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46 Cards in this Set

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compare and contrast different trusts:

express trusts, resulting trusts, constructive trusts, testamentary trusts, and inter vivos trusts

express trusts: trust docs signed

resulting trust: minor/single owner for couple

constructive trust: imposed against titleholder

testamentary trust: enacted via will

inter vivos trusts:enacted while alive

Requirements to create a valid trust

capacity: settlor-age of majority, sound mind, solvent; trustee-can hold prop (not unincorp)

constitution:property transferred

three certainties: intent, subject matter (ben entitled to cap/inc interest), objects (ben name/cls)

legality of purpose: ie cannot make broad restrictions, can't preclude future marriage unless specifying a specific individual

explain the perpetuity rules that could invalidate a trust

under common law, property must be distributed/vest w/i perpetuity period: lifetime of a life in being + 21*

life in being: person who was alive, or conceived but unborn, at the time the trust was created

If prop might not vest w/i period, declared void

*some prov have diff rules

Beneficiary Interest Classifications

immediate: life interest

future: remainder interest

absolute: current interest - could sell even if life tenant possesses property

contingent: interest exists upon future event

fixed: specify exactly amt beneficiary to receive

discretionary: trustee determines if/when & how much beneficiary is to receive

What types of "income" are capital beneficiaries entitled to before time/event occured

Default provisions of common law entitle the capital beneficiary to capital gains or losses, recapture of capital cost allowance or terminal losses and any stock dividends

The settlor may also give the trustee the discretion to define the interest of the income beneficiaries.

what happens to Income retained by the trust?

-become capital at fiscal YE, if not to violating rights of income beneficiaries

-Income attributable to a minor or a disabled beneficiary may be retained by the trust until required to support the beneficiary and such amounts are liabilities of the trust, not entitlements of the capital beneficiaries.

life tenant vs remainderman

life tenant: entitled to a life interest in the capital property of a trust

remainderman: person receiving capital interest

Vested vs. Contingent Interests

Vested: given possession of the property or ready to take possession subject to certain conditions

Vested absolutely:met all or no conditions

Vested subject to divestment: vesting subject to condition that could terminate interest after the interest is created

Contingent interest: interest will only come into existence upon the occurrence of some future event

How could intent not be clear and result in an invalid trust?

If the settlor retains ownership of the assets or if the trustee can use the assets for his or her own use

ie. CTB cheques ITF child, if no formal trust document and another trustee named, could argue that parent did not give up all control funds held in the trust for child

precatory trust

transferor is relying on the moral values of the recipient to carry out his or her wishes

-true trust has not been established

-court could still find it enforceable

Why could a trustee be a corporation, but not an unincorporated association?

-require capacity to hold property in his or her own name

-unincorp are not separate legal entities and cannot hold property in their own names

-unincorp could also not be beneficiaries bc not a separate legal entity

three certainties

Intent: property to be transferred, settlor no longer owns, clear intention

Subject Matter: property identified, not based on loan of property, specifies capital, income, etc.

Objects: beneficiaries identified, could be unborn descendants, could be a purpose

spendthrift trusts

spendthrift trusts: testator feels beneficiary could not wisely handle a lump sum bequest

Given less favourable tax treatment, why would one use inter vivos trusts

NOTE: inter vivos trust retains its inter vivos status for tax purposes even after the death of the settlor

-reduce future tax liability or the tax liability of the trust's beneficiaries

-creditor proof assets,

-estate freezing

-property not expected to much income

-income will be distributed as earned

-income only be in the form of deferred capital gains

press Trusts vs. Resulting Trusts

express trusts: intent expressed as transfer of property to inter vivos or established in will

resulting trust: may form bc statues ie infant ben's bequest held in trust until 18/19 or where one party holds property, but intention of both parties that the titleholder was really holding his partner's share in trust

Income Tax Act treatment of revocable trusts?

realized capital gains or income earned by a revocable trust will be attributed to the settlor

mere power vs trust power

trust power: requires the trustee to distribute the trust income and/or property, while still giving the trustee the discretion to determine how that income or property is going to be divided among the beneficiaries

mere power: does not impose an obligation on the trustee to distribute trust income or property to any of the beneficiaries

Why are Bare Trusts used?

-beneficiary has the sole absolute interest in the trust property, as well as the right to demand possession of that property at any time

-maintain confidentiality, to hold property in an agency relationship, or to defer or avoid paying property transfer taxes.

Who pays tax on Income earned by a testamentary trust?

-taxable either in the hands of the trust, or in the hands of the beneficiaries

-can also elect to have the income taxed to the trust even if it has been paid or is payable to the beneficiary

How does the CRA limit the mechanism for income splitting after death by creating separate trusts?

A settlor cannot create two trusts for one beneficiary and still take advantage of the income splitting opportunity because both trusts will be considered as a single trust for tax purposes

PRO / CON of setting up 2 trusts for children rather than 1 combined trust

PRO: if high income, each trust has own graduated tax level thus lower MTR

CON: Cost of trust admin, limits trustee ability to distribute amounts per beneficiary need/income

How is property taxed when transferred from a trust to a beneficiary?

rolls over to the beneficiary at the adjusted cost base of the trust

distribution of capital property to the beneficiaries is not a deemed disposition

Consequence if T3 return and tax owing paid later that 90 days after the end of the trust's taxation?

Late filing/payment penalty: penalty of 5% of the unpaid tax, plus 1% of the unpaid tax for each full month that the return is late, to a maximum of 12 months (higher if history of late filings)

If the trust has no tax payable, when would there be a penalty for not filing an information return by the required date?

If trustee allocates or designates income to the beneficiaries and files the information return late

OR if the trustee is late in distributing the required T3 slips to the beneficiaries

-$25 per day, with a minimum penalty of $100 and a maximum of $2,500

If an inter vivos trust for minor child, and assets were used to purchase shares of Nortel Networks, how is income taxed?

Until child 18, interest, capital losses dividends and dividend tax credit will be attributed to parent. The capital gains will be attributed to child.

21-year Rule

definition of the first deemed disposition date

trusts are required to report a deemed disposition of most capital property on the first deemed disposition date and every 21 years thereafter


way of working around the 21-year deemed disposition rule

transfer trust property to beneficiaries according to their interests before the expiry of the 21-year period. Thus no deemed disposition & tax deferred until the beneficiary disposes of the property

trustee must have the discretionary ability to distribute the property prior to the expiry of the 21-year period.

When may a trust reduce its tax liability by shifting the tax burden on the trust income to that beneficiary, even if it retains the income?

using the preferred beneficiary election, if that person qualifies for the disability credit

-Canadian resident who is the settlor's spouse, c/l (curr or former), child, grandchild, or great-grandchild, or spouse/cl to one of those persons

-filed jointly by the trust and the preferred beneficiary

-used often w inter vivos trusts (minor cannot shift div/int income)

How can you make income taxable in hands of beneficiary, without giving income to beneficiary? (assuming not diabled, thus cannot tax income in hands of ben while retaining income)

-Income taxed to ben if paid or payable.

-deemed payable if the beneficiary has the legal right to demand payment

-issue a promissory note payable on demand to the beneficiary

-paid directly to a 3rd party, private sch, camp

-NOT payments for food/shelter/clothing bc CRA considers this benefit to parents, not ben

What ensures that 2 inter vivos trusts established by dad for daughters are separate entities for tax purposes?

-trusts have different beneficiaries and are irrevocable

in order for the rollover provisions to apply to a testamentary trust, what three criteria must be met

1 resident in Canada

2 pass bc death

3 vested indefeasibly (i.e., absolutely, without possibility of change)

What Constitutes a Spousal or Common-law Partner Trust?


Spouse is only person who may receive the use of any income or capital during his or her lifetime

Income dist cannot be left to trustee (must be distributed)

Capital does not have to be dist.

Taint: income/capital benefited anyone else

How to untaint a spousal trust?

Purify by establishing a second trust to hold non-qualifying bequests. Ie. non-spouse ben renounce inheritance

Note: trust assets used for testamentary debts not considered tainting

Taxation of Testamentary Spousal or Common-law Partner Trusts

-Bc spouse entitled to all income earned by trust, it can be taxed to spouse or trust

-Capital beneficiary rec's at ACB, and gains can be deferred until disposal.

-Gains of property can essentially be rolled from spousal trust to child tax deferred

How is transfer of capital property to a "spousal or common-law partner trust", "alter ego trusts" and "joint spousal or common-law partner trusts" taxed?

disposition is deemed to occur at fair market value upon the death of the transferor (in the case of an alter ego trust) or upon the death of the last surviving spouse or common-law partner

What is use of an Alter Ego Trusts? (cannot be set up until at least 65)

NOTE: must specify that settlor only person w access to the trust capital & income during the settlor's lifetime

fulfil the function of the will

avoids the probate process

not subject to public scrutiny

more difficult to contest than a will

protection from wasting/undue influence bc trustee must release assets

NOTE: can be revocable, or conditionally irrevocable

Conditions of joint spousal trusts

Same as Alter Ego (ie 65)

Can convert Existing Spousal Trusts to Joint Spousal Trusts at age 65

-Can convert spousal testamentary trust to joint spousal trust (w new partner of widow)

Purpose and workings of Protective Trusts

-any age

-can be revocable

-terminates upon settlors death, with assets reverting to ESTATE

-settlor must be sole beneficiary

-used to to protect misappropriation of estate

-Alter ego trust better, bc can name capital beneficiaries to bypass estate, but cannot set up until 65

PRO/CON of Family Trusts

CON income attribution for minor children taxed to testator/testatrix (settlor)

PRO future purpose when the beneficiaries are no longer minors

PRO capital gains can be realized minor

PRO: estate planning, spendthrift spouse

Spendthrift Trusts

-designed to ration the trust's income and capital, with control in the hands of a trustee

-some people choose to transfer property to an irrevocable trust for their own benefit (a "voluntary trust"), to protect themselves from their own spendthrift ways.

estate freeze

minimize income taxes due at death as a result of the deemed disposition of capital property, by freezing that disposition at an earlier point in time so that any future gains accrue to the intended beneficiaries

Tax consequence of transferring capital asset to an inter vivos trust to effect an estate freeze?

Unless the inter vivios is an alter ego trust (65+ & settlor is only life ben), there is a FMV deemed disposition. Future growth deferred till beneficiaries dispose of property.

Why would a settlor establish a life insurance intervivos trust? (Holds insurance policy prior to death of insured)

(BC trust remains intervivos after death, thus taxed unfavourably)

Hold policy on life of someone else. ie, MR owns policy on MRS life. If transfer to trust w son named as Capital Ben, then CSV will not form part of MR estate and son becomes owner of policy at ACB (or FMV at transfer to trust if not alter ego).

Legal lists vs. prudent investor principle

Diff provinces give trustees broader investment powers

List: Div stock, GIC, Bonds, Mortgages

Prudent:MF's ok criteria to consider - economic, inflation, tax, role, return/income/capital, liquidity, income, capital, purpose

Duty to convert

w/o power to retain trust assets in existing form & power to choose investments, DUTY to CONVERT ASAP to legal list

A trust set to end at age 21 can be ended at age 19 if:

Beneficiary can demand that the trustee distribute the trust property if:

1. Beneficiary absolutely entitled to all of the trust property

2. age of majority

3. full mental capacity