Family Trusts are a powerful and effective financial planning and asset protection tool. Traditional reasons for creating a trust include will and succession planning, asset and legal liability protection and asset administration.
However, trusts have evolved as a tax planning and minimization tool, especially for the family business and high net-worth individuals. In many instances Trusts were created solely for tax purposes.
In response, the Government of Canada has slowly been closing tax "loopholes" where trust structures result in favourable tax results and income splitting opportunities. The introduction of the TOSI (Tax on Split Income) which restricts income splitting with individuals not actively engaged in the related business.
Nevertheless, access to multiplication the Lifetime Capital Gain Exemption remains, as well as the opportunity to split some investment income.
Here are 10 administration practices to follow to avoid reassessment from CRA Trust audits:
1. Obtain a lawyer specializing in Trusts to provide legal advice and drafting of the trust agreement;
2. Perfect the settlement of the Trust;
3. Perfect the acquisition of the Trust property especially purchase or subscription of private company shares;
4. Ensure financial statement are prepared annually and a full set of accounting (and legal) records are kept;
5. Ensure minutes and resolutions are prepared at least annually;
6. Distributions allocated but not paid to beneficiaries should be supported by a promissory note;
7. Loans made or received by the Trust should be supported by promissory notes, with an appropriate interest rate;
8. Ensure the Trust maintains a bank account;
9. Payment to beneficiaries should not be made to joint bank accounts; and
10. Ensure Trust income from related private corporations are supported by Corporate resolutions.
If you have questions about your family trust contact the experienced lawyers at Estate Connection Law Office. We are here to help!