Canada: U.S. Citizens And Canadian Trusts

Last Updated: June 2 2014
Article by Todd King

Trusts are important tools in Canadian tax and estate planning. Discretionary family trusts, in particular, have become common and are continually evolving. Some of the most powerful benefits of these tools include:

  • Flexibility – the ability to maintain control of assets while directing income and value as the trustees see fit.
  • Income splitting – directing income of the trust to lower-income beneficiaries (usually family members) to minimize the overall family tax burden.
  • Capital splitting – allocating capital gains to beneficiaries, enabling the use of multiple capital gains exemptions.

Trust use is even more common in U.S. tax and estate planning, but for different reasons. In fact, many of the typical planning strategies deployed in Canada are not effective – and may in fact be punitive – under U.S. tax law.

When a U.S. person (a U.S. citizen or resident alien) is connected with a Canadian trust, we must consider the U.S. tax implications of the trust arrangement. Two important distinctions under U.S. tax law are whether a trust is domestic or foreign, and whether the trust is a grantor or non-grantor trust. 

Domestic or foreign?

Prior to 1996, whether a trust was foreign or domestic was a fact-based determination. In 1996, a two-part objective test was introduced. The test requires that a trust be considered foreign unless it satisfies two tests: the U.S. Court Test and the Control Test.

The U.S. Court Test is satisfied where a U.S. court is able to exercise primary jurisdiction over the trust. This, of course, is a question of fact and a matter of law in the relevant jurisdictions, but in general a U.S. court must have the ability and jurisdiction to determine all issues regarding the administration of the trust. The regulations do contain guidance in terms of certain facts that would, in the U.S. Treasury's eyes, meet the Court Test. In the case of an inter vivos trust, the trust will meet the Court Test if the trustees or beneficiaries take steps with a U.S. court that cause the trust to be subject to that court (e.g. registering the trust document with the court).

The Control Test is met if one or more U.S. persons have the authority to control all substantial decisions of the trust. Again, an examination of the trust indenture is required and factors such as the presence of a "primary trustee" must be considered. 

If a trust meets both of these tests, it is considered a domestic trust and is taxable in the U.S. on its worldwide income. If the trust fails either test, it is a foreign trust. Most Canadian discretionary family trust arrangements would not meet the Court Test and, therefore, would be considered foreign trusts under U.S. tax law.

Grantor or non-grantor?

U.S. taxation of a foreign trust varies greatly depending on whether the trust is a grantor or non-grantor trust.

Foreign grantor trusts

Generally, where a U.S. person gratuitously transfers property to a foreign trust directly or indirectly, and that trust has a U.S. beneficiary, the grantor is treated as the owner of that trust property. As the owner of the property, the grantor is taxable on any income or gain relating to the property. In this regard, the grantor trust rules are similar to the Canadian reversionary trust rules. There are exceptions for testamentary transfers and for transfers at fair market value. However, the fair market value exception is limited in what consideration is considered fair market value in transfers from related persons. 

The income of a Canadian discretionary family trust considered a grantor trust would attribute to the U.S. owner for U.S. tax purposes. This situation has the potential to create significant exposure to double taxation since, for Canadian tax purposes, the income of the trust often is taxed in the hands of other beneficiaries, or not taxed at all in the case of dividends allocated to a connected corporation.

While the settlement of a typical Canadian discretionary family trust would not generally involve a direct transfer from an interested party, the use of the term "directly or indirectly transfers" suggests a broad interpretation of the word "transfer." In fact, legislative history suggests the term "indirectly transfers" includes such situations as share reorganizations initiated by a controlling shareholder and transfers through foreign intermediaries. For example, if a controlling shareholder of a company caused that company to be reorganized to "freeze" the shareholder's value in fixed-value preferred shares and subsequently to issue low-value common shares to a trust, such an arrangement generally would be considered an indirect transfer by the controlling shareholder to the trust. There are also anti-avoidance provisions in the regulations for transfers through intermediaries where the principal purpose was to avoid U.S. tax.

The requirement that the trust have a U.S. beneficiary is far from straightforward. In addition to contemplating the expected scenarios, these rules were bolstered in 2010 to contemplate many "back door" provisions that would allow the addition of a U.S. beneficiary at a later time (i.e. power of appointment), and even to include contingent beneficiaries. Furthermore, the determination is made annually so it is possible for existing trusts to acquire U.S. beneficiaries and thereby become grantor trusts. This can be particularly punitive to the U.S. owner since the throwback rules would apply to any undistributed net income of the trust until the time it acquires a U.S. beneficiary. Thankfully, if a beneficiary becomes a U.S. person at a time that is more than five years after the transfer, they will not be considered a U.S. beneficiary for the purposes of the grantor trust determination.

Given today's global economy and the general mobility of talent between Canada and the U.S., the possibility of a beneficiary becoming a U.S. person is very real. Contemplating this possibility in the drafting of the trust indenture is feasible, but doing so might impact the planning flexibility and could be contrary to the settlor's intent. Mobility of the grantor can also be an issue. If a non-resident alien becomes a U.S. person within five years of the original property transfer, the trust can become a grantor trust upon the individual's residency start date. 

Foreign non-grantor trusts

A foreign trust may be a non-grantor trust. Given the risks and pitfalls of the grantor trust rules, one might think this is a good thing. But it is not necessarily so if the trust has U.S. beneficiaries. Foreign non-grantor trusts generally are taxed as non-resident alien individuals. That is to say they are taxed only on their U.S. source income. Such trusts receive a deduction for the proportion of their distributable net income distributed to beneficiaries, and U.S. beneficiaries must include the distributed amounts in their income. To the extent that foreign (i.e. Canadian) tax has been paid on non-U.S. income, a foreign tax credit should be available for U.S. tax purposes.

Because foreign non-grantor trusts are taxed similarly to non-resident aliens, they have the ability to accumulate income without current U.S. tax to the extent that they do not distribute the income to U.S. beneficiaries. To discourage this type of tax deferral, the throwback rules apply to distributions of undistributed net income. The throwback rules are punitive, complex and for the most part, beyond the scope of this article. In general terms, however, they apply a tax rate and interest charge to "throw back" the income into the respective accumulation years. In addition, the accumulated income loses its character and is taxed as ordinary income to the U.S. beneficiary, possibly losing preferential tax treatment. Fortunately most, but not all, Canadian discretionary family trusts distribute their income currently and would not typically accumulate income.

U.S. reporting requirements for foreign trusts can be complex and the penalties for non-filing can be severe. 

In addition to the U.S. tax implications of the trusts themselves, there are numerous U.S. income and transfer tax traps affecting much of the Canadian planning strategies for trusts. The most obvious example is a basic Canadian estate freeze transaction, which can result in a realization transaction for U.S. income tax purposes and can potentially trigger U.S. gift tax. 

The bottom line is cross-border tax and estate planning is extremely specialized and requires the delicate touch of a tax specialist familiar with these issues. Achieving many of the above-noted benefits Canadians have come to enjoy is still possible but must be done in full contemplation of the tax laws in both countries. Your Collins Barrow advisor can help to ensure your U.S./Canadian trust matters are managed properly.

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

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Todd King
Similar Articles
Relevancy Powered by MondaqAI
Miller Thomson LLP
Minden Gross LLP
Miller Thomson LLP
Collins Barrow National Incorporated
Moodys Gartner Tax Law LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Miller Thomson LLP
Minden Gross LLP
Miller Thomson LLP
Collins Barrow National Incorporated
Moodys Gartner Tax Law LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions