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Inter vivos and testamentary trusts

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testamentary-trustsAn inter vivos trust is a trust created between living persons, as opposed to a testamentary trust, which arises upon the death of an individual and as a consequence of that death. A testamentary trust is usually established in the will of the deceased but it may also be created pursuant to a court order. An inter vivos trust remains such even at the death of the settler. On the other hand, a testamentary trust will be treated as an inter vivos trust if any third party contributes property to it. A testamentary trust may lose its status as such and come to be considered as an inter vivos trust. This loss of testamentary status, usually occasioned by an error on the part of the trustee(s), is irrevocable.

Taxation years

The taxation year of a testamentary trust can end on any day in the calendar year. The trust chooses its taxation year end when it files its first tax return. The taxation year cannot exceed 12 months.

The taxation year of an inter vivos trust, other than a mutual fund, must end on December 31. Mutual funds can elect to have a taxation year that ends on December 15.

Due date for returns

Trust returns, including the T3 return, T3 slips and T3 summary, must be filled no later than 90 days after the end of the taxation year. The same applies to RL-16 slips and TP-646 return for Quebec purposes.

Personal Trusts

Personal trusts include testamentary trusts and inter vivos trusts of which no beneficiary has paid for its interest in the trust. Generally, only personal trusts are allowed to allocate eligible capital gains to beneficiaries so that they can claim the capital gains exemption. Also, a personal trust may qualify for the principle residence exemption.

Taxation rules

When computing the trust’s net income, the trust may deduct the income that was “paid or payable” to beneficiaries before the end of the taxation year. The basic concept here is that the trust only pays tax on the portion of the income that has not been allocated out to beneficiaries.

Capital Gains

The net capital gains of a Canadian resident trust may be allocated to trust beneficiaries, who may claim ordinary capital gains treatment on this allocation.

Note that (ABILs) allowable business investment losses are to be disregarded in the computation of a trust’s allowable capital losses. As a result, ABILs will not result in a reduction of taxable capital gains that may be flowed through to beneficiaries and against allowable capital losses may be carried forward.

Dividends

A trust may attribute to its income beneficiaries the taxable dividends it received from taxable Canadian corporations during the year. The trust does this by designating a reasonable portion of the income payable to a beneficiary as being composed of these dividends. This designation has the effect of transferring to the beneficiary not only the amount of the taxable dividend received by the beneficiary from a taxable Canadian corporation. However, where the beneficiary is a non-resident, the dividend income will lose its character as such. This, of course, is important given the beneficial tax treatment accorded dividends.

 

 

 

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