Trust

Trusts are generally created and operated for tax planning and/or estate planning purposes. From the Canada Revenue Agency (CRA)'s perspective, there are two types of trusts, a testamentary trust or an inter vivos trust. Trusts can also be classified as formal (established through legal documents) and informal (created using a financial institution paperwork).

This is an area of financial planning that generally requires professional assistance (e.g., accountants, lawyers, notaries). Applicable legislation varies by province.

Formal trusts
Formal trusts are those trusts that have been created through legal documents and from a tax perspective operate as a separate entity. The trustee needs to ensure that an annual tax return is filed for the trust, if required (see Who should file a T3 return).

Testamentary trust
A testamentary trust is a personal trust or estate that is generally created on the day a person dies. The terms of the trust are generally established by a Will, or failing the existence of a valid Will, a court order.

Testamentary trusts are useful when you don't wish the beneficiaries to receive their inheritance immediately, all at once. For example, the beneficiaries might be minor, or be bad at managing money. Another use is for blended families. The assets in the trust are "unseizable and are not part of the beneficiary’s wealth".

Wills that contain provisions for testamentary trusts will cost more to prepare (in legal fees) than simpler wills. However there are no other costs while the testator is still alive.

Before 2016, testamentary trusts were taxed more advantageously that other types of trusts. More specifically, "testamentary trusts were allowed to access the marginal tax rates available to individuals", allowing tax planning opportunities, but that is no longer the case, except during the first 36 months during which graduated tax rates are still available, or for qualified disability trusts (QDTs). Therefore, since 2016, testamentary trusts are set up mostly for non-tax reasons.

Inter vivos trust
An inter vivos trust is any trust that is not a testamentary trust. Due to the creativity of lawyers and accountants, there are many types of inter vivos trusts, common ones being an Alter Ego Trust, a Master Trust and a Personal Trust.

The 21-year deemed disposition rule
To avoid indefinite capital gains deferral, a trust is generally "deemed to dispose of its capital property every 21 years". This can trigger a large and sudden tax bill, if not planned for.

Formal trusts in Quebec
There are specific considerations for residents of Quebec: common law trusts are different from those created under the Civil Code. These differences include "the nature of the trust, the functions participants can perform, the ability to change beneficiaries, and the variations and terminations of the trust".

Investment restrictions
Another consideration if what types of investments are allowed in the trust. The Quebec Civil Code, articles 1339 and following, describes what are "presumed sound" investments. This includes, for example, Canadian stocks, but not foreign ones. Article 1340 states that the portfolio must be diversified but mentions "so far as possible", which may not be to everyone's liking. The same article also states that asset allocation, specifically the stock-bond mix, "must in the proportion suggested by the prevailing economic conditions", rather then, say, a function of the time horizon and aims of the trust. In short, if you don't like the provisions of the 1990s Civil Code, make sure to account for that in the trust documents. For exemple, you could replace them by more modern instructions to help trustees manage the portfolio.

Extended administration
In Quebec, an alternative to formal testamentary trusts for minor children is called "extended administration" (administration prolongée). This arrangement is also set up in the will. The executor will manage the assets until the children turn 18. Although the will may state that the distribution should take place at a later age (e.g., 25), it is possible for impatient beneficiaries to challenge that, and get their inheritances more quickly, once they are adults, by arguing that there are no "serious and legitimate reasons" to wait. Despite this potential weakness, extended administration will likely cost less in legal fees to set up, will likely be less expensive to manage when/if activated, and may be appropriate for smaller inheritances; discuss it with your notary or lawyer. To implement extended administration, the executor would typically open an ITF account to manage the assets (see next section).

How they work
Many Canadians dealing with Canadian financial institutions on behalf of minor children or grandchildren create informal trusts (also known as in-trust accounts or ITF accounts) with the financial institution, typically using the financial institutions paperwork to designate the account as an informal trust. There are no initial or ongoing legal costs associated with in-trust accounts. However there are many potential pitfalls (see, and ).

The person who sets up the account can be the trustee or can appoint someone else. The trustee manages the assets until the beneficiary reaches legal age. Management of the account has to be prudent. The trustee then transfers control of the account to the beneficiary, perhaps progressively.

Ultimately, "the contributor has no control over what the beneficiary spends the funds on". If the aim is to provide for post-secondary education, then Registered Education Savings Plans (RESPs) offer more control than ITF accounts, and attract government grants.

Taxes
ITF accounts are not registered and are subject to taxes. From the CRA's point of view, "for tax purposes, there is no distinction made between a formal trust and an informal trust". However, because of the lack of detailed legal documentation, it can be more difficult to establish that an informal trust is in fact a valid (legal) trust. In particular, for an ITF account to be a valid trust, "there had to be an intention to set up a trust when the investments were made". Should the CRA decide that "the account in question is actually not a trust, it may attribute all income to the contributor from the inception of the account, including capital gains. This could result in back taxes and penalties".

If the CRA treats the ITF account as a valid (legal) trust, or if it is "considered a direct gift of the assets to the child" (an agency relationship) then who pays the tax depends on where the money came from. If the beneficiary received their own funds (inheritance, earned income, government child benefits) then all income is taxed to the child. However, if the contributor is the source of the funds, under attribution rules, the contributor pays the tax on income (interest, foreign income and dividends), although the minor beneficiary is taxed on capital gains.

RBC notes that "if there is truly a trust arrangement, the trustee needs to ensure that an annual tax return is filed for the trust, if required." See Who should file a T3 return. In cases the ITF account is not a legal trust, but an agency relationship, then there is no requirement to file a T3.

There are specific considerations for residents of Quebec in terms on who pays taxes on ITF accounts, since these accounts may not be considered valid trusts under the Civil Code.

Formal trusts

 * Ontario Securities Commission, Using trusts in estate planning
 * How to give money to grandchildren
 * La planification testamentaire avec des fiducies – Pas totalement simple, mais tellement efficace
 * How to give money to grandchildren
 * La planification testamentaire avec des fiducies – Pas totalement simple, mais tellement efficace
 * How to give money to grandchildren
 * La planification testamentaire avec des fiducies – Pas totalement simple, mais tellement efficace