Overview of Issues Reviewed

  • 21‐Year Deemed Disposition Rule
  • Typical Use of Trust
  • Allowing Deemed Disposition
  • Rollout to Canadian Resident Beneficiaries
  • Limitations on Rollout Approach
  • Non‐Resident Beneficiary
  • 75(2) Problem
  • Vested Indefeasibly Approach
  • Pros and Cons Between Vested Approach and Rollout
  • Approach
  • Non‐Tax Considerations
  • Key Takeaway Points

The 21‐Year Deemed Disposition Rule

  • The 21‐year deemed disposition rule ("DDR") is one of the significant limitations that applies to the use of trusts
  • The DDR is provided for in subsections 104(4),
  • 104(5) (depreciable property) and 104(5.2) (resource property) of the Income Tax Act ("ITA")
  • Most trusts are deemed to dispose of their assets at fair market value on each 21st anniversary of the trust for proceeds equal to fair market value
  • 21 years can pass more quickly than you can expect
  • Assuming fair market value exceeds tax cost, this results in a capital gain and income tax
  • Often large income tax exposure with no liquidity to pay
  • The purpose of DDR is to avoid being able to have unlimited deferral of capital gains tax
  • Limited exceptions to DDR include qualifying spouse and common‐law partner trusts, alter ego trust, joint spouse trusts, all interests vested indefeasibly (discussed below), eligible capital property and inventory that is not land
  • Because of limited time, presentation will address a few selected issues

Typical Use of Trust

  • Many different possible uses for a trust in tax and estate planning (beyond scope of presentation)
  • Common use is for trust to own shares in a private corporation
  • Trust often introduced in the context of an estate freeze in situation where common shares owned by a parent are exchanged for frozen value shares with new growth shares issued to trust so increase in value of corporation accrues to trust (with various family members as beneficiaries) to limit capital gains tax of parent
  • Recent tax changes reduce some tax advantages for use of a trust, such as income splitting but still useful reasons for a trust
  • Many advantages to have growth shares owned by a trust rather than children directly, including more flexibility, more control for parent, creditor protection, etc.
  • Trustees have ability to decide later how growth shares allocated among family members
  • Parent can be among the discretionary beneficiaries for commercial protection, if needed (subject to careful set‐up to avoid subsection 75(2), as per below)

Allowing Deemed Disposition

  • Non‐tax reasons for assets to remain in Trust vs transfer to beneficiaries
  • Assets without significant unrealized gains
  • Liquid assets to sell to pay tax
  • Reduce value of shares by pay dividends from CDA and RDTOH
  • Retain some assets and roll out other assets
  • Trust can elect 159(6.1) to pay tax in 10 annual instalments subject to interest and provide security

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.