Family trusts can be a highly effective tax-planning tool. But
you have to be sure to dot your i's and cross your t's to
avoid the unwanted attention of the Canada Revenue Agency, as I
spelled out in a previous article. Trusts are frequently used
as a means of splitting income, and here too it's vitally
important to follow the rules to ensure you get the maximum tax
benefit. Here's a primer on what to do.
For those who have put in place income-splitting strategies
where income is actually being paid out of a trust to your minor
kids, ensure that prior to the year-end for the trust (December
31), the trustees pass a resolution stating that a stipulated
amount or proportion of the trust's income be paid or made
payable to the actual beneficiaries and that such resolution is
A copy of this resolution or other form of notification should
be given to the beneficiaries with some form of acknowledgement or
signed receipt, where possible (although this may not always be
preferred, especially if the beneficiaries are minors).
Proof of flow of funds
But more importantly, there should be proof of the flow of
actual funds. It's not enough to pass a trustee resolution if
you can't provide evidence that the money actually went to the
kids. As I mentioned, the CRA will be looking for instances where
the parents "scoop" the cash for themselves. So to be
extra safe, you should open up bank accounts for your kids and
deposit the funds into the accounts.
If you're not actually paying the cash, you should have the
trust give a promissory note to the beneficiaries as evidence that
a debt is actually due to the beneficiaries from the trust.
It's true that any amount payable or paid by a trust to the
beneficiaries would be reflected in a T3 return for the trust.
While this would be evidence of an allocation, it's likely that
this would not satisfy the CRA, because the T3 return (or the T3
Supplementary, which would show the allocation) would be issued
after the end of the year. The CRA wants to see evidence of the
amount payable or paid before December 3l.
Payments to third parties (like schools)
An interesting issue arises where amounts are paid to third
parties on behalf of the kids – for example, where you want
to cut a cheque to your child's private school directly from
the trust to pay for your child's tuition.
In this situation, you should ensure that you comply with all
three requirements set out by the CRA in order to ensure that such
payments to third parties will still be deductible to the
1. The trustee must exercise their discretion
per the trust to make an amount payable to the beneficiary before
the payment is actually made.
2. The trustee must initiate the steps to make
the payment, the trustee must notify the parents of the exercise of
the discretion, and the parents must direct the trustee to pay the
amount to the appropriate person before the payment is made.
Or the payment must be made pursuant to the parents' request
and direction, and the parent is advised of the exercise of
discretion and payment of the amount either before or after the
payment is made.
3. It must be reasonable to consider that the
payment was made for an expenditure for the child's
I personally find these conditions confusing, and hard to abide
by. So if you need to pay a third party, I would recommend going
the safe route: Take the extra step of opening up an account for
your child, distribute the funds to that account, and then pay the
third party directly from that account.
Yes, it means an extra step, but it avoids any confusion and
will be more likely to satisfy the CRA.
On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
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