Two main categories of Trusts operate in Canada.
TESTAMENTARY TRUST - A testamentary trust is a trust or estate that is generally created on the day a person dies. The terms of the trust are established by the will or by court order in relation to the deceased individual's estate under provincial or territorial law.
Generally, this type of trust does not include a trust created by a person other than a deceased individual, or a trust created after November 12, 1981, if any property was contributed to it other than by a deceased individual as a consequence of the individual's death.
What is the purpose of a Testamantary Trust. Typically these are created by either a deceased individual through a will or by a Court for the benefit of a beneficiary who is incompetent to manage the assets placed in a trust. Incompetence can stem from under legal age, infirmity or lack of suffistication in managing financial affairs.
INTER VIVOS TRUST - An inter vivos trust is a trust that is not a testamentary trust. There are many different types of inter vivos trusts each with its own set of tax rules. Here are a few of the common ones.
Alter Ego trust
This is a trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor is entitled to receive all the income that may arise during his or her lifetime, and is the only person who can receive, or get the use of, any income or capital of the trust during the settlor's lifetime. A trust will not be considered an alter ego trust if it so elects in its return for its first tax year.
Health & Welfare trust (HWT)
Health and welfare benefits for employees are sometimes provided through a trust arrangement under which the trustees receive the contributions from the employer(s), and in some cases from employees, to provide such health and welfare benefits as have been agreed to between the employer and the employees. To qualify for treatment as a HWT, the funds of the trust cannot revert to the employer or be used for any purpose other than providing health and welfare benefits for which the contributions are made. In addition, the employer's contributions to the fund must not exceed the amounts required to provide these benefits. Further, to qualify for treatment as a HWT, the payments by the employer cannot be made on a voluntary or gratuitous basis – they must be enforceable by the trustees should the employer decide not to make the payments required. This arrangement is restricted to the following:
- a group sickness or accident insurance plan;
- a private health services plan;
- a group term life insurance policy; or
- any combination of (A) to (C).
Insurance segregated fund trust
This is a related segregated fund of a life insurer for life insurance policies and is considered to be an inter vivos trust. The fund's property and income are considered to be the property and income of the trust, with the life insurer as the trustee.
Lifetime Benefit trust
This a trust that is at any particular time a lifetime benefit trust with respect to a taxpayer and the estate of a deceased individual if:
- immediately before the death of the deceased individual, the taxpayer:
- was both a spouse or common-law partner of the deceased individual and mentally infirm; or
- was both a child or grandchild of the deceased individual and dependent of the deceased individual for support because of mental infirmity; and
- the trust is, at the particular time, a personal trust under which:
- no person other than the taxpayer may receive or otherwise obtain the use of, during the taxpayer’s lifetime, any of the income or capital of the trust; and
- the trustees:
- are empowered to pay amounts from the trust to the taxpayer; and
- are required in determining whether to pay, or not to pay, an amount to the taxpayer to consider the needs of the taxpayer including, without limiting the generality of the foregoing, the comfort, care and maintenance of the taxpayer
Mutual Fund trust
This is a unit trust that resides in Canada. It also has to comply with the other conditions of the Act, as outlined in section 132 and the conditions established by Income Tax Regulation 4801. For a mutual fund trust that is a public trust, or public investment trust, there are certain reporting requirements these types of trusts must meet.
A public trust is, at any time, a mutual fund trust of which its units are listed, at that time, on a designated stock exchange in Canada.
Public investment trust
A public investment trust is, at any time, a trust that is a public trust, where all or substantially all of the fair market value of the property is, at that time, attributable to the fair market value of property of the trust that is:
- units of public trusts;
- partnership interests in public partnerships;
- shares of the capital stock of public corporations; or
- any combination of those properties.
Real Estate Investment trust (REIT)
A trust is a REIT for a tax year, if it is resident in Canada throughout the year and meets a number of other conditions, including the following:
- at least 90% of the trust’s non-portfolio properties must be qualified REIT properties;
- at least 90% of the trust’s gross REIT revenue for the tax year must be derived from rent, from real properties, interest, capital gains from dispositions of real properties which are capital properties, dispositions of eligible resale properties, dividends and royalties; and
- at least 75% of the trust’s gross REIT revenues for the tax year must be derived from rent from real properties, interest from mortgages on real properties and capital gains from dispositions of real properties which are capital properties.
RRSP or RRF trust
An RRSP, or RRIF trust has to complete and file a T3 return if the trust meets one of the following conditions:
- the trust has borrowed money and paragraph 146(4)(a) or 146.3(3)(a) of the Act applies;
- the RRIF trust received a gift of property and paragraph 146.3(3)(b) of the Act applies; or
- the last annuitant has died and paragraph 146(4)(c) or subsection 146.3(3.1) of the Act applies. If this is the case, claim an amount on line 43 of the T3 return only if the allocated amounts were paid in accordance with paragraph 104(6)(a.2) of the Act.
If the trust does not meet one of the above conditions and the trust held non-qualified investments during the tax year, you have to complete a T3 return to calculate the taxable income from non-qualified investments, determined under subsection 146(10.1) or 146.3(9) of the Act. If the trust is reporting capital gains or losses, it has to report the full amount (that is, 100%) on line 01 of the T3 return.
This is an organization (for example, club, society, or association) that is usually organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit. The organization will generally be exempt from tax if no part of its income is payable to, or available for, the personal benefit of a proprietor, member, or shareholder.
If the main purpose of the organization is to provide services such as dining, recreational, or sporting facilities to its members, we consider it to be a trust. In this case, the trust is taxable on its income from property, and on any taxable capital gains from the disposition of any property that is not used to provide those services. The trust is allowed a deduction of $2,000 when calculating its taxable income. Claim this on line 54 of the T3 return
Retirement Compensation Arrangement (RCA)
This arrangement exists when an employer makes contributions for an employee's retirement, termination of employment, or any significant change in services of employment.
Salary Deferral Arrangement (SDA)
Generally, this is a plan or arrangement (whether funded or not) between an employer and an employee or another person who has a right to receive salary or wages in a year after the services have been performed.
As always these are general description and for general information ONLY, you need to seek professional advice to see how any action benefits or impact your situation.