Trusts in Canada
Written by Tiffany Woodfield, Associate Portfolio Manager, STEP Associate, CIM®, CRPC® and John Woodfield, Portfolio Manager, CIM®, CFP®
We've created an essential guide to Canadian trusts so you can begin learning how to protect your wealth. Once you’ve accumulated substantial assets, it’s important to protect what you’ve built and ensure your legacy is protected.
Trusts have been used as far back as the middle ages when Franciscan monks couldn’t own property. As a result, they would have benefactors hold the legal title to the property on their behalf. Today it is a similar concept. When using a trust, someone else, such as a trustee, holds the property's title for the benefit of a named beneficiary. A trust is a split in beneficial and legal interest.
Please note that this article is general, and you will need professional advice about your situation. The author of this article is a STEP Associate. STEP is a global body of lawyers, accountants, trustees and other practitioners that help families and professionals plan for the future and protect generational wealth. The author of this article is also a portfolio manager and financial advisor; however, the author is not a lawyer. For legal advice, please speak with a legal professional who has worked with people in your situation.
TABLE OF CONTENTS
- Why Use a Trust?
- What Is a Trust?
- How to Know If You Need a Trust in Canada
- How Do Trusts Work in Canada?
- Key Terms You Need to Know to Understand Trusts in Canada
- Types of Trusts in Canada
- Trust Funds in Canada
- In-Trust Accounts in Canada
- Setting Up a Trust in Canada
- How Canadian Trusts Differ from American Trusts
- What US Citizens Need to Know about Canadian Trusts
- Trusts in Canada to Protect Assets
- Putting Together Your Trust Team
- Working with a Financial Advisor in Canada
- How much does it cost to set up a trust in Canada?
- What are the disadvantages of a trust?
- What are the advantages of a trust in Canada?
- Who can be the trustee of a trust?
- Is it better to have a will or a trust in Canada?
Why Use a Trust?
There are many ways you could use a trust when doing estate planning. Some examples of common use cases for a trust are as follows:
EDUCATION
Say a grandparent wants to put money aside for education for their current and future grandkids. They can fund a trust and have a trustee invest the funds prudently to provide funds for future grandkids.
INHERITANCE
Imagine a mother who wants to provide for her adult daughter. Let's call this daughter Mary. Unfortunately, Mary loves couture and spends money like it's going out of style. Her mother doesn’t want the money wasted. She would like her daughter to use the money to fund a business or property. She could outline all of this through a trust to ensure the money is used to support her daughter long-term.
RECREATION PROPERTIES
It's not uncommon to use family trusts in Canada for property such as a recreation property to be shared by parents, grandparents, siblings and future generations. The trust can be set up so the trust pays the costs of maintaining the property. Having this trust set up will also help if you fear a spouse may have access to the property after a divorce.
CORPORATE ESTATE FREEZE
To help with an estate freeze when you own a corporation, you may use a family trust to carry the common shares you want for your heirs.
These four uses of trusts are just some of the common ones.
But there are many more examples. Remember that the trust you need depends on your specific goals and circumstances.
You should work with a legal professional when deciding what trusts to use in your estate planning.
What Is a Trust?
In simple terms, a trust is set up when a settlor transfers the title of specific assets to a trustee to hold for a beneficiary or group of beneficiaries. You could also define a trust as a fiduciary relationship involving a gift or property transfer from the settlor to the trustee. After the transfer, the settlor has no control over what the trustee does with the trust unless they specifically reserve this right in the trust deed.
A trust can be created during the lifetime or after the death of a settlor. A trust is an excellent tool for estate planning and income splitting. However, working with an estate lawyer and team who understands trusts is essential. They will make sure the trust is created to follow your wishes.
How to Know If You Need a Trust in Canada
First, to know if you need a trust in Canada, you should speak with an attorney who has experience working with people in your situation. However, let’s briefly review how to identify if you might need a trust.
In Canada, we have a "deemed disposition tax" when you pass away. It is as if you sold everything the day before you passed away, which can mean a tax liability for any gains on the property. The only exception to this is when you have qualified rollovers. A trust allows you to transfer assets while alive, which helps to lower the "death tax" and avoid probate.
A trust is often created to reduce taxes for a family and to provide flexibility around controlling and managing assets. Usually, when determining if you need a trust in Canada, you will start with how much wealth you need to protect.
Ask yourself if the amount of wealth you need to protect warrants the additional cost of setting up a trust and the annual filing costs. Using a trust will often be worth it if your estate is worth millions or even hundreds of thousands.
In addition, a trust can be useful when you have remarried and have children from a previous marriage. You may want the income from the trust for your spouse while they are alive and the remaining capital for your children.
Another situation you may feel you need a trust is if you have a disabled child, and you want to know they are taken care of when you are no longer around to do it yourself.
Finally, if you have a corporation, using an estate freeze might make sense. When you do an estate freeze, you'll transfer the future value of an asset (usually your small business corporation) that you own to other people, such as your children, grandchildren, or key employees. You, as the transferor, keep the value of your shares at the moment of the freeze. Doing this provides a tax benefit to you and your heirs.
To review, consider using a trust and seeking legal advice in these situations:
- To reduce taxes for your family when they inherit your estate
- To provide flexibility around the management of your assets
- To provide an inheritance with stipulations around how the assets can be used
- If your estate is large enough to warrant the added expense of setting up the trust
- If you own a corporation and wish to do an estate freeze for your share of the ownership to reduce tax at death
- If you are remarried and have children from another marriage
- If you have a disabled child, you want to ensure is taken care of after you pass
How Do Trusts Work in Canada?
A trust is considered a separate taxable entity under the Income Tax Act.
Simply put, a trust is set up when a settlor transfers the title of specific assets to a trustee to hold for a specific beneficiary(s).
For any trust to be valid, three certainties are required:
- Certainty of intention: the clear intention of the settlor to create the trust.
- Certainty of subject matter: the identifiable property must be transferred to the trust
- Certainty of objects: certainty of the beneficiaries.
There can be tax advantages when setting up a trust. But if not done properly, there are also serious disadvantages. In addition, there are many types of trusts, so it's important to speak with an expert before making any decisions.
Key Terms You Need to Know to Understand Trusts in Canada
Attribution Rules
Attribution refers to the tax consequences of certain rules in the Canada Income Tax Act to stop various forms of income splitting. Attribution rules may apply to a spouse or minor children. Also the income of a Canadian discretionary family trust considered a grantor trust would attribute to the U.S. owner for U.S. tax purposes.
Settlor
The settlor is the person who creates an express trust in Canada. There could be more than one settlor on the same trust. The settlor is the person who transfers or gifts property to another person to be held in trust for a beneficiary.
Trustee
A settlor transfers the title of specific property to a trustee. The trustee then manages the property according to the trust deed for the beneficiary (s). The trustee can also be the settlor and/or a beneficiary. A corporation can also be a trustee in limited instances but cannot carry on business unless incorporated.
Types of Trusts in Canada
There are many types of trusts in Canada. While you must speak with a professional to learn exactly what type of trust is best for your situation, this brief overview will help you identify some potential options.
Express Trusts
An express trust is when someone clearly intends to create a trust. For example, if a grandparent puts aside money for their grandchild in a trust, that is an express trust. The trust allows control over when the beneficiary gets the assets and what they are used for.
Trusts by Operation of Law
Trusts by operation of law are usually in two categories: resulting trusts or constructive trusts.
If a person is dealing with a resulting or constructive trust they are typically speaking with a lawyer(s).
Operation of Law - Resulting Trust
- An automatic resulting trust results from extenuating circumstances not covered in an express trust. For example, a man creates a trust which states that the trust's income will go to his son during his lifetime. The remaining capital will go to his son's children when the son passes. However, if the son passes before he has any kids, the trustee will hold the capital on behalf of the son's estate as an automatic resulting trust.
- A presumptive resulting trust is when someone is presumed to hold something in trust for another person, but it is unclear. For example, Joe transfers some money to Shelly, and she uses the money to buy land in her name. Joe passes away, and his heirs say the money was not a gift. It is presumed that Shelly holds the property in trust for Joe.
Operation of Law - Constructive Trust Situations
A constructive trust situation arises not out of express intention but rather by operation of law. For example, say Mary and Mike live together and run a store. Mike has legal ownership of all the store's assets. But Mary has worked for years without getting paid. Mike and Mary's relationship ends, and Mike sells the store. He keeps all the proceeds. The courts could conclude that Mike held the assets in a constructive trust for Mary. Mary may be entitled to some of the proceeds.
Discretionary Trusts
A discretionary trust is where a trustee can determine the following:
- the amount of income and/or capital a beneficiary can receive
- which beneficiaries can receive the income and/or capital or
- which beneficiaries can receive the income and capital and the amount each person receives.
Fixed Trusts – Non Discretionary
A fixed trust is where there is a fixed amount or a fixed portion of the trust, and the trustee has no discretion to determine the amounts.
Family Trusts
A family trust is a tool for transferring wealth and protecting assets. It is a legal entity that can enter into contracts with third parties on behalf of the beneficiaries.
If you own a QSBC-qualified small business corporation in Canada and a family trust, you may have more options to control your wealth. You could use a professional trustee to follow your intended wishes and to permit discretion in allocating income and capital gains to particular beneficiaries.
When considering setting up a family trust, it is imperative to seek professional advice.
Living Inter-Vivos Trusts
A living trust is a legal document created during the settlor's lifetime where they name a trustee responsible for managing the assets for the beneficiaries. A living trust can be revocable or irrevocable, which means the settlor may or may not control the assets in the trust.
Real Estate Investments Trusts (REIT)
A real estate investment trust (REIT) is designed similarly to a mutual fund in that it is a company that manages a pool of capital for investors. The company that owns the REIT owns income-generating real estate such as apartment buildings, retail centers and offices where individual investors benefit from dividends without having to hold multiple properties.
Land Trusts
A land trust is a living trust designed to manage the property while an owner is alive. These trusts provide the owner anonymity and prevent probate when the owner passes. Land trusts are similar to other trusts, except they are meant to be used for real estate, such as a development property.
There are two types of land trusts: conservation land trusts and title-holding trusts. With conservation land trusts, the owner would need to surrender some rights to land use or development.
Charitable Trusts
A charitable trust is a public trust that is irrevocable and usually has tax benefits. It is essential to understand a charity is not necessarily considered a charitable purpose trust. A charitable purpose trust is a trust whose purpose is recognized by the common law as charitable. This isn't the same thing as being a charity.
Charitable Remainder Trusts
A charitable remainder trust is where a settlor transfers property to a trust for himself and others over their lifetime. Then it has the remainder interest in the trust with a named registered charity. This trust is created to take advantage of the tax credit created for charitable donations. This type of trust is not subject to probate fees in an inter-vivos trust as it will be part of the settlor's estate.
Trust Funds in Canada
A trust fund usually refers to the assets held in a trust. Usually, these assets are part of estate planning, allowing individuals to pass their assets to a beneficiary or organization. When establishing a trust fund, you will have a settlor who sets up the trust, a trustee who is a neutral third party to manage the trust, and the beneficiary(s) for whom the assets are being held.
In-Trust Accounts in Canada
An in-trust account is an investment or bank account designed to facilitate a parent or grandparent managing things for a minor who does not have legal capacity. The main consequence of these in-trust accounts is they lack documentation which can cause complications when there is a discrepancy as to who owns the funds, who the named beneficiary(s) are, and how long the trust is to last.
Setting Up a Trust in Canada
A trust is set up when a settlor puts assets into a trust and has a trustee manage it on behalf of a person or specific purpose. When setting up a trust, the most crucial step is to speak to an estate lawyer about your situation and detail your intentions.
There are many factors to consider. Some critical factors to consider include the following:
- loss of control of the assets
- the tax implications
- how you want the assets distributed
- who the beneficiaries are
- the purpose of the trust
While many people ask about the steps to set up a trust, the most crucial step is determining why you want the trust. Begin with your intention when setting up the trust.
How Canadian Trusts Differ from American Trusts
Canadian trusts differ from American trusts in several ways, including taxation, types of trusts, and terminology.
The tax implications of trusts in Canada and the US are different. If you have a revocable living trust in the US, it is a disregarded entity. This means it is taxed the same as the individual who set up the trust. In Canada, a trust is a separate taxpayer, and a separate tax return must be filed for the trust regardless of whether it is revocable or irrevocable.
Funding a trust or taking money out of a trust in Canada is usually considered a taxable event. There are only a few exceptions to this. Trusts in Canada are also usually taxed at the highest marginal rate, so proper planning is needed to avoid overpaying your taxes.
The tax treatment of trusts creates the most significant problems if you move across the border and still have your assets in a revocable living trust. This is a problem because the foreign tax credits likely won’t match up. It is important to consider where the trust is situs, and where the individual is now situs. If you are a Canadian beneficiary of a non-resident trust or a US beneficiary of a Canadian Resident Trust, mind and management determines residency of the trust.
In addition, some of the terms are different in Canada. A settlor in Canada is called a grantor in the US. Moreover, there are different types of trusts in the two countries.
Because trust laws vary between countries, it is essential to deal with a lawyer who has experience with clients in situations similar to yours. In addition, please speak with your tax advisor to learn more about tax planning when using a trust in Canada.
What US Citizens Need to Know about Canadian Trusts
As a US citizen, you have a continual filing obligation back to the IRS. This complicates the use of trusts because they are taxed differently in Canada and the US. A US beneficiary is usually subject to US income tax on their worldwide assets, so the tax implications and reporting requirements can cause an additional tax bill.
I had a recent case where a US citizen was a beneficiary of a Canadian trust. All of his Canadian-only siblings had received their inheritances without issue. However, he was in dispute with the IRS because there was a corporation in the trust. He had been earning passive income and was at risk of paying close to $2 million in taxes.
The transfer of assets from a Canadian trust to a Canadian resident versus a US resident beneficiary differs. Capital assets can typically be taken out of a trust on a rollover basis. However, this usually isn’t the case with a US resident. Thus, there can be a tax liability in the trust when distributed to a US resident, and that liability needs to be planned for.
It is very important to speak to a cross-border tax lawyer if you are considering setting up a trust as a US person living in Canada and/or if you are a beneficiary of a US or Canadian trust.
Trusts in Canada to Protect Assets
A trust helps to protect your assets as you have given a trustee the power to hold and manage your assets according to your wishes. The trustee has a fiduciary duty to act according to your trust deed and provincial laws. You also have creditor protection if a beneficiary runs into trouble because the creditor lawsuit has no claim against the trust.
Putting Together Your Trust Team
When you are putting together your estate planning team and are considering a trust you should consult with tax, investment, and legal advisors familiar with clients in your situation. Without proper advice, your intentions may not be followed.
Working with a Financial Advisor in Canada
Your Canadian financial advisor should be helping you with your estate planning. They are a key member of your wealth management team and can guide you through your estate planning process and provide advice based on your situation and goals. You’ll also want to work with a lawyer and accountant.
Common Questions about Trusts in Canada
How much does it cost to set up a trust in Canada?
The cost of creating a trust is dependent on the cost of the lawyer you decide to use. Finding a team with expertise in dealing with clients in situations like yours is essential because the cost of fixing mistakes can be high. Setting up a trust usually costs between $5000 and $10,000. The yearly cost is usually insignificant if you aren't making large changes. The yearly costs will include accounting fees to file an annual tax return.
What are the disadvantages of a trust?
Usually, the most significant disadvantage of a trust is that if it isn't set up correctly, it can cost you money and not achieve your intended goals. You also need to be prepared to give up control because if you fund an irrevocable trust, you cannot change your wishes unless you've reserved the right.
A trust income is usually subject to the highest marginal rate in Canada unless it is a graduated rate estate (GRE) or a qualified disability trust (QDT). You need to do tax planning for your trusts, and you also will need a certain level of wealth or complexity to warrant the cost of creating a trust. A solution is extracting income each year to ensure there are no tax consequences.
When seeking advice, if you have non-resident beneficiaries, consider how this will impact your intentions. I have had several clients whose lawyers didn't understand the implications of a US citizen living in Canada. So if you have beneficiaries in other countries, make sure you work with a lawyer who understands how that will affect the trust or beneficiaries.
What are the advantages of a trust in Canada?
The main advantage of a trust in Canada is that you can transfer wealth during your lifetime or use it for estate planning. You can ensure your wishes are followed, and your assets are distributed as you see fit. A trust helps to avoid conflict and lowers the likelihood of beneficiaries disputing the will and utilizing dependents relief legislation.
A trust also creates privacy as the assets in a trust do not go through probate, and therefore there isn't a public document on what you own. A trust, along with proper advice, generally offers tax planning opportunities that may not be available without a trust.
Who can be the trustee of a trust?
Choosing the right person to be the trustee of any trust you set up is important. Consider having a professional trustee if you want to be sure it is set up correctly. You can have more than one trustee; you can have a friend, a company or a beneficiary as a trustee. You also may want to name a successor trustee as well.
Is it better to have a will or a trust in Canada?
Wills and trusts are not the same; so it's not a question of having one or the other. A will is a legal document detailing how you want things handled after you pass. On the other hand, a trust is a fiduciary agreement where the settlor gives a trustee the right to manage and hold assets for the benefit of a specific person or purpose.
Everyone should have a will; however, not everyone needs a trust. However, there are many benefits to having a trust.
Everything in a will has to go through a process called probate, which validates a will. A trust avoids probate because the assets you hold in a trust are not part of your estate. With a trust, the assets and beneficiaries of the trust are not public like with a will going through probate.
In BC, beneficiaries are more likely to dispute a will than a trust because the Wills Estate Succession Act WESA allows spouse(s) children to apply to court if they feel they have been unfairly treated. Whether or not it's important to have a trust depends on your individual needs and level of wealth.
Summary of Key Points:
- A trust can be an excellent tool for estate planning.
- A trust is a relationship between a settlor, trustees and beneficiaries.
- When you use a trust, the assets in the trust won’t have to go through probate.
- There are living trusts and testamentary trusts, which both have important uses depending on your situation.
- Work with a team including a lawyer, accountant and financial advisor who understands your situation.
- Trusts work differently in Canada and the US, so be sure you’re aware of the differences if you have beneficiaries across the border.
Get More Information on Trusts from These Articles and Websites:
What Is a Legal Trust? Common Purposes, Types, and Structures, Investopedia
CED: An Overview of the Law, Trusts – General Principles, West Law Canada
Understanding Constructive Trusts, Prowse Chowne LLP
Discretionary Family Trusts by Samantha Prasad LL.B., Minden Gross
Qualified small business corporation shares, CRA
What Is a Land Trust? Ontario Land Trust Alliance
Charities and Giving Glossary, CRA
Charitable remainder trust, CrA
A Tribute to The BC Wills Variation Act, Disinherited
Next Steps
If you’re a Canadian resident or are planning on moving to Canada and need assistance with moving and optimizing your investments, estate planning, wealth management and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management.
More Canadian Financial Planning Articles & Guides
If you’re planning a cross-border move, these articles and guides will help you simplify your move and ensure you’ve covered everything.
🔹 Cross-Border Estate Planning Guide
🔹 Canadian RRSP Facts for Dual Citizens, Expats and Canadians
🔹 Financial and Tax Planning for US Citizens Living in Canada
About the Authors
Tiffany Woodfield is an Associate Portfolio Manager licensed in Canada and the USA, and the co-founder of SWAN Wealth Management, along with her husband, John Woodfield. Tiffany advises clients who live in Canada and the United States and want to simplify their cross-border financial plan, move their assets across the border, and optimize their investments to minimize their tax burden. Together Tiffany and John Woodfield help their clients simplify their cross-border finances and create long-term revenue streams that will keep their assets safe whether they live in Canada or the US.
John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), and a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals and business owners who understand the importance of comprehensive wealth and investment plans driven by the lifestyle they want to lead.
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