Financial Advisor Talking To Senior Couple At Home

Background

Family Trusts are a powerful and effective financial planning and asset protection tool. Traditional reasons for creating a trust include will and succession planning, asset and legal liability protection, and asset administration.

However, Trust has evolved as a tax planning and minimization tool, especially for the family business and high net-worth individuals. In many instances Trusts were created solely for tax purposes.

In response, Government has slowly been closing tax “loopholes” where trust structures result in favorable tax results and income splitting opportunities, the most recent of which was the introduction of TOSI (Tax on Split Income) which restricts income splitting with individuals not actively engaged in the related business.

Nevertheless, access to multiplication the Lifetime Capital Gains Exemption remains, as well as the opportunity to split some investment income.

CRA’s New Strategy and Purpose

It’s been over a decade since the Auditor General released a report saying Trusts are not properly reporting income but no significant action was taken by the CRA enforce compliance. However, times have changed. In addition to new trust reporting and disclosure rules beginning in 2021 which carry a $2,500 penalty for non-compliance, CRA has begun Trust audit projects, especially when the capital gains exemption is claimed.

The CRA is attacking the setup and administration of Trusts with the intent of attributing all the income and or distributions back to the settlor or trustee using reversionary trust rules found in the Act, as well taking the position that some Trusts are altogether a sham.

Perfecting the Family Trust

Taking advantage of Trust opportunities and minimizing the risk of CRA reassessment requires both perfections of planning and execution of the Trust, as well as following best administrative practices.

We present 10 of the more common best administrative practices to follow based on recent results with CRA Trust audits:

  • Obtain a lawyer specializing in Trusts to provide legal advice and drafting of the trust agreement;
  • “Perfect” the settlement of the Trust;
  • “Perfect” the acquisition of Trust property especially purchase or subscription of private company shares;
  • Ensure financial statements are prepared annually and a full set of accounting (and legal) records are maintained;
  • Ensure minutes and resolutions are prepared at least annually;
  • Distributions allocated but not paid to beneficiaries should be supported by promissory notes;
  • Loans made or received by the Trust should be supported by promissory notes, with the appropriate interest rate where necessary;
  • Ensure the Trust maintains a bank account;
  • Payment to beneficiaries should not be made to joint bank accounts;
  • Ensure Trust income from related private corporations are supported by Corporate resolutions;

Most importantly, speak to your Sloan Partners tax specialist to guide you on how to use a Trust to protect and maximize your family wealth, take advantage of tax planning opportunities, and navigate the complicated world of Trust income tax compliance.

Roman Belenky CPA, CGA is an associate at Sloan Partners LLP specializing in tax planning and advisory for business owners and their families

Disclaimer: This article is intended for educational and informational purposes only. It is not intended in any way whatsoever to provide tax advice. The reader should be aware that legislation and administrative policy are subject to change at any time. None of the persons involved in the preparation of this article accepts any responsibility for its contents or the consequences that arise from its use.

 

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