Presented by: William H. Cooper, CPA, CGA, LLB And Moon Mah, CPA, CGA, LLB of Boughton Law Corporation a member of Meritas Law Firms Worldwide tax|mentor practical tax updates Trust and Estates Update Keeping Trust onside with the Income Tax Act Rules and the new Graduated Rate Rules A Brave New World

Table of Contents VII. Distributions VIII. Variations of a Trust IX. The 21 year rule X. Reporting and Record Keeping XI. New rules for Testamentary Trusts I. What is a Trust? II. The Settlor III. The Trustee(s) IV. The Beneficiaries V. Residence of a Trust VI. The Trust Property ©2010 The Taxation of Trusts - A Tax Checklist

I.What is a Trust? A Trust is not a legal person/entity A trust is a legal relationship between Settlor, Trustee and Beneficiaries A Trust is taxed as an Individual – s.104(2) Using a trust in estate plannin

The settlor establishes the trust relationship with the settlement of property Where is the initial Trust Settlement Property? Basic Rules on Settlements and Transfers to Trusts Keep the records of payments used to settle the Trust and provide initial funding Who loaned the initial start up funds – make sure it was a documented loan No funds transferred to trust except by commercial loan or return on investments (cont…) II.The Settlor

II.The Settlor (cont…) Basic Rules (cont…) Trace funds used to buy the initial trust investment (shares) to ensure they didn ’ t come from a beneficiary or a trustee Avoid advisor loan funding Compliance Points — are there any reversionary interests that offend s.75(2)? R. v. Sommerer, 2012 CarswellNat 2441, 2012 FCA 207, 2012 D.T.C. 5126, [2014] 1 F.C.R. 379, 2012 CAF 207 (Federal Court of Appeal) — s.75(2) does not apply to a genuine sale T — a transfer for less than FMV may be a contribution

Trustee(s) hold and manage assets for the benefit of the beneficiaries Who is conducting the affairs of the trust? – a principal of the Company (ie: client who caused the trust to be settled) or the trustees? Are the trustees aware of their duties and obligations and do they keep trustee minutes? III.The Trustee(s)

III.The Trustee(s) (cont…) What powers does Trust give Trustees – Trustee Acts grant narrow investment powers Trusts are not Contracts or Agreements that can be amended by simple agreement Determine whether trustees have power to amend clerical/administrative errors in Trust Power to amend trust – will exercise of such power be a disposition of trust assets and formation of a new trust?

III.The Trustee(s) (cont…) Compliance Points Change of Trustee(s) — change of control and deemed year end under s.249(4)? Examine the association rules and the look-through rules in s.256(1.2)

IV.The Beneficiaries Who are the beneficiaries, named, potential, contingent? Prepare a list Compliance Points Have beneficiaries become non-resident of Canada (withholding/ no rollout under s.107(5)/reporting obligations in the US)? Association look through rules in s.256(1.2)(f)(ii)

V.Residence of a Trust The residence of Trustees may determine Trust ’ s residence – but CRA may look to Central Management and Control Trustees should be actively engaged in their duties and understand their obligations Keep trustee resolutions and record all trustees actions and decisions If Trust residence not in “ Principal ’ s ” jurisdiction – i.e. BC Corp owned by Alberta Trust – make sure the AB Trustees are active managers - not order takers

V.Residence of a Trust (cont…) Compliance Points Garron Family Trust (Trustee of) v. R., 2012 CarswellNat 953, 2012 SCC 14, 75 E.T.R. (3d) 1, [2012] 3 C.T.C. 265, 343 D.L.R. (4th) 670, 2012 D.T.C (Fr.), 2012 D.T.C (Eng.), 428 N.R. 202, [2012] 1 S.C.R. 520 (Supreme Court of Canada) Deemed resident under s.94

VI.The Trust Property Are shares included in the trust property? Ensure assets are properly acquired by trust to ensure no contributions or attribution Obtain the articles, share registers and director ’ s registers for any companies in which the trust holds shares Compliance Points Loss of small business corporation status - QSBCs and attribution under s.74.4(2) and s.74.5(5)?

VII.Distributions Basic Rules Have there been trustee resolutions and designations made to verify the nature of the income – i.e. s.104(19) for dividends? Has the company paying dividends prepared the appropriate dividend declaration resolutions? Have trust flow through payments been made in cash or by promissory note?

VII.Distributions (cont…) Basic Rules (cont…) Does the “ kiddie tax ” apply to the trust – s.120.4? Have distributions to minor beneficiaries been properly documented where payments were made to adults on their behalf? Do the adult recipients have receipts, accounting or bank records to track the use of funds for the benefit of minors?

VIII.Variation of a Trust Variation may result in resettlement of trust? Variation may result in disposition of interest by beneficiary?

IX.The 21 Year Rule Record the settlement date and the 21 year deemed disposition date in a “ Bring Forward ” Make plans for the Trust property well in advance of the deemed disposition date Consider Trust ’ s provisions for distribution of the trust property – what is wind up date Examine the current circumstances of the beneficiaries – have plans for distribution changed? Can the trust capital be distributed tax free under s.107(2) or is s.75(2) a s.107(4.1) problem?

X.Reporting and Record Keeping Place the originally signed trust in safe place and include year of creation in the Trust Name Keep Trust Financial Statements to stay honest on funds in trust bank account File T3s even when no income – nil assessment will go statute barred Keep a separate trust bank account Who keeps the records: the client, the accountant or the lawyer? Should Trust keep a minute book? Accountant to keep copy in current Trust accounting file with notation as to location of original

XI.New Rules for Testamentary Trusts Elimination of graduated rates for testamentary trusts Graduated rate estate Tax accrued gains of certain trusts in the Deceased Beneficiary's terminal return rather than in the trust itself Possible allocation of charitable donations between deceased and estate

Trust and Estates Update - Keeping Trust onside with the Income Tax Act Rules and the new Graduated Rate Rules - A Brave New World Thank -you tax|mentor practical tax updates