Trust Structuring for Canadian Taxpayers

In Canada, there are various tax-efficient structures available for estate and wealth planning purposes, including inter vivos trusts, and testamentary trusts. These trusts can provide significant tax benefits, asset protection, and continuity of management.

An inter vivos trust is a trust that is created during the lifetime of the settlor. It can be used to transfer assets to the next generation while still maintaining some level of control of the assets. If the Canadian resident contributor to the trust foregoes any beneficial interest in the trust, then the income earned by the trust’s assets is taxed in the hands of the trust. If the contributor retains any form of beneficial interest (present or future) then the income of the assets of the trust will still be attributed back to the Canadian resident contributor. This applies regardless of whether the trust is resident in Canada or otherwise.

A family trust is a form of inter vivos trust set up for the benefit of family members. Provided the income and capital gains earned by the trust are taxed at the trust level, such income would still be taxed will be the top marginal rate for individuals. However, in certain cases, the income, if distributed to them, can be taxed at the marginal tax rate of individual beneficiaries. Additionally, the trust can provide some asset protection, as it separates legal ownership from beneficial ownership.

A testamentary trust is a trust that is established upon the death of the settlor through a will. This can be an effective way to transfer ownership of assets while minimizing taxes. Income earned by the trust is taxed at the trust level, and the tax rate is the marginal tax rate as though the trust were an individual for the first two years of the testamentary trust’s existence.

Overall, incorporating trusts into an asset management and estate plan can provide tax savings and asset protection benefits. However, every individual’s financial and tax circumstances are unique, and we would be happy to provide advice to allow you understand your situation.