Keep your trust documentation in great shape!

MONDAY, NOVEMBER 28, 2022

Trusts continue to be under scrutiny by Canada Revenue Agency so it is very important to make sure you document trust activity carefully. As the end of year approaches, make sure you have the following in mind:

1. Determine either the amount or the percentage of income that will be distributed to each beneficiary before the end of the year. Certain trust income may be taxed in the hands of the beneficiary if it is either “paid or payable” to them. If this test is met then the income is taxed at that beneficiary’s marginal tax rate. If the income is taxed inside the trust then it is tax at the highest marginal rate. The key element here is that the trustee should decide before the end of the year either the amount of income or the percentage of the income that should go to each beneficiary.

2. If the trust is allocating income to children then you should consider reimbursing parents or grandparents for expenses incurred on behalf of the children. The child beneficiary will be allocated the income while the parent or grandparent is reimbursed. It is very important that the parent keeps the expenses on file as support. Expenses beyond the necessities are eligible to be reimbursed to the parents. Examples of eligible expenses include the following: expenses for vacations, such as plane tickets; tuition/private lessons; summer camp; club members dues; sports equipment. 

3. Ensure the trust has sufficient cash to pay interest by January 30, 2023 to any grandparent or parent that loaned money to the trust. The trust may need to raise cash in order to make this interest payment. Therefore, it is a good idea to start thinking about this now. If the interest on the loan is not paid by January 30, 2023 then the loan is tainted not only for the 2022 year but for all future years. This means that the income earned in the trust cannot be flowed out of the beneficiary but must be taxed in the grandparents or parents hands.

4. Make sure that you can demonstrate that the trustees carried out their role in determining how trust assets are distributed. The trustees should to be shown to have carried out their role through careful keeping of minutes and email exchanges showing how decisions were made.

If you have any questions please reach out to us.