Below is a great article written by Tim Cesnick and published in The Globe and Mail.
Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education
Now that my kids have decided they want to be brain surgeons, I’ve been thinking about how to pay for their post-secondary education. Two methods of saving for a child’s education are often overlooked. The first is a family trust, and the second is life insurance.
FAMILY TRUST
A trust is simply a legal relationship between three parties: The settlor (the person creating the trust), the trustee (the person who holds and controls the property of trust) and the beneficiary (the person for whom the property of the trust is being held). The nice thing about a trust is that it’s possible to have the income of the trust taxed in the hands of the beneficiaries, who may pay little or no tax if they are minors and have little or no other income.
Setting up a trust does come with a cost, so it’s not generally going to make sense unless you’re willing and able to commit a sustantial sum to the trust over a short period of time. You can make this a loan to the trust if you want, so that you can take back your capital again later, as a repayment of the loan.
Once the money is in the trust, any interest and dividend income earned in the trust will be attributed back to you to be taxed in your hands while the beneficiaries of the trust are minors (unless you charge the taxman’s prescribed rate of interest on a loan to the trust), but capital gains can be taxed in the hands of the beneficiaries. Also, any second generation income (that is, income on the income, even if it’s interest or dividends) can be taxed in the hands of your children.
You can pay for all or part of your child’s education costs out of the income or capital of the trust. The taxman will consider payments to third parties, including reimbursements to you, as being paid to the beneficiary as long as those payments were clearly for the benefit of your child. To the extent that little or no tax has been paid on the income of the trust over the years (by having income taxed in your child’s hands), you’ll effectively be using pre-tax dollars to pay for the child’s education.
The benefits of the trust include: protection of the assets of the trust from creditors, splitting income with your children, maintaining control over the assets, and flexibility to use the trust funds for things other than education. There’s a lot to consider when setting up a trust.
LIFE INSURANCE
Life insurance is an interesting tool because you can accumulate investments inside a policy on a tax-sheltered basis. Further, if it is the life of your child that is insured, you’re able to transfer ownership of the policy, including the accumulated investments inside the policy, to your child free of tax once he or she reaches age 18. Your child can then make withdrawals of those investments from the policy to pay for education. While those withdrawals are generally going to be taxable to your child, he’ll likely pay little or no tax if he has little or no other income.
One of the benefits of choosing a whole life insurance policy is that the returns have been incredibly stable over the years, even throughout 2008. The reason for this is that the insurance companies are allowed to smooth, or average, the returns you receive over a period of years.
Consider some numbers. If you pay $2,750 annually into a whole life policy each year until your child is 18, there could be $70,000 to $75,000 in the accumulating fund to be accessed (varies by insurance company), assuming a 5 per cent annual return inside the policy. If you set aside the same $2,750 in a tax-free savings account (TFSA) you could end up with approximately $84,000 earning that same 5 per cent, but this would assume a portfolio that is largely in equities that is subject to the volatility of the markets. If you earned, say, 6 per cent in the TFSA, you’d have close to $92,000 in this case, with the volatility.
Life insurance also offers asset protection, flexibility to use the assets for any purpose, and a death benefit ($265,000 in my example) over and above the investment component of the policy if your child passes away prematurely. Insurance is just another tool to consider.
As usual, please do not hesitate to contact Hugues Boisvert should you have any questions. hboisvert@hazlolaw.com.com
Showing posts with label family discretionary trust. Show all posts
Showing posts with label family discretionary trust. Show all posts
Wednesday, March 27, 2013
Friday, March 23, 2012
Business Owners: Why you MUST have a Holding Company (Holdco)
Today, I would like to share an excellent article written by Tim Cesnick, clearly explaining the advantages of Holding Companies. At HazloLaw, we advise clients on a daily basis about the necessity of putting in place this type of structure and we also suggest to add a Family Trust to your current structure. Please email us at info@hazlolaw.com is you have any questions.
HOLDING COMPANY
This summer when you're standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning.
I can tell you from experience that you'll bore them to tears with the conversation, but they'll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.
THE RULES
If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax.
How? By establishing a holding company to own the shares of your active business corporation (ABC).
You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends.
If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.
It's subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are "connected" under our tax law (which will be the case in the vast majority of situations), you'll avoid another tax called the Part Four tax.
By passing some of those earnings from your ABC to your holding company, you'll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus.
The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.
THE STRATEGIES
What strategies should you be thinking about?
Multiple shareholders: If you're one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you.
Think of each holding company as a tap to control the payment of dividends to each of you personally.
Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.
Splitting income: Your holding company can be owned by more than one person in the family.
Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared.
It's not always advisable to issue shares in the holding company directly to your children (and if they're minors, this isn't possible), and so a family trust can be utilized, which brings me to the next strategy.
Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust.
The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company.
Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you'll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are "connected."
The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.
Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.
Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or "pension" that you will need to look after yourself during retirement.
HOLDING COMPANY
This summer when you're standing around the barbecue with your business-owner neighbours, impress them with your knowledge of tax planning.
I can tell you from experience that you'll bore them to tears with the conversation, but they'll thank you later when the tax savings start rolling in. Specifically, share with them that holding companies can help them to defer tax. Here are the highlights.
THE RULES
If you happen to own a corporation that carries on an active business, give some thought to setting up your affairs to allow for a deferral of tax.
How? By establishing a holding company to own the shares of your active business corporation (ABC).
You see, if you own the shares of your ABC directly, then any payment of dividends from that corporation to you will be taxable in your hands personally in the year you receive those dividends.
If, on the other hand, you have a personal holding company that owns your shares in your ABC, you can pay a dividend to your holding company that will, in most cases, be tax free to your holding company.
It's subsection 112(1) of our tax law that allows, in most cases, your holding company to claim a deduction for taxable dividends received from your ABC. And, as long as your holding company and ABC are "connected" under our tax law (which will be the case in the vast majority of situations), you'll avoid another tax called the Part Four tax.
By passing some of those earnings from your ABC to your holding company, you'll defer tax, which is essentially the difference between the tax paid by your ABC on its profits, and the amount of tax you would have paid had the profits been paid out immediately to you as a bonus.
The tax deferred is approximately 30 per cent of the taxable income in most provinces for someone in the highest tax bracket.
THE STRATEGIES
What strategies should you be thinking about?
Multiple shareholders: If you're one of multiple shareholders in your ABC, setting up a personal holding company for each shareholder can provide flexibility to each of you.
Think of each holding company as a tap to control the payment of dividends to each of you personally.
Your ABC can pay dividends to each of the holding companies on a tax-free basis, and then each holding company can pay dividends to its shareholders based on his or her personal cash requirements.
Splitting income: Your holding company can be owned by more than one person in the family.
Your spouse, for example, could own some shares. This will allow you to sprinkle dividends to your spouse or others in the family so that the tax burden on those dividends can be shared.
It's not always advisable to issue shares in the holding company directly to your children (and if they're minors, this isn't possible), and so a family trust can be utilized, which brings me to the next strategy.
Establish a trust: I really like this structure. The shares of your ABC can be held by a family trust.
The beneficiaries of the trust will include you, your spouse, your children (regardless of their age), and your holding company.
Now, any dividends paid by your ABC to the trust can be distributed out to your holding company as a beneficiary of the trust, and you'll achieve the same tax-free payment to the holding company as you would achieve if the holding company owned the shares in the ABC directly, provided the two companies are "connected."
The advantages, however, include: The ability to sprinkle dividends to family members or the holding company as beneficiaries of the trust, at your discretion; the ability to multiply the lifetime capital gains exemption on a sale of the shares of your ABC (assuming the shares qualify for the exemption); creditor protection over the property of the trust, including the shares of the ABC, among other benefits.
Protection from creditors: Any excess profits of your ABC can be paid to your holding company as dividends, and can be lent back to your operating business on a secured basis, if the cash is needed for the business. This will protect those excess profits from other creditors of the business.
Retirement nest egg: The accumulation of assets inside your holding company can become the type of retirement nest egg or "pension" that you will need to look after yourself during retirement.
Monday, February 20, 2012
The 21-Year Rule is Taxing on Family Trusts
Family trusts are popular estate and succession planning vehicles for good reason: they can be versatile and effective tools to help manage family wealth and taxes.
But many Canadian family trusts are now well into their second decade and need attention to avoid significant—even devastating—tax bills triggered by the Income Tax Act’s “21-year rule.” “This rule,” says Angela Ross, associate partner, tax services, PwC, “states in general that any family trust, whether it is created during someone’s lifetime or on the death of a person, has to treat itself as having disposed of its property every 21 years.”
In Canada, when someone dies, they are seen as having disposed of their property (except property left to their spouse) at fair market value and their estate pays taxes on any gains realized on that property. Any property then acquired by their child will again be deemed disposed on the death of that child. Were it not for the “21-year rule,” a family trust could hold property for multiple generations without ever incurring tax on the death of a generation.
So every 21 years in a family trust’s “life,” the CRA looks at the property in a trust as if it were the property of someone who had just died. “When the 21 years are up, if the trust holds property on that date, it is deemed to have disposed of the property at its current market value and has to pay taxes on it. Say the trust owns property that had an original cost of $10 but its value on the 21-year anniversary is $100. That trust will be deemed to have realized a $90 capital gain.” As we enter 2011, many Canadian family trusts are approaching the 21st anniversary of their creation and families need to be aware that in most cases, with proper, advanced planning, steps can be taken to defer the tax.
“A trust can generally transfer its assets to Canadian resident beneficiaries on a tax-deferred basis prior to the 21-year anniversary, meaning it can transfer its assets to beneficiaries without triggering the tax on the gain,” says Ross. “So if the trust owns property with a cost of $10, and at 20 years, its fair market value is $100, the trust can transfer the entire asset to its Canadian resident beneficiaries at its $10 price. The trust disposition would reflect $10 of proceeds and not the $90 gain. The taxes on the $90 capital gain can be deferred until that beneficiary sells or dies.” Ross advises family trusts to begin planning for the transfer at least a year in advance of the 21-year anniversary—although in more complex cases two or more years will be needed.
Some important points to keep in mind include: With the exception of Canadian real estate held in a trust, the general rule is you can’t transfer the trust’s assets at cost to beneficiaries who are not Canadian residents. But even if you have non-Canadian resident beneficiaries, depending on the terms of the trust and situation, it may be possible to do some planning to get the assets out for the benefit of that non-resident. It can be very complicated, so start early.
If timed properly and you have the right tax scenario, you can transfer the trust’s assets to grandchildren rather than your children and thus defer the taxes for another generation. In the case of a family trust owning a business that is transferring shares to children or grandchildren, it’s prudent to have a shareholders’ agreement in place before the children or grandchildren receive the shares.
Even if your family trust is nowhere near 21 years old, having it reviewed carefully by an expert now can be a smart move. “There are a few provisions in the Tax Act that could prevent you from doing the rollout before 21 years,” says Ross.
“Most important is 75(2)—the revocable trust provision. It applies if the trust received property from any person who is a capital beneficiary of the trust or is a person who decides when the trust property is disposed of or to whom it eventually goes. It’s a brutal provision that may prevent the rollout of any assets to beneficiaries before 21 years and it’s one people need to be aware of.” Although there’s nothing that can be done to change it, with enough time, it’s possible to develop strategies to fund the eventual tax liability. “The sooner you know you have this issue, the better,” says Ross. “Alternative planning may be possible.
You could implement a reorganization at say 10 years to stop the growth in a bad trust and potentially start the growth in a good trust and minimize the tax hit that’s going to happen at 21 years.”
written and published by Ms. Angela M. Ross from PriceWaterHouseCooper(PWC)
But many Canadian family trusts are now well into their second decade and need attention to avoid significant—even devastating—tax bills triggered by the Income Tax Act’s “21-year rule.” “This rule,” says Angela Ross, associate partner, tax services, PwC, “states in general that any family trust, whether it is created during someone’s lifetime or on the death of a person, has to treat itself as having disposed of its property every 21 years.”
In Canada, when someone dies, they are seen as having disposed of their property (except property left to their spouse) at fair market value and their estate pays taxes on any gains realized on that property. Any property then acquired by their child will again be deemed disposed on the death of that child. Were it not for the “21-year rule,” a family trust could hold property for multiple generations without ever incurring tax on the death of a generation.
So every 21 years in a family trust’s “life,” the CRA looks at the property in a trust as if it were the property of someone who had just died. “When the 21 years are up, if the trust holds property on that date, it is deemed to have disposed of the property at its current market value and has to pay taxes on it. Say the trust owns property that had an original cost of $10 but its value on the 21-year anniversary is $100. That trust will be deemed to have realized a $90 capital gain.” As we enter 2011, many Canadian family trusts are approaching the 21st anniversary of their creation and families need to be aware that in most cases, with proper, advanced planning, steps can be taken to defer the tax.
“A trust can generally transfer its assets to Canadian resident beneficiaries on a tax-deferred basis prior to the 21-year anniversary, meaning it can transfer its assets to beneficiaries without triggering the tax on the gain,” says Ross. “So if the trust owns property with a cost of $10, and at 20 years, its fair market value is $100, the trust can transfer the entire asset to its Canadian resident beneficiaries at its $10 price. The trust disposition would reflect $10 of proceeds and not the $90 gain. The taxes on the $90 capital gain can be deferred until that beneficiary sells or dies.” Ross advises family trusts to begin planning for the transfer at least a year in advance of the 21-year anniversary—although in more complex cases two or more years will be needed.
Some important points to keep in mind include: With the exception of Canadian real estate held in a trust, the general rule is you can’t transfer the trust’s assets at cost to beneficiaries who are not Canadian residents. But even if you have non-Canadian resident beneficiaries, depending on the terms of the trust and situation, it may be possible to do some planning to get the assets out for the benefit of that non-resident. It can be very complicated, so start early.
If timed properly and you have the right tax scenario, you can transfer the trust’s assets to grandchildren rather than your children and thus defer the taxes for another generation. In the case of a family trust owning a business that is transferring shares to children or grandchildren, it’s prudent to have a shareholders’ agreement in place before the children or grandchildren receive the shares.
Even if your family trust is nowhere near 21 years old, having it reviewed carefully by an expert now can be a smart move. “There are a few provisions in the Tax Act that could prevent you from doing the rollout before 21 years,” says Ross.
“Most important is 75(2)—the revocable trust provision. It applies if the trust received property from any person who is a capital beneficiary of the trust or is a person who decides when the trust property is disposed of or to whom it eventually goes. It’s a brutal provision that may prevent the rollout of any assets to beneficiaries before 21 years and it’s one people need to be aware of.” Although there’s nothing that can be done to change it, with enough time, it’s possible to develop strategies to fund the eventual tax liability. “The sooner you know you have this issue, the better,” says Ross. “Alternative planning may be possible.
You could implement a reorganization at say 10 years to stop the growth in a bad trust and potentially start the growth in a good trust and minimize the tax hit that’s going to happen at 21 years.”
written and published by Ms. Angela M. Ross from PriceWaterHouseCooper(PWC)
Monday, August 29, 2011
Business Owners: Income Splitting 101 and how to save taxes!
if you follow my blog, you know that I enjoy reading Tim Cesnick's article published in the Globe & Mail. Once again, Tim's article is a MUST read for all of you. As usual, please do not hesitate to contact me should you wish to discuss some personal tax strategies.
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The Concept
Income splitting is one of the pillars of tax planning. It involves moving income from the hands of one family member who will pay tax at a higher rate to the hands of someone else in the family who will pay tax at a lower rate. By taking advantage of the lower tax brackets of family members, the overall tax burden for the family can be reduced.
How much tax can be saved? It varies by province, but the average across Canada is $17,000 in potential tax savings annually per family member. Your actual savings will depend on your level of income, your family member’s level of income, and your province of residence. The provinces where the greatest annual tax savings are possible are Nova Scotia ($21,000), Ontario ($19,565) and B.C. ($18,908). Alberta offers the smallest opportunity for annual savings at $13,196.
The Challenge
Here’s the problem: The attribution rules in our tax law are designed to prevent you from simply moving income to someone else’s hands. If you’re caught under these rules, the income earned by your family member will be attributed back to you to be taxed in your hands. The most common situations where these nasty rules will apply are where you give or lend money (at no or low interest) to your spouse or minor children.
The good news? There are quite a few strategies that can be implemented to split income that will sidestep the attribution rules.
The Strategies
Set yourself up for tax savings next year with one of these ideas:
1. Lend money to your spouse or child. You can simply lend money to your spouse or a child for them to invest. In the case of your spouse, all income and capital gains will be attributed back to you, and in the case of minor children, all income (but not capital gains) will face tax in your hands. But second generation income (that is, income on the income) will not be attributed back to you. It makes sense to move the income annually into a separate account so that its growth can be tracked separately from the original loan amount.
2. Lend money to family at interest. This idea is much the same as the one above, except that you can charge interest on the loan to avoid the attribution rules. By charging the prescribed rate of interest (currently just 1 per cent) your family member, not you, will face tax on any income earned. Your family member will have to pay you the interest every year by Jan. 30 for the prior year’s interest charge (if this is overlooked even once, the attribution rules will apply every year going forward). And get this: The current prescribed rate can be locked in indefinitely. So, if you set this loan up before Dec. 31 of this year, the 1-per-cent rate can apply forever. To the extent your family member earns more than 1 per cent on the funds, you’ll effectively split income.
3. Lend or give money to acquire a principal residence. If you help a family member to purchase a home, this will free up the income of that family member for other purposes – such as investing – effectively moving investable assets from your hands to theirs. In addition, if the property appreciates in value, the capital gain could be sheltered using the principal residence exemption of your family member if they are older than 18 or married.
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The Concept
Income splitting is one of the pillars of tax planning. It involves moving income from the hands of one family member who will pay tax at a higher rate to the hands of someone else in the family who will pay tax at a lower rate. By taking advantage of the lower tax brackets of family members, the overall tax burden for the family can be reduced.
How much tax can be saved? It varies by province, but the average across Canada is $17,000 in potential tax savings annually per family member. Your actual savings will depend on your level of income, your family member’s level of income, and your province of residence. The provinces where the greatest annual tax savings are possible are Nova Scotia ($21,000), Ontario ($19,565) and B.C. ($18,908). Alberta offers the smallest opportunity for annual savings at $13,196.
The Challenge
Here’s the problem: The attribution rules in our tax law are designed to prevent you from simply moving income to someone else’s hands. If you’re caught under these rules, the income earned by your family member will be attributed back to you to be taxed in your hands. The most common situations where these nasty rules will apply are where you give or lend money (at no or low interest) to your spouse or minor children.
The good news? There are quite a few strategies that can be implemented to split income that will sidestep the attribution rules.
The Strategies
Set yourself up for tax savings next year with one of these ideas:
1. Lend money to your spouse or child. You can simply lend money to your spouse or a child for them to invest. In the case of your spouse, all income and capital gains will be attributed back to you, and in the case of minor children, all income (but not capital gains) will face tax in your hands. But second generation income (that is, income on the income) will not be attributed back to you. It makes sense to move the income annually into a separate account so that its growth can be tracked separately from the original loan amount.
2. Lend money to family at interest. This idea is much the same as the one above, except that you can charge interest on the loan to avoid the attribution rules. By charging the prescribed rate of interest (currently just 1 per cent) your family member, not you, will face tax on any income earned. Your family member will have to pay you the interest every year by Jan. 30 for the prior year’s interest charge (if this is overlooked even once, the attribution rules will apply every year going forward). And get this: The current prescribed rate can be locked in indefinitely. So, if you set this loan up before Dec. 31 of this year, the 1-per-cent rate can apply forever. To the extent your family member earns more than 1 per cent on the funds, you’ll effectively split income.
3. Lend or give money to acquire a principal residence. If you help a family member to purchase a home, this will free up the income of that family member for other purposes – such as investing – effectively moving investable assets from your hands to theirs. In addition, if the property appreciates in value, the capital gain could be sheltered using the principal residence exemption of your family member if they are older than 18 or married.
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Tuesday, August 23, 2011
Business owners: Lets talk about Family Trusts
In the past 3 years, I spent a considerable amount of time blogging about the use of Family Trust for business owners. Family Trusts are a great and effective way to save taxes. Today, I would like to have a closer look at the fine print on Family Trusts.
1. Establishing the trust. There will be a problem under our tax law if the settlor of the trust (the person who creates the trust by transferring assets to it) has the ability to take back the assets placed in the trust, has the right to name additional beneficiaries of the trust after its creation, or has the ability to control dispositions of the trust assets. If any of these conditions apply, the income, gains or losses of the trust will be reported on the settlor’s tax return. To avoid this outcome, it’s important to make sure that the settlor is not also the sole trustee (or a trustee with veto power over what is done with the trust assets) or sole beneficiary. The best approach is to have another family member – perhaps a parent or grandparent – be the settlor of the trust. This family member can “settle” the trust with a small asset such as a silver coin or $20 bill. The trust can then acquire other assets by, for example, borrowing money from you or others to acquire investments, shares in a private company, a vacation home, or other assets.
2. Transfers to the trust. If you transfer assets other than cash to a trust you’ll be deemed to have sold those assets at fair market value, so if they’ve appreciated in value, you could trigger a taxable capital gain. Be sure to count this cost first. You may be able to shelter from tax a capital gain on transferring assets to a trust if you have, for example, capital losses to use up, or some other tax deductions or credits available. And if you transfer a principal residence to a trust, you might be able to use your principal residence exemption on the transfer to avoid a tax hit.
3. Income of the trust. The income of the trust can be taxed in the hands of the trust, or one or more of the beneficiaries. Where the beneficiaries are minors, or your spouse, the attribution rules in our tax law could apply to cause the income to be taxed in your hands – that is, the hands of the settlor or someone who may have transferred assets to the trust. You can avoid this problem by lending money to the trust instead and charging the prescribed rate of interest (currently 1 per cent). You should also know that where a trust receives certain types of income, such as dividends from private companies, or rent or business income earned from a property or business carried on by a person related to minor beneficiaries, and an attempt is made to have that trust income taxed in the hands of minor beneficiaries, the “kiddie tax” rules can apply to cause the child to pay tax at the highest marginal tax rate. The kiddie tax won’t apply to second-generation income (that is, income on income), so it’s still possible for the trust to receive income subject to this tax, and use the cash to build up investments over time, and avoid the kiddie tax on any second-generation income.
4. Distributions from the trust. The assets, or capital of the trust, can generally be distributed from the trust on a tax-free basis to the beneficiaries of the trust who have a right to the capital. In this case, the beneficiaries inherit the adjusted cost base of the trust and may pay tax later on any income or gains on those assets they receive.
5. Twenty-one years later. Be aware that on every 21st anniversary of the trust there will be a deemed disposition of the assets of the trust, which could trigger taxable capital gains. There are various ways to plan for this tax hit (a topic for another day).
6. Asset protection benefits. Finally, assets can often be protected from potential creditors when placed in a trust where the trustee has discretion to distribute the assets to beneficiaries as the trustee sees fit. However, there are laws in place to protect the rights of creditors, so speak to a lawyer about these.
And be sure to speak to a tax lawyer before setting up a trust.
1. Establishing the trust. There will be a problem under our tax law if the settlor of the trust (the person who creates the trust by transferring assets to it) has the ability to take back the assets placed in the trust, has the right to name additional beneficiaries of the trust after its creation, or has the ability to control dispositions of the trust assets. If any of these conditions apply, the income, gains or losses of the trust will be reported on the settlor’s tax return. To avoid this outcome, it’s important to make sure that the settlor is not also the sole trustee (or a trustee with veto power over what is done with the trust assets) or sole beneficiary. The best approach is to have another family member – perhaps a parent or grandparent – be the settlor of the trust. This family member can “settle” the trust with a small asset such as a silver coin or $20 bill. The trust can then acquire other assets by, for example, borrowing money from you or others to acquire investments, shares in a private company, a vacation home, or other assets.
2. Transfers to the trust. If you transfer assets other than cash to a trust you’ll be deemed to have sold those assets at fair market value, so if they’ve appreciated in value, you could trigger a taxable capital gain. Be sure to count this cost first. You may be able to shelter from tax a capital gain on transferring assets to a trust if you have, for example, capital losses to use up, or some other tax deductions or credits available. And if you transfer a principal residence to a trust, you might be able to use your principal residence exemption on the transfer to avoid a tax hit.
3. Income of the trust. The income of the trust can be taxed in the hands of the trust, or one or more of the beneficiaries. Where the beneficiaries are minors, or your spouse, the attribution rules in our tax law could apply to cause the income to be taxed in your hands – that is, the hands of the settlor or someone who may have transferred assets to the trust. You can avoid this problem by lending money to the trust instead and charging the prescribed rate of interest (currently 1 per cent). You should also know that where a trust receives certain types of income, such as dividends from private companies, or rent or business income earned from a property or business carried on by a person related to minor beneficiaries, and an attempt is made to have that trust income taxed in the hands of minor beneficiaries, the “kiddie tax” rules can apply to cause the child to pay tax at the highest marginal tax rate. The kiddie tax won’t apply to second-generation income (that is, income on income), so it’s still possible for the trust to receive income subject to this tax, and use the cash to build up investments over time, and avoid the kiddie tax on any second-generation income.
4. Distributions from the trust. The assets, or capital of the trust, can generally be distributed from the trust on a tax-free basis to the beneficiaries of the trust who have a right to the capital. In this case, the beneficiaries inherit the adjusted cost base of the trust and may pay tax later on any income or gains on those assets they receive.
5. Twenty-one years later. Be aware that on every 21st anniversary of the trust there will be a deemed disposition of the assets of the trust, which could trigger taxable capital gains. There are various ways to plan for this tax hit (a topic for another day).
6. Asset protection benefits. Finally, assets can often be protected from potential creditors when placed in a trust where the trustee has discretion to distribute the assets to beneficiaries as the trustee sees fit. However, there are laws in place to protect the rights of creditors, so speak to a lawyer about these.
And be sure to speak to a tax lawyer before setting up a trust.
Wednesday, August 17, 2011
Business Owners: Don't forget to file your Trust tax return on time...
To avoid paying penalties, trustees must ensure that they file a trust's tax return by the filing deadline. If you fail to file on time, a penalty of 5% of the unpaid tax is due. A further penalty of 1% of the unpaid tax times the number of months the return is not filed (to a maximum of 12 months) will also be due if the return remains unfiled. Even if the trust does not have a balance owing, the trust return is also an information return. That means that if the trust return is not filed on time or any of the information slips are not distributed on time, a penalty for each failure to comply with this requirement can be charged.
The filing deadline for trust returns with a December 31, 2011 year-end (which includes all inter-vivos trusts) will be March 31, 2012.
The filing deadline for trust returns with a December 31, 2011 year-end (which includes all inter-vivos trusts) will be March 31, 2012.
Tuesday, August 9, 2011
Careful estate planning can stave off legal battles!
below is a good article written by Thane Stenner and published in the Globe and Mail.
Last week I had a working lunch with “Bill,” a client who had sold a significant portion of his family-held business about two years ago.
Over the course of our discussion, Bill told me a close friend from his university days had called him last month. The friend's father passed away back in March, leaving a sizable estate. Unfortunately, that estate was now in the process of an extensive legal battle, as four siblings (from two different marriages), a widow, and an ex-spouse bickered and fought over their share of the pie.
•Why you need an estate plan
•It's time to have 'the talk' with mom and dad
•Planning for your estate
“What a mess,” Bill said, shaking his head as he waited for his grilled salmon. “When I go, I want things to be well-organized – easy to deal with.” Bill paused for a moment before looking at me and adding: “And I want everybody to know exactly what I want done with my money.”
Bill's concern is well founded. In my experience, there's a direct relationship between the size of one's estate and the potential for conflict. The higher the stakes, the higher the chances for litigation.
Unfortunately, as I told Bill, there is no such thing as a litigation-free estate. Even the most well-organized, well-constructed estate may be challenged by disgruntled heirs or creditors. That said, there are things high-net-worth individuals can do to discourage litigation, and diffuse inter-family conflict before it leads to courtroom drama.
Start the process early
Estate planning can be detailed, complicated work. By starting early, high-net-worth individuals have the time to seek professional counsel and consider options carefully. This in turn clarifies intentions, and makes ambiguities and disagreements less likely, which should help deter claims against the estate.
For business owners like Bill, an early start is even more critical. Succession plans need put in place well in advance of the owner's retirement date, particularly if the intention is to groom a particular family member to take over the business.
Avoid ‘surprises’
Most estate litigation is born from what I call the “awful surprise”: an heir discovers they've been left much less than they thought they would, or have not been recognized as an owner of certain assets (the family business, for example). The news generates shock, alienation and anger. The desire to see justice done leads the heir to challenge the will, regardless of the ultimate chance of success.
Most high-net-worth individuals work hard to avoid this kind of dynamic. They communicate their estate intentions to heirs, and, if appropriate, to business partners and associates. If they know their family situation is explosive, they set up a family meeting or formal conference – using a professional mediator, if necessary –to let heirs know what their estate intentions actually are.
Use trusts
Trusts are an extremely flexible, extremely effective tool for organizing high-net-worth estates. Properly written, trusts can accomplish a number of important estate planning goals: They can reduce taxes, increase privacy, protect assets from creditors, protect family assets from future divorces, and structure an ongoing charitable contribution.
Trusts can also be an excellent way to avoid estate litigation. By putting a portion of your assets/estate into a trust, you can ensure an inheritance passes to specific people (adult children from a first marriage, for example). Another possibility is to put a family asset (the family cottage) into a trust instead of bequeathing it to a specific individual. That way all family members can enjoy it without bickering about who owns it. Ultimate ownership should still be completed though.
Assign a professional trustee
As the “manager” of an estate, the trustee wields a tremendous amount of financial power. While appointing a family member has its advantages, it’s unlikely the average person has the time, the knowledge, or even the inclination to properly administer a multi-million dollar estate at the same time they’re grieving for a loved one.
One way to get the best of both worlds is to appoint two estate trustees: (a) a family member, and (b) a financially competent professional (typically a CA, lawyer, or a trustee from a respected financial institution) who knows the family well. By appointing a trustee from outside the family who is legally bound to act in the interests of all beneficiaries, you can eliminate claims of bias or conflict of interest before they happen.
Update your will
Changes in business or family relationships can create friction among heirs. By regularly updating their wills, high-net-worth individuals can avoid making that friction boil over into legal challenges and/or inter-family disputes.
Reviewing a will every two years is usually a good rule of thumb. Such a review needn’t take more than an hour – the idea is to check to see whether everything is still in order. If a significant life or financial change takes place earlier than that (a marriage, a divorce, a liquidity event, etc.), a more frequent update may be warranted
Last week I had a working lunch with “Bill,” a client who had sold a significant portion of his family-held business about two years ago.
Over the course of our discussion, Bill told me a close friend from his university days had called him last month. The friend's father passed away back in March, leaving a sizable estate. Unfortunately, that estate was now in the process of an extensive legal battle, as four siblings (from two different marriages), a widow, and an ex-spouse bickered and fought over their share of the pie.
•Why you need an estate plan
•It's time to have 'the talk' with mom and dad
•Planning for your estate
“What a mess,” Bill said, shaking his head as he waited for his grilled salmon. “When I go, I want things to be well-organized – easy to deal with.” Bill paused for a moment before looking at me and adding: “And I want everybody to know exactly what I want done with my money.”
Bill's concern is well founded. In my experience, there's a direct relationship between the size of one's estate and the potential for conflict. The higher the stakes, the higher the chances for litigation.
Unfortunately, as I told Bill, there is no such thing as a litigation-free estate. Even the most well-organized, well-constructed estate may be challenged by disgruntled heirs or creditors. That said, there are things high-net-worth individuals can do to discourage litigation, and diffuse inter-family conflict before it leads to courtroom drama.
Start the process early
Estate planning can be detailed, complicated work. By starting early, high-net-worth individuals have the time to seek professional counsel and consider options carefully. This in turn clarifies intentions, and makes ambiguities and disagreements less likely, which should help deter claims against the estate.
For business owners like Bill, an early start is even more critical. Succession plans need put in place well in advance of the owner's retirement date, particularly if the intention is to groom a particular family member to take over the business.
Avoid ‘surprises’
Most estate litigation is born from what I call the “awful surprise”: an heir discovers they've been left much less than they thought they would, or have not been recognized as an owner of certain assets (the family business, for example). The news generates shock, alienation and anger. The desire to see justice done leads the heir to challenge the will, regardless of the ultimate chance of success.
Most high-net-worth individuals work hard to avoid this kind of dynamic. They communicate their estate intentions to heirs, and, if appropriate, to business partners and associates. If they know their family situation is explosive, they set up a family meeting or formal conference – using a professional mediator, if necessary –to let heirs know what their estate intentions actually are.
Use trusts
Trusts are an extremely flexible, extremely effective tool for organizing high-net-worth estates. Properly written, trusts can accomplish a number of important estate planning goals: They can reduce taxes, increase privacy, protect assets from creditors, protect family assets from future divorces, and structure an ongoing charitable contribution.
Trusts can also be an excellent way to avoid estate litigation. By putting a portion of your assets/estate into a trust, you can ensure an inheritance passes to specific people (adult children from a first marriage, for example). Another possibility is to put a family asset (the family cottage) into a trust instead of bequeathing it to a specific individual. That way all family members can enjoy it without bickering about who owns it. Ultimate ownership should still be completed though.
Assign a professional trustee
As the “manager” of an estate, the trustee wields a tremendous amount of financial power. While appointing a family member has its advantages, it’s unlikely the average person has the time, the knowledge, or even the inclination to properly administer a multi-million dollar estate at the same time they’re grieving for a loved one.
One way to get the best of both worlds is to appoint two estate trustees: (a) a family member, and (b) a financially competent professional (typically a CA, lawyer, or a trustee from a respected financial institution) who knows the family well. By appointing a trustee from outside the family who is legally bound to act in the interests of all beneficiaries, you can eliminate claims of bias or conflict of interest before they happen.
Update your will
Changes in business or family relationships can create friction among heirs. By regularly updating their wills, high-net-worth individuals can avoid making that friction boil over into legal challenges and/or inter-family disputes.
Reviewing a will every two years is usually a good rule of thumb. Such a review needn’t take more than an hour – the idea is to check to see whether everything is still in order. If a significant life or financial change takes place earlier than that (a marriage, a divorce, a liquidity event, etc.), a more frequent update may be warranted
Business owners: In trusts you can trust to find tax savings...
Trusts are wonderful tools for the wealthy, but business owners should use them, too. They can be worthwhile for amounts of money or assets of $150,000 – even less in some circumstances. The cost of setting up a simple testamentary trust – a trust set out in a will that takes effect when you die – can be an initial $2,000 to $3,000, mainly for legal fees.
The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you’re still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.
“If you have enough, you might be okay with giving it up today,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you’ll take the prudent approach and pass on whatever is left in a will, she says.
Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.
An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child’s living expenses or even to buy a car.
Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.
Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client’s children from the first marriage.
In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.
But trusts have other advantages.
For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.
You can spread your largesse around, using “sprinkler” trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.
Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, “you have to look at whose money is generating the income.” It must belong to the children.
Keep it private
If privacy or probate is an issue, consider a trust.
When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.
“Anyone” might include family members with an axe to grind or even charities hoping to approach your beneficiaries.
“Certain charities look at the affluent,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. “They want to follow up with the beneficiaries looking for donations.”
Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.
The classic family trust is a form of living, or inter-vivos, trust, one that takes effect while you’re still alive. A testamentary trust forms part of a will and so takes effect only after you are gone. Which one you choose depends on how willing and able you are to give up ownership of some of your assets now.
“If you have enough, you might be okay with giving it up today,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. But if think you might need your savings, you’ll take the prudent approach and pass on whatever is left in a will, she says.
Perhaps the simplest trust is one you set up during your lifetime for the education of your children or grandchildren. Often people will put enough money into a registered education savings plan to take advantage of the federal government grants, and then put money into a trust with the children as beneficiary.
An education trust is more flexible than an RESP, Ms. Marshall says. One of the children or grandchildren might decide to go to a technical school or theatre school that is not approved by the Canada Revenue Agency; an education trust will allow them to. The trust money can be used to pay for the child’s living expenses or even to buy a car.
Given the large number of people in second or third marriages, spousal trusts are growing in popularity as a way to protect the interests of the children from a first marriage, experts say.
Often in a second marriage, a person will naturally want to provide for the new spouse but will worry about disinheriting children from a first marriage, says Keith Masterman, associate vice-president, trusts, at TD Waterhouse in Toronto. Rather than leaving everything to a second spouse, who may in turn leave it to his or her own family, Mr. Masterman advises clients set up a spousal trust as long as he or she lives. When the second spouse dies, the assets will go to the client’s children from the first marriage.
In this case, the choice of trustee becomes complicated, Mr. Masterman points out, because choosing either a child or the second spouse would put either in a conflict of interest. This can be resolved by hiring a professional trustee.
But trusts have other advantages.
For example, spousal trusts, like family trusts, can be used to split income, thereby lowering income taxes. By setting up a spousal trust, you are creating a second taxpayer because trusts are a separate legal entity. So, if you split your income with your spouse now, you can continue to do so after you are gone by setting up a trust and having the trust foot part of the tax bill.
You can spread your largesse around, using “sprinkler” trusts to split your income with your spouse, your children and their children, giving the trustee the discretion to allocate income from the trust however he or she sees fit – that is, to best tax advantage.
Naturally, the Canada Revenue Agency will scrutinize such arrangements closely, so the trust has to be set up properly, Ms. Marshall cautions. While parents retain control of the monies lent to the trust, “you have to look at whose money is generating the income.” It must belong to the children.
Keep it private
If privacy or probate is an issue, consider a trust.
When you die and your will is probated, your assets and your beneficiaries are on the public record. Anyone can see your will by paying a small fee. The details of a trust, in contrast, are confidential.
“Anyone” might include family members with an axe to grind or even charities hoping to approach your beneficiaries.
“Certain charities look at the affluent,” says Allison Marshall, financial advisory consultant at RBC Wealth Management in Toronto. “They want to follow up with the beneficiaries looking for donations.”
Another reason some people choose trusts is to avoid probate fees, which vary from province to province and are comparatively high in Ontario.
Friday, July 22, 2011
Business Owners: 5 Myths that you should know about Family Trust!!
Over the past 3 years, I've been blogging extensively about the various advantages of using a Family Trust for business owners and owners/managers -
On a daily basis, I spent a considerable amount of time educating people on the benefits of using such structure. Today, I would like to share an excellent article written by Chaya Cooperberg published in the Globe & Mail.
The Truth about Family Trusts.
The perception of family trusts as vehicles for only the extremely wealthy is one of the misperceptions about trusts that Ms. Blades wants to put to rest. Here are her top five myths and realities about the structure.
Myth #1: They are inflexible.
Reality: Trusts can be quite versatile and are often the best option to provide for disabled beneficiaries or for children of blended marriages. The terms of the trust can vary. There can be a fixed-interest trust, where an amount is invested and the beneficiary gets the money. Or a trustee can be appointed to pay it out. You can also stagger the payments so that funds are paid out when the beneficiary reaches certain age milestones.
Myth #2: They are mainly used to avoid estate taxes and probate costs.
Reality: Trusts can offer significant tax benefits and avoid probate costs, but they also have other benefits like asset protection, investment management, and protection for disabled family members or the client if they become incapacitated.
“It’s always a cost benefit analysis with a trust,” says Ms. Blades. “You would never just look at the financial benefits such as how much tax is saved; you would also look at the beneficiary benefits. You need to do the analysis to see when and where it is worthwhile.”
Myth #3: They are only for the very wealthy.
Reality: Trusts can be set up for anyone with specific needs and are useful vehicles for passing funds to children or grandchildren. There are multimillion-dollar trusts and there are much smaller trusts.
Myth #4: You lose control.
Reality: Trusts are customized vehicles designed in line with your wishes and ensure that cash is ultimately transferred to beneficiaries as desired. While you no longer own the money, you can say when and how you want it used. Your control comes in under the terms and conditions you’re drafting.
Myth #5: Trusts are complicated and onerous to manage.
Reality: The provisions of a trust can be as simple or as complex as you want or need. To set up a trust, you would first need to meet with a will and estate planner or a lawyer to draft the agreement. It is also important to get separate tax advice from an accountant to ensure the trust is a worthwhile vehicle for you. If you make the trust a part of a will – this type of trust is called a testamentary trust – the cost will be built into the cost of the will. If you create a trust that takes effect while you are alive – known as a living trust or inter vivos trust.
On a daily basis, I spent a considerable amount of time educating people on the benefits of using such structure. Today, I would like to share an excellent article written by Chaya Cooperberg published in the Globe & Mail.
The Truth about Family Trusts.
The perception of family trusts as vehicles for only the extremely wealthy is one of the misperceptions about trusts that Ms. Blades wants to put to rest. Here are her top five myths and realities about the structure.
Myth #1: They are inflexible.
Reality: Trusts can be quite versatile and are often the best option to provide for disabled beneficiaries or for children of blended marriages. The terms of the trust can vary. There can be a fixed-interest trust, where an amount is invested and the beneficiary gets the money. Or a trustee can be appointed to pay it out. You can also stagger the payments so that funds are paid out when the beneficiary reaches certain age milestones.
Myth #2: They are mainly used to avoid estate taxes and probate costs.
Reality: Trusts can offer significant tax benefits and avoid probate costs, but they also have other benefits like asset protection, investment management, and protection for disabled family members or the client if they become incapacitated.
“It’s always a cost benefit analysis with a trust,” says Ms. Blades. “You would never just look at the financial benefits such as how much tax is saved; you would also look at the beneficiary benefits. You need to do the analysis to see when and where it is worthwhile.”
Myth #3: They are only for the very wealthy.
Reality: Trusts can be set up for anyone with specific needs and are useful vehicles for passing funds to children or grandchildren. There are multimillion-dollar trusts and there are much smaller trusts.
Myth #4: You lose control.
Reality: Trusts are customized vehicles designed in line with your wishes and ensure that cash is ultimately transferred to beneficiaries as desired. While you no longer own the money, you can say when and how you want it used. Your control comes in under the terms and conditions you’re drafting.
Myth #5: Trusts are complicated and onerous to manage.
Reality: The provisions of a trust can be as simple or as complex as you want or need. To set up a trust, you would first need to meet with a will and estate planner or a lawyer to draft the agreement. It is also important to get separate tax advice from an accountant to ensure the trust is a worthwhile vehicle for you. If you make the trust a part of a will – this type of trust is called a testamentary trust – the cost will be built into the cost of the will. If you create a trust that takes effect while you are alive – known as a living trust or inter vivos trust.
Tuesday, July 19, 2011
Why Family Trust are NOT only for Millionaire....
If you’re like most business owners, you probably think of trusts as powerful financial tools used by the ultra-rich. Well, you’d be wrong. They are powerful financial tools, but they’re not just for the rich. They’re used by all kinds of financially savvy business people who know about the benefits they offer and save a lot of money using them to their advantage.
You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $35,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars.
In addition, did you know that if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate fee (taxes payable at death)and save you thousand of dollars. I highly recommend that you contact me if you wish to learn more.
The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.
If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com
You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $35,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars.
In addition, did you know that if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate fee (taxes payable at death)and save you thousand of dollars. I highly recommend that you contact me if you wish to learn more.
The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.
If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com
Sunday, July 17, 2011
Business owner: Are you a candidate for a Family Trust and save thousand of $$ in taxes?
As a business lawyer, I meet with entrepreneurs on a daily basis, and for many of them their most valuable asset is their corporation. For obvious reasons, their first priority is on income-earning activities, such as generating sales. Attention to such activities is, of course, a practical necessity and a hallmark of success. However, the utilization of a proper corporate structure to reduce tax exposure is often overlooked. Business owners must realize that a proper structure can save a substantial amount of taxes and can also be greatly beneficial for them and their family. The purpose of this article is to explain to you the benefits of using a Family Trust and to help you determine if you are a good candidate for implementing such a structure.
What is a Family Trust?
In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).
How do I determine if I’m a good candidate to setup a Family Trust?
Here are some key indicators that you should consider a Family Trust:
Ø You are shareholder in a private corporation.
Ø Your business is profitable and generating profits.
Ø You have children(s) and you are paying/will pay for their education(s).
Ø You may want to sell your company in the future.
Would it be beneficial for me and for my family?
Some of the benefits of using a Family Trust structure are:
Ø Funding of your children’s education. The first and immediate benefit is the funding of your children's education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 14% through the trust as opposed to funding your child's education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, you can save as much as 34% of taxes (i.e. a potential saving of $34,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.
Ø Income splitting. A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).
Ø Capital gains exemption. Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.
Ø Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.
As you can see, a Family Trust can offer business owners a great deal of flexibility and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional. For more personalized information regarding setting up a Family Trust please contact me via email.
What is a Family Trust?
In essence, a trust is not a legal entity like a corporation, but rather a relationship that exists whenever a person, called a Trustee, holds property for the benefit of other individuals. The trust arrangement permits the legal ownership of the property to be held by the trustee while the benefits of ownership (income, capital gains) accrue to the beneficiaries. It is common practice for an entrepreneur and his or her spouse to act as Trustees of their Family Trust. Hence, entrepreneurs can still maintain control over their companies, while benefiting from a trust arrangement (subject to their fiduciary duties to act in the best interest of the beneficiaries).
How do I determine if I’m a good candidate to setup a Family Trust?
Here are some key indicators that you should consider a Family Trust:
Ø You are shareholder in a private corporation.
Ø Your business is profitable and generating profits.
Ø You have children(s) and you are paying/will pay for their education(s).
Ø You may want to sell your company in the future.
Would it be beneficial for me and for my family?
Some of the benefits of using a Family Trust structure are:
Ø Funding of your children’s education. The first and immediate benefit is the funding of your children's education. By having the trust own shares in the family company and having your children as beneficiaries of the trust, it is possible to fund as much as $32,000.00 per child over the age of 18 at a tax rate of approximately 14% through the trust as opposed to funding your child's education from your personal funds which are usually taxed at a substantially higher rate. If you are a high income earner you will be paying tax at approximately 48%. Basically, you can save as much as 34% of taxes (i.e. a potential saving of $34,000 for each $100,000 earned). This is a substantial savings for each of your children for each year that he/she is in school with little or no other source of income.
Ø Income splitting. A well-structured family trust allows for splitting the income earned by the trust among the various beneficiaries. If you are a high income earner you may be able to split your revenue to a lower income earner. (subject to the potential application of the attribution rules and the “kiddie tax”).
Ø Capital gains exemption. Once in your life time, you may be eligible to claim the $750,000 capital gains exemption. Basically, what it means it that an individual selling his/her shares of a Canadian Private Corporation (subject to a set of specific rules) can receive the first $750,000 on a tax free basis. Hence, the $750,000 capital gains exemption may be multiplied by the number of family members who are beneficiaries of the trust, without direct share ownership.
Ø Reducing tax liability at death. Transferring assets to a trust may limit the size of the individual’s estate, such that tax liability at death is reduced. In addition, probate fees may be reduced.
As you can see, a Family Trust can offer business owners a great deal of flexibility and should be further explored. Any individual who is interested in setting up a corporate structure that involves a Family Trust should evaluate all the tax consequences and consult with a knowledgeable professional. For more personalized information regarding setting up a Family Trust please contact me via email.
Monday, May 16, 2011
Transfer assets to a Trust for a number of tax and non-tax reasons...
An entrepreneur or a business owner may wish to transfer assets to a trust for a number of tax and non-tax reasons.
Tax reasons include the desire:
(a) to transfer the tax burden from a high bracket taxpayer to a taxpayer in a lower tax bracket;
(b) to utilise the enhanced 750k capital gains exemption of various members of the family;
(c) to access the lower tax rates of a different province (such as Alberta at this time); and
(d) in the case of testamentary trusts, to multiply the ability to access the lower tax rates by using multiple testamentary trusts.
Non-tax reasons include the following:
(a) to set a mechanism in place to manage one’s property in the event of disability or incapacity;
(b) to protect property from the claims of creditors;
(c) to provide for disabled beneficiaries without jeopardising their government benefits;
(d) to provide for a person who is not able to look after his or her property by reason of minority, mental incapacity or lack of business experience;
(e) to give a beneficiary the benefits of property ownership without giving up control over the property;
(f) to provide for successive interests; and
(g) to avoid the application of provincial probate
taxes.
please do not hesitate to contact me via email at hugues.boisvert@andrewsrobichaud.com should you have any questions.
Tax reasons include the desire:
(a) to transfer the tax burden from a high bracket taxpayer to a taxpayer in a lower tax bracket;
(b) to utilise the enhanced 750k capital gains exemption of various members of the family;
(c) to access the lower tax rates of a different province (such as Alberta at this time); and
(d) in the case of testamentary trusts, to multiply the ability to access the lower tax rates by using multiple testamentary trusts.
Non-tax reasons include the following:
(a) to set a mechanism in place to manage one’s property in the event of disability or incapacity;
(b) to protect property from the claims of creditors;
(c) to provide for disabled beneficiaries without jeopardising their government benefits;
(d) to provide for a person who is not able to look after his or her property by reason of minority, mental incapacity or lack of business experience;
(e) to give a beneficiary the benefits of property ownership without giving up control over the property;
(f) to provide for successive interests; and
(g) to avoid the application of provincial probate
taxes.
please do not hesitate to contact me via email at hugues.boisvert@andrewsrobichaud.com should you have any questions.
Friday, February 18, 2011
Business owners: Why Family Trusts are not just for millionaires...
If you’re like most business owners, you probably think of trusts as powerful financial tools used by the ultra-rich. Well, you’d be wrong. They are powerful financial tools, but they’re not just for the rich. They’re used by all kinds of financially savvy business people who know about the benefits they offer and save a lot of money using them to their advantage.
You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $32,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars plus annual trustee and administration fees.
In addition, if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate and save you thousand of dollars.
The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.
If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com
You don’t have to have millions of dollars to take advantage of those benefits. As a business owners, the setup fees of a trust is usually worth while as you can save up to $32,000 per $100,000 of profit. You can set up a simple trust for a few thousand dollars plus annual trustee and administration fees.
In addition, if you have 2 wills drafted (personal & corporate) the corporate will allow you to avoid probate and save you thousand of dollars.
The goal of this posting is simply to make you more aware of trusts and what they can do for you and your estate plan. Keep in mind that trusts can be very complex and that you definitely need the help of a professional to know how a trust would help you in your specific situation.
If you have any questions on the above, please contact me at hugues.boisvert@andrewsrobichaud.com
Thursday, November 11, 2010
Business Owners: Income Splitting 101 & How can you reduce your tax burden with some Income Splitting" strategies?
if you follow my blog, you know that I enjoy reading Tim Cesnick's article published in the Globe & Mail. Once again, Tim's article is a MUST read for all of you. As usual, please do not hesitate to contact me should you wish to discuss some personal tax strategies.
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The Concept
Income splitting is one of the pillars of tax planning. It involves moving income from the hands of one family member who will pay tax at a higher rate to the hands of someone else in the family who will pay tax at a lower rate. By taking advantage of the lower tax brackets of family members, the overall tax burden for the family can be reduced.
How much tax can be saved? It varies by province, but the average across Canada is $17,000 in potential tax savings annually per family member. Your actual savings will depend on your level of income, your family member’s level of income, and your province of residence. The provinces where the greatest annual tax savings are possible are Nova Scotia ($21,000), Ontario ($19,565) and B.C. ($18,908). Alberta offers the smallest opportunity for annual savings at $13,196.
The Challenge
Here’s the problem: The attribution rules in our tax law are designed to prevent you from simply moving income to someone else’s hands. If you’re caught under these rules, the income earned by your family member will be attributed back to you to be taxed in your hands. The most common situations where these nasty rules will apply are where you give or lend money (at no or low interest) to your spouse or minor children.
The good news? There are quite a few strategies that can be implemented to split income that will sidestep the attribution rules.
The Strategies
Set yourself up for tax savings next year with one of these ideas:
1. Lend money to your spouse or child. You can simply lend money to your spouse or a child for them to invest. In the case of your spouse, all income and capital gains will be attributed back to you, and in the case of minor children, all income (but not capital gains) will face tax in your hands. But second generation income (that is, income on the income) will not be attributed back to you. It makes sense to move the income annually into a separate account so that its growth can be tracked separately from the original loan amount.
2. Lend money to family at interest. This idea is much the same as the one above, except that you can charge interest on the loan to avoid the attribution rules. By charging the prescribed rate of interest (currently just 1 per cent) your family member, not you, will face tax on any income earned. Your family member will have to pay you the interest every year by Jan. 30 for the prior year’s interest charge (if this is overlooked even once, the attribution rules will apply every year going forward). And get this: The current prescribed rate can be locked in indefinitely. So, if you set this loan up before Dec. 31 of this year, the 1-per-cent rate can apply forever. To the extent your family member earns more than 1 per cent on the funds, you’ll effectively split income.
3. Lend or give money to acquire a principal residence. If you help a family member to purchase a home, this will free up the income of that family member for other purposes – such as investing – effectively moving investable assets from your hands to theirs. In addition, if the property appreciates in value, the capital gain could be sheltered using the principal residence exemption of your family member if they are older than 18 or married.
&&&&&&&&&&
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The Concept
Income splitting is one of the pillars of tax planning. It involves moving income from the hands of one family member who will pay tax at a higher rate to the hands of someone else in the family who will pay tax at a lower rate. By taking advantage of the lower tax brackets of family members, the overall tax burden for the family can be reduced.
How much tax can be saved? It varies by province, but the average across Canada is $17,000 in potential tax savings annually per family member. Your actual savings will depend on your level of income, your family member’s level of income, and your province of residence. The provinces where the greatest annual tax savings are possible are Nova Scotia ($21,000), Ontario ($19,565) and B.C. ($18,908). Alberta offers the smallest opportunity for annual savings at $13,196.
The Challenge
Here’s the problem: The attribution rules in our tax law are designed to prevent you from simply moving income to someone else’s hands. If you’re caught under these rules, the income earned by your family member will be attributed back to you to be taxed in your hands. The most common situations where these nasty rules will apply are where you give or lend money (at no or low interest) to your spouse or minor children.
The good news? There are quite a few strategies that can be implemented to split income that will sidestep the attribution rules.
The Strategies
Set yourself up for tax savings next year with one of these ideas:
1. Lend money to your spouse or child. You can simply lend money to your spouse or a child for them to invest. In the case of your spouse, all income and capital gains will be attributed back to you, and in the case of minor children, all income (but not capital gains) will face tax in your hands. But second generation income (that is, income on the income) will not be attributed back to you. It makes sense to move the income annually into a separate account so that its growth can be tracked separately from the original loan amount.
2. Lend money to family at interest. This idea is much the same as the one above, except that you can charge interest on the loan to avoid the attribution rules. By charging the prescribed rate of interest (currently just 1 per cent) your family member, not you, will face tax on any income earned. Your family member will have to pay you the interest every year by Jan. 30 for the prior year’s interest charge (if this is overlooked even once, the attribution rules will apply every year going forward). And get this: The current prescribed rate can be locked in indefinitely. So, if you set this loan up before Dec. 31 of this year, the 1-per-cent rate can apply forever. To the extent your family member earns more than 1 per cent on the funds, you’ll effectively split income.
3. Lend or give money to acquire a principal residence. If you help a family member to purchase a home, this will free up the income of that family member for other purposes – such as investing – effectively moving investable assets from your hands to theirs. In addition, if the property appreciates in value, the capital gain could be sheltered using the principal residence exemption of your family member if they are older than 18 or married.
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Tuesday, November 9, 2010
Example of how you can save $26,000 or more in taxes if you use a Family Trust
Example of the Operation of A Family Trust
Scenario 1: Income Splitting
Mr. X establishes a trust for the benefit of himself, his spouse, Mrs. X, and their three children, A, B and C. A and B are over 18 years of age and attending university. C is a minor living at home.
The participating shares of Opco, Mr. X’s active business corporation, are owned 100% by the trust.
After salaries are paid to Mr. X, Opco is earning $100,000 before tax and $82,000 after tax.
Based on current tax rates, if Mr. X wishes to pay out the net after corporate tax income of $82,000 to himself to enable him to use it personally, he would pay additional taxes of over $26,000 if he were the sole shareholder of the company.
Using the family trust arrangement and paying the income earned by the trust equally to the adult beneficiaries (except Mr. X.), the trust’s dividend could be split evenly between Mrs. X, A, and B. The tax liability on the dividend would thus be taxed as follows:
Mr. X = O in dividend (he is paid via salary)
Mrs. X, A and B all take a Dividend of $27,334 each for a total of $82,000. Hence, if Mrs. X, A, and B have no other sources of income, they would pay no taxes at all on this amount.
Note, that dividends allocated to the minor child would be subject to tax at top marginal rates with no personal tax credits applicable, pursuant to the “Kiddie Tax” provisions.
By using a family trust arrangement, Mr. X has just saved the family unit about $26,000 in tax.
Scenario 2: Capital Gains Splitting
Mr. X has received an offer to sell the shares of Opco (which are "qualified small business corporation shares") for $2,000,000. The shares were acquired for a nominal amount ($100). If Mr. X were to receive the sale proceeds as sole shareholder of the business, his tax liability might be computed as follows:
Proceeds $ 2,000,000
Cost (100)
Capital Gain 1,999,900
Capital Gains Exemption (750,000)
Capital Gains Subject to Tax $ 1,240,900
Taxable Capital Gain $ 620,450
Tax $ 310,225
Under the family trust arrangement, the trust would receive the total $2,000,000 proceeds. The trust's capital gain could be paid out to trust's beneficiaries (if desired by the trustee) and the beneficiaries could shelter the gain with their own $750,000 capital gains exemptions. In this case up to the entire $310,225 in tax calculated above could potentially be saved (subject to alternative minimum tax
considerations).
Note that this benefit can be achieved even if the beneficiary is a minor child, since the "Kiddie Tax" does not apply to capital gains.
Any trust income not actually paid or payable to a specific beneficiary in a given year would be taxable in the trust at the highest marginal tax bracket (thus eliminating the benefits of using the trust).
Amounts will be paid or payable to a beneficiary in the year under the following scenarios:
1. An expense report detailing the year’s expenses incurred by the parent on behalf of a beneficiary is submitted by the parent to the trustee. The trustee initials the report to evidence the exercise of his discretion pursuant to the terms of the trust agreement, and a trust cheque is issued to the parent before the end of the year.
2. The parent requests the trustee in writing to make certain payments to a third party for the benefit of the beneficiary. The trustee initials the written request to evidence the exercise of his discretion and makes the payments to the third party before the end of the year.
3. The trustee declares an income distribution using a trustee’s minute and either issues a trust cheque payable to the beneficiary before the end of the year, or issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.
4. Where the amount of trust income earned is not known in the year (e.g., where a trust owns units in a mutual fund trust) the trustee resolves to make an income distribution to a beneficiary equal to a certain percentage of the undistributed income earned by the trust in the year using a trustee’s minute, and issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.
Under the most recent guidelines released by Canada Revenue Agency, the trust can pay for, or reimburse a wide variety of expenses for a child as long as the payment of the expense clearly benefits the child. Such expenses may include (but are not necessarily limited to):
• Education and tuition expenses
• Recreation expenses and equipment
• The child’s share of restaurant meals and family grocery bills
• Clothing
• Medical and dental expenses
• Spending allowances
• Toys
• Car expenses, including per kilometre reimbursements for driving to and from the child’s activities
• A proportionate share of vacation costs
Asset purchases (e.g., cars, boats, vacation properties) and mortgage payments which cannot or will not be legally registered in a child’s name are problematic and we generally suggest that they not be reimbursed by the trust.
In all cases, receipts should be retained that document the fact that trust funds were spent on the beneficiary’s behalf.
Scenario 1: Income Splitting
Mr. X establishes a trust for the benefit of himself, his spouse, Mrs. X, and their three children, A, B and C. A and B are over 18 years of age and attending university. C is a minor living at home.
The participating shares of Opco, Mr. X’s active business corporation, are owned 100% by the trust.
After salaries are paid to Mr. X, Opco is earning $100,000 before tax and $82,000 after tax.
Based on current tax rates, if Mr. X wishes to pay out the net after corporate tax income of $82,000 to himself to enable him to use it personally, he would pay additional taxes of over $26,000 if he were the sole shareholder of the company.
Using the family trust arrangement and paying the income earned by the trust equally to the adult beneficiaries (except Mr. X.), the trust’s dividend could be split evenly between Mrs. X, A, and B. The tax liability on the dividend would thus be taxed as follows:
Mr. X = O in dividend (he is paid via salary)
Mrs. X, A and B all take a Dividend of $27,334 each for a total of $82,000. Hence, if Mrs. X, A, and B have no other sources of income, they would pay no taxes at all on this amount.
Note, that dividends allocated to the minor child would be subject to tax at top marginal rates with no personal tax credits applicable, pursuant to the “Kiddie Tax” provisions.
By using a family trust arrangement, Mr. X has just saved the family unit about $26,000 in tax.
Scenario 2: Capital Gains Splitting
Mr. X has received an offer to sell the shares of Opco (which are "qualified small business corporation shares") for $2,000,000. The shares were acquired for a nominal amount ($100). If Mr. X were to receive the sale proceeds as sole shareholder of the business, his tax liability might be computed as follows:
Proceeds $ 2,000,000
Cost (100)
Capital Gain 1,999,900
Capital Gains Exemption (750,000)
Capital Gains Subject to Tax $ 1,240,900
Taxable Capital Gain $ 620,450
Tax $ 310,225
Under the family trust arrangement, the trust would receive the total $2,000,000 proceeds. The trust's capital gain could be paid out to trust's beneficiaries (if desired by the trustee) and the beneficiaries could shelter the gain with their own $750,000 capital gains exemptions. In this case up to the entire $310,225 in tax calculated above could potentially be saved (subject to alternative minimum tax
considerations).
Note that this benefit can be achieved even if the beneficiary is a minor child, since the "Kiddie Tax" does not apply to capital gains.
Any trust income not actually paid or payable to a specific beneficiary in a given year would be taxable in the trust at the highest marginal tax bracket (thus eliminating the benefits of using the trust).
Amounts will be paid or payable to a beneficiary in the year under the following scenarios:
1. An expense report detailing the year’s expenses incurred by the parent on behalf of a beneficiary is submitted by the parent to the trustee. The trustee initials the report to evidence the exercise of his discretion pursuant to the terms of the trust agreement, and a trust cheque is issued to the parent before the end of the year.
2. The parent requests the trustee in writing to make certain payments to a third party for the benefit of the beneficiary. The trustee initials the written request to evidence the exercise of his discretion and makes the payments to the third party before the end of the year.
3. The trustee declares an income distribution using a trustee’s minute and either issues a trust cheque payable to the beneficiary before the end of the year, or issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.
4. Where the amount of trust income earned is not known in the year (e.g., where a trust owns units in a mutual fund trust) the trustee resolves to make an income distribution to a beneficiary equal to a certain percentage of the undistributed income earned by the trust in the year using a trustee’s minute, and issues a demand promissory note to the beneficiary as evidence of payment before the end of the year.
Under the most recent guidelines released by Canada Revenue Agency, the trust can pay for, or reimburse a wide variety of expenses for a child as long as the payment of the expense clearly benefits the child. Such expenses may include (but are not necessarily limited to):
• Education and tuition expenses
• Recreation expenses and equipment
• The child’s share of restaurant meals and family grocery bills
• Clothing
• Medical and dental expenses
• Spending allowances
• Toys
• Car expenses, including per kilometre reimbursements for driving to and from the child’s activities
• A proportionate share of vacation costs
Asset purchases (e.g., cars, boats, vacation properties) and mortgage payments which cannot or will not be legally registered in a child’s name are problematic and we generally suggest that they not be reimbursed by the trust.
In all cases, receipts should be retained that document the fact that trust funds were spent on the beneficiary’s behalf.
Monday, November 8, 2010
Business owners: What is a business lawyer ?
What is a business lawyer?
A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when I use the term "business lawyer" I think of all three of the above.
What types of clients do I represent?
On a daily basis, I represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and I advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters. Further, my primay focus is on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs.
Do I need a business lawyer?
If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.
A business lawyer can advise you of the applicable laws and help you comply with them.
A business lawyer can help steer you away from future disputes and lawsuits.
A business lawyer can help protect your tangible and intangible assets.
A business lawyer can help you negotiate more favourable business transactions.
Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.
Over the years, I have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, I am extremely sensitive to that concern and actively work with you to control legal costs. I believe it is in both our interests to discuss the scope of work and the costs involved before I provide any legal services.
You should seek a business lawyer if you or your company are . . .
- Starting a new business; (partnership, sole proprietorship or corporation)
- Issuing shares, stocks, options, warrants or convertible notes;
- Hiring your first employees (i.e. employment agreement);
- Negotiating a new lease;
- Acquiring another business;
- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)
- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)
- Selling your company;
- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)
- Planning to create and develop new ideas, products and services;
- Seeking to resolve internal disputes. (i.e. shareholders agreement);
- Any other business/legal issues
For any questions on the above, please do not hesitate to send me an email at hugues.boisvert@andrewsrobichaud.com or at +1.613.237.1512 x 255
A "business lawyer" or a "corporate lawyer" generally refers to a lawyer who primarily works for corporations and represents business entities of all types. These include sole proprietorships, corporations, associations, joint venture and partnerships. Typically business lawyers also represent individuals who act in a business capacity (owners-managers, entrepreneurs, directors, officers, controlling shareholders, etc.). Further, business lawyers also represent other individuals in their dealings with business entities (e.g. contractors, subcontractors, consultants, minority shareholders, employees). Generally, when I use the term "business lawyer" I think of all three of the above.
What types of clients do I represent?
On a daily basis, I represent start ups, family businesses, owners/managers and mid size companies at the regional, provincial, national and international level in a wide range of industries and I advise clients on their legal issue and their day-to-day business issues, including but not limited to: contracts, corporate structure, mergers & acquisitions, corporate reorganizations (family trust, holding company etc.), estate planning and any other corporate matters. Further, my primay focus is on the creation of various tax-effective structures for the preservation, accumulation and transfer of wealth for entrepreneurs.
Do I need a business lawyer?
If you are a business owner and you are concerned with the legal protection of your business and your personal assets, the answer is YES.
A business lawyer can advise you of the applicable laws and help you comply with them.
A business lawyer can help steer you away from future disputes and lawsuits.
A business lawyer can help protect your tangible and intangible assets.
A business lawyer can help you negotiate more favourable business transactions.
Having a business lawyer can also project positively on your business. Further, an established relationship with a business lawyer can be invaluable when you need to turn to someone who knows your business for quick legal guidance.
Over the years, I have realized that many small businesses have genuine concerns about lawyers running up large tabs for unwanted, unnecessary or questionable work. Hence, I am extremely sensitive to that concern and actively work with you to control legal costs. I believe it is in both our interests to discuss the scope of work and the costs involved before I provide any legal services.
You should seek a business lawyer if you or your company are . . .
- Starting a new business; (partnership, sole proprietorship or corporation)
- Issuing shares, stocks, options, warrants or convertible notes;
- Hiring your first employees (i.e. employment agreement);
- Negotiating a new lease;
- Acquiring another business;
- Reorganizing your affairs to save taxes (i.e. family trust, holding company, etc.)
- Transferring your business to you children and/or employee (Section 86 – Estate Freeze)
- Selling your company;
- Succession planning; (estate planning, estate freeze, primary and secondary will, etc.)
- Planning to create and develop new ideas, products and services;
- Seeking to resolve internal disputes. (i.e. shareholders agreement);
- Any other business/legal issues
For any questions on the above, please do not hesitate to send me an email at hugues.boisvert@andrewsrobichaud.com or at +1.613.237.1512 x 255
Monday, October 11, 2010
A New Chapter in Taxation of Trusts: The Residency of a Trust
Below is an excellent article published by Collins Barrow, Chartered Accountants.
A New Chapter in Taxation of Trusts
The recent decision of the Tax Court of Canada in Garron Family Trust v. R (2009 DTC 1568) has cast doubt on some common international and inter-provincial tax planning structures that involve the use of trusts. Generally, these trust structures reallocated income to jurisdictions that had either lower tax or no tax at all on certain types of income. This was accomplished by implementing a tax strategy that involved a trust and relying on the residency of that trust to determine the jurisdiction in which the trust's income would be taxed.
For over thirty years, tax professionals have relied on the principles set out in the well-known Thibodeau Family Trust case (78 DTC 6376) to determine the residency of a trust. Now, as a result of the decision in the Garron Family Trust case, we appear to have a new set of rules for determining the residency of a trust. These new rules can have a serious impact on any trust tax planning strategy that relies on the old residency rules of the trust to minimize or eliminate taxation.
Pursuant to the Thibodeau case, the residency of a trust was based on the residency of the managing trustees. The Thibodeau trust had three trustees, one resident in Canada and two in Bermuda. The trust was administered in Bermuda and the books and records of the trust were in Bermuda. The Court concluded that the trust resided in Bermuda because the trust document required that a majority of trustees agree on all matters of trustee discretion, and the majority of trustees resided in Bermuda. The Court rejected the notion that the residence of a trust should be similar to that of a corporation, and therefore disregarded the "management and control" test used for corporations. The Court then concluded that the residence of a trust should be determined based on residency of the trustees.
Just over thirty years later, we now have a different opinion from the Tax Court regarding this issue. With the Garron Family Trust decision, the Court has now embraced the notion that the residence of a trust should be similar to that of a corporation. The Court will look to the management and control of the trust to determine residency of the trust. The Court concluded that adopting a similar test of residence for trusts and corporations promotes the important principles of consistency, predictability and fairness in the application of tax law.
With an update in the jurisprudence related to the residency of trusts, the Canada Revenue Agency (CRA) is now aggressively reviewing tax planning structures involving trusts to reduce tax avoidance through international and inter-provincial tax planning.
The CRA recently hired additional auditors to review the residency of Alberta trusts. During the past several years, it has been attractive and popular for individuals located in provinces other than Alberta to set up an Alberta resident trust to access Alberta's low provincial tax rates. With this review of Alberta Trusts, the CRA is seeking to determine the "management and control" over the trust assets. As a result, it has distributed questionnaires to Alberta trustees, requesting the following information:
•a list of the duties and responsibilities as the trustee;
•the signing and/or contracting authority of the trustees; and
•the responsibility of the trustees for the management of any business or property owned by the trust, the banking and financing arrangements for the trust, and the preparation of the trust's accounts and reporting to the beneficiaries.
If the CRA determines that the management and control over the trust assets rests with any person(s) other than the Alberta trustees, it may determine the residence of the trust to be other than Alberta and reassess the provincial taxes accordingly.
Based on the 2010 Federal Budget, and the Department of Finance's desire to close various loopholes in the Income Tax Act, and to try to find ways to generate revenue to assist in reducing the deficit, we can anticipate the CRA will also apply the same aggressive nature toward international tax planning strategies involving trusts.
This may be a new chapter in the taxation of trusts, but the story is not over yet. The Garron Family Trust has requested leave to appeal to the Federal Court of Appeal. We will have to wait for the outcome of that appeal to see whether a new chapter is written once again, or if the book is closed for the foreseeable future.
A New Chapter in Taxation of Trusts
The recent decision of the Tax Court of Canada in Garron Family Trust v. R (2009 DTC 1568) has cast doubt on some common international and inter-provincial tax planning structures that involve the use of trusts. Generally, these trust structures reallocated income to jurisdictions that had either lower tax or no tax at all on certain types of income. This was accomplished by implementing a tax strategy that involved a trust and relying on the residency of that trust to determine the jurisdiction in which the trust's income would be taxed.
For over thirty years, tax professionals have relied on the principles set out in the well-known Thibodeau Family Trust case (78 DTC 6376) to determine the residency of a trust. Now, as a result of the decision in the Garron Family Trust case, we appear to have a new set of rules for determining the residency of a trust. These new rules can have a serious impact on any trust tax planning strategy that relies on the old residency rules of the trust to minimize or eliminate taxation.
Pursuant to the Thibodeau case, the residency of a trust was based on the residency of the managing trustees. The Thibodeau trust had three trustees, one resident in Canada and two in Bermuda. The trust was administered in Bermuda and the books and records of the trust were in Bermuda. The Court concluded that the trust resided in Bermuda because the trust document required that a majority of trustees agree on all matters of trustee discretion, and the majority of trustees resided in Bermuda. The Court rejected the notion that the residence of a trust should be similar to that of a corporation, and therefore disregarded the "management and control" test used for corporations. The Court then concluded that the residence of a trust should be determined based on residency of the trustees.
Just over thirty years later, we now have a different opinion from the Tax Court regarding this issue. With the Garron Family Trust decision, the Court has now embraced the notion that the residence of a trust should be similar to that of a corporation. The Court will look to the management and control of the trust to determine residency of the trust. The Court concluded that adopting a similar test of residence for trusts and corporations promotes the important principles of consistency, predictability and fairness in the application of tax law.
With an update in the jurisprudence related to the residency of trusts, the Canada Revenue Agency (CRA) is now aggressively reviewing tax planning structures involving trusts to reduce tax avoidance through international and inter-provincial tax planning.
The CRA recently hired additional auditors to review the residency of Alberta trusts. During the past several years, it has been attractive and popular for individuals located in provinces other than Alberta to set up an Alberta resident trust to access Alberta's low provincial tax rates. With this review of Alberta Trusts, the CRA is seeking to determine the "management and control" over the trust assets. As a result, it has distributed questionnaires to Alberta trustees, requesting the following information:
•a list of the duties and responsibilities as the trustee;
•the signing and/or contracting authority of the trustees; and
•the responsibility of the trustees for the management of any business or property owned by the trust, the banking and financing arrangements for the trust, and the preparation of the trust's accounts and reporting to the beneficiaries.
If the CRA determines that the management and control over the trust assets rests with any person(s) other than the Alberta trustees, it may determine the residence of the trust to be other than Alberta and reassess the provincial taxes accordingly.
Based on the 2010 Federal Budget, and the Department of Finance's desire to close various loopholes in the Income Tax Act, and to try to find ways to generate revenue to assist in reducing the deficit, we can anticipate the CRA will also apply the same aggressive nature toward international tax planning strategies involving trusts.
This may be a new chapter in the taxation of trusts, but the story is not over yet. The Garron Family Trust has requested leave to appeal to the Federal Court of Appeal. We will have to wait for the outcome of that appeal to see whether a new chapter is written once again, or if the book is closed for the foreseeable future.
Tuesday, September 21, 2010
Business owners: Unconventional ways of saving for your child's education
Below is a great article written by Tim Cesnick and published in The Globe and Mail.
Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education
Now that my kids have decided they want to be brain surgeons, I’ve been thinking about how to pay for their post-secondary education. Two methods of saving for a child’s education are often overlooked. The first is a family trust, and the second is life insurance.
FAMILY TRUST
A trust is simply a legal relationship between three parties: The settlor (the person creating the trust), the trustee (the person who holds and controls the property of trust) and the beneficiary (the person for whom the property of the trust is being held). The nice thing about a trust is that it’s possible to have the income of the trust taxed in the hands of the beneficiaries, who may pay little or no tax if they are minors and have little or no other income.
Setting up a trust does come with a cost, so it’s not generally going to make sense unless you’re willing and able to commit a sustantial sum to the trust over a short period of time. You can make this a loan to the trust if you want, so that you can take back your capital again later, as a repayment of the loan.
Once the money is in the trust, any interest and dividend income earned in the trust will be attributed back to you to be taxed in your hands while the beneficiaries of the trust are minors (unless you charge the taxman’s prescribed rate of interest on a loan to the trust), but capital gains can be taxed in the hands of the beneficiaries. Also, any second generation income (that is, income on the income, even if it’s interest or dividends) can be taxed in the hands of your children.
You can pay for all or part of your child’s education costs out of the income or capital of the trust. The taxman will consider payments to third parties, including reimbursements to you, as being paid to the beneficiary as long as those payments were clearly for the benefit of your child. To the extent that little or no tax has been paid on the income of the trust over the years (by having income taxed in your child’s hands), you’ll effectively be using pre-tax dollars to pay for the child’s education.
The benefits of the trust include: protection of the assets of the trust from creditors, splitting income with your children, maintaining control over the assets, and flexibility to use the trust funds for things other than education. There’s a lot to consider when setting up a trust. Visit a tax pro for help.
LIFE INSURANCE
Life insurance is an interesting tool because you can accumulate investments inside a policy on a tax-sheltered basis. Further, if it is the life of your child that is insured, you’re able to transfer ownership of the policy, including the accumulated investments inside the policy, to your child free of tax once he or she reaches age 18. Your child can then make withdrawals of those investments from the policy to pay for education. While those withdrawals are generally going to be taxable to your child, he’ll likely pay little or no tax if he has little or no other income.
One of the benefits of choosing a whole life insurance policy is that the returns have been incredibly stable over the years, even throughout 2008. The reason for this is that the insurance companies are allowed to smooth, or average, the returns you receive over a period of years.
Consider some numbers. If you pay $2,750 annually into a whole life policy each year until your child is 18, there could be $70,000 to $75,000 in the accumulating fund to be accessed (varies by insurance company), assuming a 5 per cent annual return inside the policy. If you set aside the same $2,750 in a tax-free savings account (TFSA) you could end up with approximately $84,000 earning that same 5 per cent, but this would assume a portfolio that is largely in equities that is subject to the volatility of the markets. If you earned, say, 6 per cent in the TFSA, you’d have close to $92,000 in this case, with the volatility.
Life insurance also offers asset protection, flexibility to use the assets for any purpose, and a death benefit ($265,000 in my example) over and above the investment component of the policy if your child passes away prematurely. Insurance is just another tool to consider.
As usual, please do not hesitate to contact me should you have any questions. hugues.boisvert@andrewsrobichaud.com or +1.613.237.1512 x 255
Family trusts and life insurance options are often overlooked when thinking of how to pay for a post-secondary education
Now that my kids have decided they want to be brain surgeons, I’ve been thinking about how to pay for their post-secondary education. Two methods of saving for a child’s education are often overlooked. The first is a family trust, and the second is life insurance.
FAMILY TRUST
A trust is simply a legal relationship between three parties: The settlor (the person creating the trust), the trustee (the person who holds and controls the property of trust) and the beneficiary (the person for whom the property of the trust is being held). The nice thing about a trust is that it’s possible to have the income of the trust taxed in the hands of the beneficiaries, who may pay little or no tax if they are minors and have little or no other income.
Setting up a trust does come with a cost, so it’s not generally going to make sense unless you’re willing and able to commit a sustantial sum to the trust over a short period of time. You can make this a loan to the trust if you want, so that you can take back your capital again later, as a repayment of the loan.
Once the money is in the trust, any interest and dividend income earned in the trust will be attributed back to you to be taxed in your hands while the beneficiaries of the trust are minors (unless you charge the taxman’s prescribed rate of interest on a loan to the trust), but capital gains can be taxed in the hands of the beneficiaries. Also, any second generation income (that is, income on the income, even if it’s interest or dividends) can be taxed in the hands of your children.
You can pay for all or part of your child’s education costs out of the income or capital of the trust. The taxman will consider payments to third parties, including reimbursements to you, as being paid to the beneficiary as long as those payments were clearly for the benefit of your child. To the extent that little or no tax has been paid on the income of the trust over the years (by having income taxed in your child’s hands), you’ll effectively be using pre-tax dollars to pay for the child’s education.
The benefits of the trust include: protection of the assets of the trust from creditors, splitting income with your children, maintaining control over the assets, and flexibility to use the trust funds for things other than education. There’s a lot to consider when setting up a trust. Visit a tax pro for help.
LIFE INSURANCE
Life insurance is an interesting tool because you can accumulate investments inside a policy on a tax-sheltered basis. Further, if it is the life of your child that is insured, you’re able to transfer ownership of the policy, including the accumulated investments inside the policy, to your child free of tax once he or she reaches age 18. Your child can then make withdrawals of those investments from the policy to pay for education. While those withdrawals are generally going to be taxable to your child, he’ll likely pay little or no tax if he has little or no other income.
One of the benefits of choosing a whole life insurance policy is that the returns have been incredibly stable over the years, even throughout 2008. The reason for this is that the insurance companies are allowed to smooth, or average, the returns you receive over a period of years.
Consider some numbers. If you pay $2,750 annually into a whole life policy each year until your child is 18, there could be $70,000 to $75,000 in the accumulating fund to be accessed (varies by insurance company), assuming a 5 per cent annual return inside the policy. If you set aside the same $2,750 in a tax-free savings account (TFSA) you could end up with approximately $84,000 earning that same 5 per cent, but this would assume a portfolio that is largely in equities that is subject to the volatility of the markets. If you earned, say, 6 per cent in the TFSA, you’d have close to $92,000 in this case, with the volatility.
Life insurance also offers asset protection, flexibility to use the assets for any purpose, and a death benefit ($265,000 in my example) over and above the investment component of the policy if your child passes away prematurely. Insurance is just another tool to consider.
As usual, please do not hesitate to contact me should you have any questions. hugues.boisvert@andrewsrobichaud.com or +1.613.237.1512 x 255
Tuesday, September 14, 2010
Family Trust Audits Highlight Need for Proper Trust Records
Today, I would like to share an excellent article written by BDO Canada - As usual, please let me know if you have any questions.
Family Trust Audits Highlight Need for Proper Trust Records
A family trust can provide significant benefits as the
legalities and benefits of ownership can be separated. A
discretionary trust allows the benefits of ownership to flow
to beneficiaries while the trustee maintains control and ownership
of trust property and can ultimately decide on who will receive the
property at a later date. Due to this, family trusts are a powerful tool
in terms of income splitting and capital gains splitting, including
multiplying access to the capital gains exemption.
As is often the case, beneficial tax planning vehicles often carry a
greater recordkeeping and compliance burden, and family trusts are
no different. In particular, one of the key benefits of a discretionary
family trust is the ability to allocate income in different shares to
different beneficiaries, or to retain the income in the trust. For a
discretionary family trust, it is important to note that the default
position is that all of the income belongs to the trust and will be
taxed there if no further action is taken. If it is beneficial to have
income taxed in the hands of a beneficiary, that income can be
allocated in one of two ways:
• It can be paid to them during the year, or the trustee(s) can
declare that the income is payable to the beneficiary at the end
of the year. In other words, the income belongs to the beneficiary.
• It can be allocated by way of a special tax rule called the
preferred beneficiary election (under this election, it is possible to
allocate income to a beneficiary of the trust that is mentally or
physically infirm or disabled without giving them a right to that
income).
Most likely due to the popularity of family trusts and the tax
benefits they provide, the Canada Revenue Agency (CRA)
implemented an audit project on these trusts. The CRA’s audit work
on trusts is focused on the following:
• Has the trust been properly formed? If your trust was set up in writing by a lawyer, this should not be a significant issue.
• Where trust income has been allocated, was the income actually
paid or is there a bona fide obligation to pay that income to a
particular beneficiary? The CRA will be looking for documentation
such as trustee resolutions that allocate the trust’s income, proof
of payment for income paid during the year and promissory notes
or other proof that the trust has made the income payable to the
individual beneficiaries.
• Where the trustees make payments to third parties, was the
payment made for the benefit of the beneficiary? It is also
possible to “pay income” to a beneficiary by making payments
to third parties for the benefit of that beneficiary. In this case,
the trustee will need to document the payments made and
also provide evidence that the payment benefited a particular
beneficiary. For example, if a parent is reimbursed for expenses
incurred on behalf of a child who is a beneficiary, receipts for the
expenses should be retained to prove the child benefited from the
payment and not the parent.
In addition to these particular issues that arise for family trusts, the
CRA will also be reviewing the records of the trust in the same way
it does for other taxable entities to determine whether income has
been calculated and reported properly. So, you should ensure that
bank and investment accounts are set up as needed and proper
records are maintained. Also, your trust agreement and the property
used to settle the trust should be kept in a safe place.
Family Trust Audits Highlight Need for Proper Trust Records
A family trust can provide significant benefits as the
legalities and benefits of ownership can be separated. A
discretionary trust allows the benefits of ownership to flow
to beneficiaries while the trustee maintains control and ownership
of trust property and can ultimately decide on who will receive the
property at a later date. Due to this, family trusts are a powerful tool
in terms of income splitting and capital gains splitting, including
multiplying access to the capital gains exemption.
As is often the case, beneficial tax planning vehicles often carry a
greater recordkeeping and compliance burden, and family trusts are
no different. In particular, one of the key benefits of a discretionary
family trust is the ability to allocate income in different shares to
different beneficiaries, or to retain the income in the trust. For a
discretionary family trust, it is important to note that the default
position is that all of the income belongs to the trust and will be
taxed there if no further action is taken. If it is beneficial to have
income taxed in the hands of a beneficiary, that income can be
allocated in one of two ways:
• It can be paid to them during the year, or the trustee(s) can
declare that the income is payable to the beneficiary at the end
of the year. In other words, the income belongs to the beneficiary.
• It can be allocated by way of a special tax rule called the
preferred beneficiary election (under this election, it is possible to
allocate income to a beneficiary of the trust that is mentally or
physically infirm or disabled without giving them a right to that
income).
Most likely due to the popularity of family trusts and the tax
benefits they provide, the Canada Revenue Agency (CRA)
implemented an audit project on these trusts. The CRA’s audit work
on trusts is focused on the following:
• Has the trust been properly formed? If your trust was set up in writing by a lawyer, this should not be a significant issue.
• Where trust income has been allocated, was the income actually
paid or is there a bona fide obligation to pay that income to a
particular beneficiary? The CRA will be looking for documentation
such as trustee resolutions that allocate the trust’s income, proof
of payment for income paid during the year and promissory notes
or other proof that the trust has made the income payable to the
individual beneficiaries.
• Where the trustees make payments to third parties, was the
payment made for the benefit of the beneficiary? It is also
possible to “pay income” to a beneficiary by making payments
to third parties for the benefit of that beneficiary. In this case,
the trustee will need to document the payments made and
also provide evidence that the payment benefited a particular
beneficiary. For example, if a parent is reimbursed for expenses
incurred on behalf of a child who is a beneficiary, receipts for the
expenses should be retained to prove the child benefited from the
payment and not the parent.
In addition to these particular issues that arise for family trusts, the
CRA will also be reviewing the records of the trust in the same way
it does for other taxable entities to determine whether income has
been calculated and reported properly. So, you should ensure that
bank and investment accounts are set up as needed and proper
records are maintained. Also, your trust agreement and the property
used to settle the trust should be kept in a safe place.
Tuesday, September 7, 2010
Business owners: why you MUST use separate corporations.
USE OF SEPARATE CORPORATIONS
The use of separate corporations to carry on different businesses is a basic creditor proofing technique that should always be considered when starting a new business. Separate corporations generally have limited liability, which will help insulate the assets associated with one business from any risks associated with another business. The use of separate corporations is also recommended where a business has used accumulated earnings to acquire significant liquid and/or investment assets or perhaps real estate. For example, it is desirable for real estate and/or equipment which is used in the business to be owned by a separate company(Holding Company), rather than be owned by the operating company. In this manner, the real estate can be protected from direct creditors of the operating business.
If the operating company already owns real estate, it may be possible to separate the real estate by means of a tax deferred corporate reorganization. Where the real estate is owned separate from the operating company, the company owning the real estate would generally charge the operating company a fair market value
rent.
This type of arrangement may also provide ancillary tax benefits with regard to the potential for a more rapid deduction of the leasehold improvements incurred by the operating company.
In addition to real estate assets, other liquid assets(such as cash) accumulating in an operating company should be separated from the company to the extent there are accumulated earnings. For example, term deposits owned by an operating company could be separated and transferred to a holding company by having the operating company pay a tax-deferred dividend to the holding company. In the future, if the
operating company requires the funds, the holding company could then loan the funds back by way of a registered debenture, so that, in the event of a business failure, the holding company’s right to realize on the loan would precede the rights of any general unsecured creditors of the operating company.
If a holding company does not currently exist, a relatively simple re-organization6 could take place to establish a holding company and protect the investment assets of the operating company.
As usual, you should seek professional advice before implementing your new structure - call me or email me if you have any questions.
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