A trust can serve at least one of two primary functions; to reduce a family’s taxes by shifting certain assets and income to family members in lower tax brackets or by controlling the finances of family members who have proven unable to hold money.
A trust in Canada is not considered its own legal entity but a taxpayer under the highest rates in Canadian law. There are two types of Canadian trusts – Testamentary Trusts and Inter Vivos Trusts.
What is a Testamentary Trust?
The Revenue Agency of the Government of Canada defines a testamentary trust as a trust or estate that is generally created on and as a result of the death of a person. The terms of the trust are established by the will or by court order concerning the deceased’s estate under provincial or territorial law.
If assets in a testamentary trust are not distributed to beneficiaries as per the wishes of the deceased, the trust may default to an inter vivos trust. A testamentary trust may also convert to an inter vivos trust if it incurs a debt or other payment obligation to a beneficiary or any other partner. Debts that circumvent this rule are:
Incurred by the trust in the fulfillment of a beneficiary’s right to implement payment of an amount owed by the trust to the beneficiary or to accept any part of the trust’s capital
Owed to a beneficiary due to services provided to the trust by the said heir
As a result of payment on behalf of the property transferred to a specified party within 12 months of payment, if the beneficiary has been dealing with the trust at arm’s length
What is an Inter Vivos Trust?
Put simply, an inter vivos trust is created by a live person to benefit someone else, also referred to as a “living trust.” There are several reasons why someone would institute an inter vivos trust. A parent may create a college education fund to mature when their child comes of age, or a business magnate may place his property assets into a trust to avoid probate or estate taxes.
There are several different types of inter vivos trusts. The Canadian Revenue Agency recognizes 33 separate types of inter vivos, or living trusts. Some of the most common are:
- Alter Ego Trusts; allowing a settlor over the age of 65 to receive income after retirement
- Real Estate Investment Trusts (REIT); allowing rent-generated income to gather
- Master Trusts; which is only for Canadian residents, cannot take deposits, and can only invest in its own funds
- Employee Trusts; are made by employers to benefit their employees
What is a Public or Public Investment Trust?
A public trust is any trust that is listed on a designated stock exchange in Canada. If a substantial amount of that trust’s fair market value comes from units of public trusts, partnership interests in public partnerships, shares of capital stock in public corporations, or any combination of those properties; then it is known as a public investment trust.
Investing in a public trust requires additional effort during tax season, such as forwarding certain information to the CDS Innovations Inc. website within sixty days of the end of your tax year.