution of a trust involves four relatively simple steps: a family trust holds assets on behalf of its beneficiaries while being protected against payment claims that creditors can exercise against them. ”A trust is an independent and distinct patrimony,” archambault explains. ”Assets cannot therefore be seized after litigation or insolvency.” Warning! But trust must be created if everything goes well. If there are already problems with its creation, a judge could still approve the seizure. The basic ownership structure of a family trust that owns a corporation would be as follows: However, there are times when you need to appoint someone else as trustee, for example a trust company.B. For example, if you want to establish a trust in another province, the trustee — or the majority if there are more than one trustee — must reside there. In other cases, you can appoint an external trustee if you want pure independence or if you expect conflicts within the family. As defined in the Income Tax Act, a trustee is usually a person who does not deal at arm`s length and establishes a trust by transferring property to the trust for the benefit of the beneficiaries […].