Last month I wrote on the ABCs of a discretionary family trust. The article highlighted some of the benefits of family trusts, such as income splitting (as long as the right structure is in place), and exercising flexibility on how property may eventually be distributed among the next generation.  So, you may have decided to go forward and set up that family trust.  Now what? What should you be doing, and what should you be aware of when it comes to the CRA?

Items that the CRA has focused on over the years in relation to discretionary trusts include:

  1. the trustee's qualification, expertise and experience;
  2. the amount of fees received by the trustee, if any;
  3. a list of the trustee's duties and responsibilities with respect to the subject trust;
  4. how decisions are made in relation to the trust property;
  5. how distributions of income to beneficiaries are determined, and whether such income is taxed in the hands of the trust or the particular beneficiary;
  6. whether parents, acting as trustees, were scooping funds for their own benefit despite being "paid" to the kids;
  7. the absence of proper accounting records and trustee minutes for the trust;
  8. an absence of the original settlement property used to establish the trust (i.e. a gold coin, or dollar bill); and
  9. proper compliance with the 21st anniversary deemed disposition rule.

Unlike companies, trusts usually don't put in place annual minutes.  And the likelihood is that a majority of family trusts in Canada have never filed a T3 tax return for the years they existed (which is required, even if the trust has no income).  Unfortunately, this laissez-faire attitude will likely not pass muster, what with the CRA potentially breathing down your neck. The first thing you should do if you are in this situation is to dig out the trust deed from the far recesses of your basement (or, hopefully, from your tax/trust advisor's file).

The  Trustees Once that is done, you should turn your attention to the role of the trustees.  No longer is residency of a trustee enough to take the position that a trust is resident in Canada (or whatever jurisdiction you are aiming for).

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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.