Every so often, the Canada Revenue Agency targets certain tax
structures for special attention. A few years ago it was
family discretionary trusts that were subject to special audits.
While that cycle has passed – for now – it doesn't
mean those with family trusts should let their guard down when
dealing with your trust's compliance each year. So I thought a
refresher on the do's and don'ts of administering family
trusts might be in order.
To start with, here's a summary of some of the items that
the CRA has focused on over the years in relation to discretionary
The trustee's qualification, expertise, and
The amount of fees received by the trustee, if any.
A list of the trustee's duties and responsibilities with
respect to the subject trust.
How decisions are made in relation to the trust property.
How distributions of income to beneficiaries are determined and
whether such income is taxed in the hands of the trust or the
Whether parents, acting as trustees, were scooping funds for
their own benefit despite being "paid" to the kids.
Absence of proper accounting records and trustee minutes for
Absence of the original settlement property used to establish
the trust (e.g., a gold coin or dollar bill).
Proper compliance with the 21st anniversary deemed-disposition
So given that the CRA will regularly scrutinize family trusts
for these items, what should you do to ensure you stay onside with
the tax hounds?
Find the documents!
Chances are good that there is no documentation in place for
your family trust. Unlike companies, family trusts typically
don't keep minutes of annual meetings. And the likelihood is
that a majority of family trusts in Canada have never filed a T3
return for the years they've been in existence.
Unfortunately, this laissez faire attitude will no longer pass
muster with the CRA's more rigorous demands for dotting i's
and crossing t's when it comes to more sophisticated tax
The first thing to do if you are in this situation is to
actually dig out the trust deed from the far recesses of your
basement banker's box, filing cabinet, or shoebox (or,
hopefully, from your tax/trust advisor's file).
The role of trustees
Once that is done, you should conduct a wholesale review the
role of the trustees.
The simple residency of a trustee in Canada is no longer enough
to take the position that a trust is resident in Canada (or
whatever jurisdiction you are aiming for).
Rather, there needs to be evidence that the trustees are taking
an active role with respect to the trust and not simply acting in
an administrative or clerical capacity, or even as a nominee or
You should also make sure that the proper documents are put in
place to show that the trustees are taking an active role in the
management of the trust's assets.
These can include a copy of the annual "minutes" for
the trust by the trustees, and resolutions relating to any actions
by the trustees in respect of the trust.
For example, the proper authorization requirements should be in
place if the authority to invest is delegated to a third party
(such as an investment advisor).
The CRA has also focused on whether the trustees have properly
held on to the actual settlement instrument (e.g., the gold coin or
dollar bill used to settle the trust), and have asked for proof of
the initial instrument's existence.
So when you're digging out the trust deed, make sure you
also get your hands on that gold coin or other instrument, so you
have proof of the evidence of the establishment of the trust.
Next time: Income splitting tax traps with
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