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Trusts

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4) Trusts

Persons moving to Canada may have connections to foreign trusts.  Such trusts require a careful review do determine the Canadian tax implications.

The residence of a trust or estate is a question of fact to be determined according to the applicable facts and circumstances in each case.  Generally a trust is considered to be resident where the trustee, executor, administrator, heir or other legal representative who manages the trust or controls the trust assets resides.   Where two or more trustees exercise power, residence may be determined based on the residences of the majority of the trustees.

Factors that the CRA look at in making the determination of a trust's residence may include:

(a) control over changes in the trust's investment portfolio,

(b) responsibility for the management of any business or property owned by the trust,

(c) responsibility for any banking, and financing, arrangements for the trust,

(d) control over any other trust assets,

(e) ultimate responsibility for preparation of the trust accounts and reporting to the beneficiaries, and

(f) the power to contract with and deal with trust advisors, such as lawyers and accountants.

The Canadian government, in an attempt to prevent abuse in the use of non-resident trusts has proposed significant changes in how Canada will tax these trusts.  Under these proposals, a factual non-resident trust may be deemed to be resident in Canada if the trust has a "resident contributor" or a "resident beneficiary" and a "connected contributor".  These proposals were originally introduced in 1999 and had been revised numerous times in response to concerns expressed by the tax community over their complexity and overly broad approach.  Some revisions were made, but the rules still remain extremely complex.  The changes are generally to be effective as of January 1, 2007.

The Canadian courts have recently looked at the concept of mind and management in determining the residence of the trust.  This approach implies that some non-resident trustees may not be exercising their fiduciary responsibilities appropriately and that, in fact, they are acting as agents on behalf of others, who may be the trust settlors or beneficiaries.  Care must be taken to ensure that any non-resident trustees have full fiduciary control and exercise it accordingly.

There is no residence tie breaker rule contained in the Treaty. In situations where dual residency arises, the matter would be referred to competent authority. This can be both costly and time consuming.

Trust income or capital gains may be attributed and taxable in the hands of a person if the person transferred property to the trust and the property , or property substituted for it, may revert back to that person or pass to other persons designated by him.  In addition, if the property can be disposed of only with his concurrence, any income or loss or taxable capital gain or allowable capital loss from the property, or property substituted for it, will be attributed to that person during his lifetime while he is resident in Canada.  In these situations, it does not matter if the trust is resident in Canada.

A new immigrant to Canada may benefit from setting up a non-resident trust.  Structured properly, the trust may be tax exempt in Canada for up to 5 years.  Also a non-resident may set up a foreign trust for a Canadian beneficiary that will be exempt of Canadian tax indefinitely.  A Canadian resident beneficiary is not taxed on capital distributions from a foreign trust.

A trust may be either inter-vivos or testamentary depending on whether the trust was established during the settlor's life or on his death.  Inter-vivos trust are always taxed at the highest marginal tax rate.  Testamentary trusts use graduated rates.

Resident and deemed resident trusts are taxable on their world wide income in, generally, the same manner as individuals.  Trust income, however, can be distributed to a beneficiary and taxed in their hands instead.  Distributions on account of capital are not taxable.

The relationship between the settlor(s), beneficiaries and trustees is governed by the trust deed.  A  properly constructed trust is an extremely flexible planning tool.

An inter-vivos trust must file its return, Form T3, "Trust Income Tax and Information Return", 90 days after its tax year end.  Inter-vivos trusts must have a calendar year end.  The tax year-end of a testamentary trust may be, but does not have to be, December 31. The first tax period of the trust begins on the day after the person dies, and ends at any time the executor selects within the next 12 months. The tax rates used, and the tax year of the slips issued to the beneficiaries, are based on the year-end of the trust.

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