Ch. 38 Trusts Flashcards
What is the purpose of having a personal trust?
Management of assets
Protecting assets
Controlling Distribution
Privacy
Access to multiple exemptions
Income splitting
What is required to be set out in a written agreement in order for a trust to exist?
i) Certainty of intention - individual who transfers title to the property to the trustee must have the intention to set up a trust
ii) Certainty of subject matter - The written agreement must be specific with respect to property to be transferred to the trustee
iii) Certainly of objects - The written agreement must specify who the income and capital beneficiaries of the trust are
What are the different types of trusts?
Testmentary Trust (arises as a result of death via will or other provision)
Inter vivos trust - etablished during their life time
What are the types of testmentray trusts?
Spousal - spouse is entitled to receive it all, no other individual may receive or use any of the income and capital of the trust
Beneficiary other than the spouse - individuals other than the spouse of the settlor are the beneficiaries of both the income and capital of the trust
What are the types of inter vivios trusts?
Spousal - spouse received all of the income during the lifetime, and they must be the only one receiving it or using it. on death of the settlor, this becomes testamentary
Joint Spousal - settlor must have been at least 65 when this was created. Settlor and his or her spouse must be entitled to receive it all before the date of their deaths.
Alter Ego - Settlor must have been at least 65 when this was created, must be entitled to all the incoem of the trust during their own life time. Must be the only one receiving it all
Family Trust - beneficiaries other than the settlor or the spouse are entitles to the income and capital of the turst
What happens when property is transferred to a trust that is not spouosal, joint spousal or alter-ego?
Settlor is deemed to have disposed of the property at its fair market value at the time of the transfer, and the trust is deemed to have acquired the property at a cost equal to the deemed proceeds of disposition of the setllor.
If there is accrued income or capital gains on the transfer, these will be taxed in the hands of the settlor.
Note: Trust is treated as a separate indiivudal in the eye of the tax gods
What happens when property is transferred to a spousal (inte and testa), joint spousal or an alter ego trust?
These can be transferred to a trust for proceeds equal to the tax cost of the property.
Non-depreciable capital: tax cost will be ACB
Depreciable capital: tax cost will be UCC
Settlor can elect out of automatic rollover provisions, if this is done, then it is considered to have deemed proceeds equal to FMV - in which they will be able to use up any capital gains or non-capital losses and is eligible for the capital gains exemption on a capital gain on the transferred property.
What is the tax rate used for income reitained in trusts?
It is taxed at the highest federal and provincial rates (fed = 33%)
It is considered graduated rate estate (GRE), an di tis considered as an estate that arose as a conseuence of an individuals death if:
- no more than 36 months have passed since death
- esttate is consdiered a testamentry trust for tax purposes
- individual SIn is provided in the return of income
- the estate designates itself as the GRE of the individual in its first taxation year after 2015
- no other estsate is desgianted as a GRE of the individual ending after 2015
What other deductions or rules are applied to the income of trusts?
Becasue it is taxed at the highest rate, the distributions are tax-free to beneficiaries.
Generla rule is that income earned by a trust loses its character when distributed to the beneficiaries. However, the following designations can be elected so that the character of certain types of income is retained and flowed through
Dividends from taxable canadian corporations
capital dividend
taxable capital gains
foreign income and foreign tax paid
If these are not made, income is treated as proeprty inocme and is fully taxable.
What happens to losses in trusts?
losses cannot be allocated, but net and non-capital tosses must be used in the trust and follow the same rules as individuals.
The following are deductible in determining net income for a trust:
- amounts paid or payable to beneficiaries
- interest and other expenses incurred in earning income of the trust
- trustee or executor fees
- amounts paid by the trust to third parties to provide goods or services to a beneficiary that are allocated to the income of a beneficiary.
When does a Trust not roll-over at cost cost to its beneficiaries?
EGO to someone else other than settlor
Spousal trust to someone else other than trust
Jooint spousal other than spouse and settlor
21 deemed disposition rule
All personal trusts (other than spusal, joint spusal and alter ego) are deemed to have disposals every 21 years.
For spousal - at time of death
alter ego - at time of death of settlor
joint spousal - later of death of spouse or self
When does attribution rules apply?
Applies to capital and income transferred to spoues and minor children, nieces and newphers of the taxpayer under the age of 18.
When must things be filed?
GRE states that they have must have a fiscal year end one year following the death of the settlor. Once a testamentrayr trust ceaes to be a GRE, the year end of the trust becomes a calendar year end.
