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Paul S. Hewitt, CPA, CA

TAX │ ACCOUNTING │ ADVISORY

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Estates & Trusts
 
 


Common Types of Trusts
 
I won't try to describe every kind of trust, but here are a few of the more common ones that may be used.
 
There are two types of trusts:  testamentary and inter vivos.  Testamentary trusts are created on death and may have a year end anytime within one year.  The terms of the trust are specified in the will or in a court order.  These are personal trusts, subject to provincial laws, and they must distribute the assets of the trust in accordance with the will.  Inter vivos trusts must have December 31 year ends.
 
Those who are 65 years of age or older may create an Alter Ego or a Joint Spousal or Common-law Partner Trust.  The person creating the trust (settlor) must be entitled to all of the income and capital of the trust during his lifetime (and in the case of the spousal or common-law partner trusts his spouse). 
 
If a resident of Canada transferred property to a trust and is a beneficiary (or is related to a beneficiary) or the trust has a beneficiary who acquired an interest in the trust from a Canadian resident who transferred property to the trust, the trust is a Deemed Resident Trust.
 
There are certain trusts created by employers for the benefit of its employees.  An Employee Benefit Plan trust is created when an employer makes contributions to a plan and it makes payments to its employees, former employees, or those related to them.
 
Employers can deduct contributions to an Employee Life and Health Trust, if they are for Designated Employee Benefits (DEBs) for employees and their related individuals.  Payments received by the employees are taxable, unless they were for designated employee benefits.
 
An employer can create an Employee Trust, by making contributions for the sole benefit of its employees.  The trustee elects in the first trust return to be treated as such.  The trust must allocate all non-business income and employer contributions to beneficiaries, each year.  Allocations to employees are reported on T4 slips, as employment income, not T3 (trust income) slips.
 
There are a variety of other trusts, including:  RRSPs, RRIFs, RESPs, TFSAs, etc...
 

Death and Taxes
 
When someone dies, they are deemed to have disposed of all of their property immediately before death.  This can give rise to capital gains (or losses).  Where all of the deceased's property is transferred to the spouse, the assets are deemed to have been disposed of at the deceased's adjusted cost base, meaning there is no gain or loss to report in the deceased's return, and the spouse receives the property with the same cost base as that of the deceased.
 
A final return must be filed to report all income up to the date of death, including employment, business and income from property.  This return must be filed by April 30 of the following year or six months after the date of death, whichever comes later.  If the deceased or the spouse of the deceased was self-employed, the filing deadline is June 15 or six months after the date of death, whichever is later.  The taxes payable must be paid by April 30 of the following year, regardless of the filing deadline.
 
If the will set up a testamentary spousal trust or a common-law partner trust, and the trust is responsible for the testamentary debts, the due date for filing is extended to 18 months after the date of death.
 
Income earned after the date of death will either be reported by the estate (trust) or by the heirs.  If a trust is created, it will need to keep track of income earned after the date of death and will need to file a trust tax return.  The trust may determine its year end anytime within one year of its creation.  Trust tax returns are due 90 days after the year end (note that this is not three-months, but 90 days).
 
The executor of the estate is usually responsible for filing all required tax returns of the deceased and the estate (trust).  In addition to the final return of the deceased, the trustee has the option to file additional tax returns for the date of death, where this would be beneficial.
 
The estate may choose to report income from "rights and things" in a return separate from the final return.  Examples of income from rights and things include:  employment income earned, but not yet paid by the date of death, Old Age Pensions payable but not received at the date of death and bond interest earned and payable but not yet received by the date of death.  These items may be reported in a separate return, which is entitled to claim most of the personal amounts claimable in any return, such as the personal amount, spousal amoutn, age amount, etc...  In effect, the deceased is entitled to claim these credits in more than one return for the year of death, which usually reduces the taxes payable.
  
If the deceased was a beneficiary of a testamentary trust with a year end prior to the date of death, the estate may file a separate return to report the income from the trust's year end to the date of death.
If the deceased was a proprietor or partner in a business with a year end prior to the date of death, a separate return may be filed to report the income from the business's year end to the date of death.
When filing these optional returns, in addition to being able to claim the full personal amounts on each return, other amounts, such as tuition, education, public transit, medical etc... can be split among the returns. It may be beneficial to claim medical expenses on a return that has the lowest income, which will maximize the amount claimable.
Some items can only be claimed on the final return. Examples include professional or union dues, RRSPs, child care, moving expenses, carrying charges, exploration and development expenses and allowable business investment losses.
 
Special rules apply to the utilization of capital losses in the estate and of the deceased's returns. 
 
Professional advice is usually necessary to determine the most advantageous method of reporting income and filing the required returns.

Executor's Responsibilities and Duties
 
The executor of an estate is usually appointed by the will of the deceased.  If the deceased did not have a will, the courts will appoint an executor to administer the distribution of property.  Executors must distribute the property of the estate according to the terms set out in the will.  The executor may be restricted in the manner in which property of the estate may be invested prior to distribution to the beneficiaries. 
 
Of course, the executor is responsible for filing all required tax returns of the deceased and the estate and for paying all taxes owing by the deceased and the estate.  Consequently, the executor usually wishes to obtain a clearance certificate from the CRA, which confirms that all taxes have been paid, before making distributions to the beneficiaries.  Each case should be reviewed for the likelihood of a significant reassessment of previous years' tax returns, as well as the final and optional returns of the deceased, and of the trust returns.  If the executor fails to obtain a clearance certificate prior to distributing the property of the estate, he or she may be held responsible for the payment of any taxes owing by the estate.
 
A clearance certificate may be requested after assessments of all tax returns have been received.  A copy of the will, probate documents and any other proof of the executor's right to legally represent the deceased and the estate may be required.  The estate will also need to provide a statement of the assets and the distribution plan, including a description of each asset, adjusted cost base, and the fair market value at the date of death and at the date of distribution.  The names, addresses, and social insurance numbers or account numbers of the recipients and their relationship to the deceased must be provided.  The list of assets that is prepared for probate court will usually be accepted along with a list of any other properties that were passed directly to beneficiaries.
 
The Ontario government has compiled a very useful checklist with links to just about everything an executor needs to administer an estate.  You can download a copy of it here.
 

Estate Tax Returns
 
Where an estate earns income from a business, property or disposes of property, a trust return is necessary to report the income and any allocations to the beneficiaries.  If the trust distributes all of its income to the beneficiaries, the trust will not have to pay any taxes, as the income will be taxable to the beneficiaries. 
 
Note that an estate cannot deduct the costs of a funeral.

Bare Trustees
 
A bare trust is a simple arrangement where a trustee holds property for one or more beneficiaries.  The trustee has no duties other than to hold title to the property and act in accordance with the wishes of the beneficiaries. 
 

Uses of Trusts
 
Often, a trust is set up, in a will, to bequeath property to minor children.  The trust administers the investment of the property and may distribute funds to the beneficiaries for specified purposes, such as living expense, education, medical care, etc...  Once the beneficiaries reach a certain age, the trust may be required to distribute some or all of the trust's property to the beneficiaries.
 
A trust may be set up to care for a disabled individual, who may not be able to responsibly manage the funds on his or her own.  The terms of the trust could specify the investment strategy of the fund and the types of personal expenses to be paid to the beneficiary.
 
Trusts can be set up solely to hold title to assets, usually real property, in the form of a bare trust.  Trusts may be used to shield assets from creditors and to eliminate land transfer taxes in certain transactions.  Professional advice is strongly recommended before setting up most trusts.