a) TOSI This special tax is calculated at the highest marginal tax rate on certain types of income generated directly by or through a trust, including: The trust would normally borrow money from a bank or other party with interest to provide the money needed to purchase the shares of a registered family business. As you can see, setting up a family trust in Canada is not very complicated, but it still requires a professional tax advisor to ensure that it is prepared in accordance with applicable escrow laws. To better understand common situations where you can use a family trust to save tax, please see the following pages below: In British Columbia, a trust can have a maximum legal life of 80 years from the date of its creation. However, for its 21st anniversary, a trust is subject to the 21-year rule of the enacted provision, which should generally have sold all the capital assets for proceeds equal to the respective fair market value (FMV) of the assets. The good news is that there are tax planning strategies that can be used to prepare for the 21-year rule to avoid the supposed FMV provision and associated tax liability. c) Canada Revenue Agency Returns A family trust must have year-end on December 31 and file a (T3) income tax return. The tax return is due 90 days after the end of the year, either March 31 or March 30 in a leap year. A trust remains an effective tool for multiplying the Lifetime Capital Gains Exemption (CGSA), as trusts can sell shares of corporations that qualify for the Qualifying Small Business Exemption (QSC). The tax payable is minimized because the profit can be shared between the beneficiaries of the trust (multiplication of LCGE). Payment of income to beneficiaries The majority of tax benefits associated with the use of discretionary trusts come from the payment to beneficiaries of income that would otherwise be taxable in the trust.
Under the rules of the Income Tax Act, income must be paid or payable to beneficiaries as of December 31 of the year, so the income is taxed in the hands of the beneficiaries and not in the trust. The operation of a family trust is similar to that of a management company, but is not identical. Typically, one or three trustees would act as a group to control the trust. Decisions are usually based on the majority decision of the trustees, which is why you would normally avoid having two trustees. Most often, trustees are family members who are familiar with the business or the family members involved in the business. A lawyer or family law advisor could also be a trustee. Many Canadian business owners are advised to set up a family trust in Canada because they have many advantages, including tax savings. However, very few entrepreneurs are aware of the steps involved in forming a family trust. This article covers: (A) The operation of a family trust and (B) the steps required to establish a family trust in Canada. Attribution rules guide these decisions. Since a transferor cannot control the ownership of a trust, he cannot be the sole trustee.
The person transferring the property to be held in trust usually asks someone else to be the settlor. It can be a grandparent or a close family friend. 5. Follow the closing agenda. ”A tax professional provides a list of steps to transfer assets such as shares to the trust,” Archambault explains. The credit rating agency interprets the words ”acquired” to mean the granting of a direct and firm right to present and future ownership that is different from a conditional right. Trustees are advised to document the fact that the income is paid to a beneficiary. This may be done by the minutes of a meeting of trustees, a copy of which could be recognized by the beneficiary or the beneficiary`s guardian, or by issuing a promissory note payable on request up to the amount of the income due. The settlor would pay the trust, usually for a nominal fee of $10 or an item such as a gold coin. Once the settlor has established the trust, he or she should no longer have any additional involvement. The grantor could be anyone, but should not be a beneficiary.
Trusted family advisors such as accountants, lawyers or financial advisors often play the role of the settlor. (b) Incorporation of affiliates If the shares of an operating company are held by a discretionary family trust, it is presumed that each beneficiary holds 100% of the shares of the trust. If the beneficiaries have their own business, membership in a beneficiary of a trust may result in the association of business corporations for income tax purposes. This can affect several provisions for small businesses, including deductions for small businesses. Potential benefits available Some of the benefits obtained by using a family trust include: Rules are established once the trust has been created. Of these, some may indicate how the money is given to children. ”A family trust allows you to make a donation without putting it directly in their hands,” archambault explains. ”This could, for example, help secure the future of a severely disabled child or, possibly, even benefit their grandchildren. A family trust can also be used to multiply the capital gains exemption when selling shares of private corporations. In Canada, the first gain of $800,000 from the sale of shares of private corporations can be exempt from tax by claiming the capital gains exemption.
This exemption is available to any beneficiary of a family trust if it is well structured. Thus, sellers of a business are motivated to add as many beneficiaries (usually family members) as possible to a family trust in order to maximize (or multiply) the capital gains exemption. See diagram below: 4. Open a bank account under the name of the family trust. Like a business, a family trust is a legal entity. It can hold assets, invest and conclude contracts with third parties. As a result, the property no longer belongs to the person who transferred it. (c) Annual reduction in income tax Another element of tax minimization for a family is to try to allocate income to family members in a lower marginal tax bracket than higher-income individuals. Subject to the limitations of the complex shared income tax (”HPR”) rules (explained below), spouses and adult children in the lower tax brackets may be eligible to receive business income. Your ownership of the Corporation`s shares through the Trust may allow these individuals to receive dividends to take advantage of their lower tax rates and personal credits, including the dividend tax credit. Only the individual can enjoy trust as long as he lives. 1.
Draft the escrow contract, ideally through a notary or tax lawyer. It allows, among other things, the appointment of the trustee and beneficiaries as well as the inclusion of various clauses. Special rules allow a person 65 years of age or older to transfer assets to these trusts without first having to pay capital gains on the assets. Only the individual – and the partner in the case of a joint trust – can benefit from the trust as long as they live. If the settlor or surviving partner dies, the trust pays taxes on realized capital gains, but the trust`s assets can be distributed to heirs without inheritance fees. Income splitting means the transfer of income from high to low income. Low-income people pay less tax. Examples of income splitting by a trust include: A family trust is considered a taxpayer for Canadian income tax purposes and pays income tax at the highest marginal tax rates.
However, any income or capital gains generated by the family trust may be attributed to a beneficiary who would pay income tax allocated to their respective marginal tax rates and not to the maximum tax rate that the family trust would pay. The trustees would determine which beneficiaries receive the income allowances from the trust each year. It is important to note that any allowance/money received from a beneficiary is legally theirs. A family trust in which only one person plays all three roles would not be considered a valid trust. It is important that when creating a family trust, you consult with your legal counsel or accountant to appoint a trustee who is a third party (as opposed to beneficiaries and settlers) to avoid a conflict of interest. A family trust has several advantages. .
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