I understand the idea behind alter-ego trusts (AETs), and joint spousal trusts. However, due to past experiences, I’m not 100% on how it’s done in practice. Do you report everything in the trust or no? I’ve taken on clients in the past who had AETs established before they came across my desk and the T3s for them have historically all been nil returns despite all the property being owned by the trust.
Technically at the end of the day, the amount of money CRA receives is the same whether you report everything in the trust, distribute it all out in kind and then report it on the T1 vs just continuing to report it on the T1. So I can understand practitioners taking the latter approach (especially if the client holds lots of EFT and mutual funds that issue T3s in late March). But has CRA ever commented about this practice?
AETs don’t have graduated rates, and are not allowed many of the same deductions as on T1s, so I doubt the taxes would be the same if you didn’t pass the income through to the beneficiary (i.e. deducted on the T3). Or are you saying you’d file the T3 showing no income and no deductions? Or just ignore the T3 altogether?
i allocate to beneficiary - s9ws and publish the t3
my alter ego t3 return is a simple return with t3 and t5 slips with investment fees
i deduct investment fees against some income before allocating
i did have issues with review last year because another trust had preferred beneficiary and allocating funds to beneficiary was not allowed unless a letter was submitted to cra. first year that this was an issue
I just mean I’ve seen the practice of filing a nil T3 and still claiming everything on the T1. Because it has the same result as claiming everything on the T3, distributing everything (so the T3 has zero net income), and then reporting the T3 slip on the T1.
Remember these are alter-ego trusts. There’s only one beneficiary allowed while the person is alive. So there’s no discretion on how to allocate it.
Personally, I have been preparing the T3 and claiming everything on it and issuing the T3 slips. But it can be difficult with the T3 deadline sharing the same deadline as many of its investments it holds. So we don’t get the slips needed to file it on time.
Yes we can use investment statements but they don’t breakdown the nature of the fund distributions (interest, capital gains, dividends, foreign etc.). I’ve tried using the funds’ online info but they often don’t disclose that either.
I did an example this year and it doesn’t make a difference tax-wise other than saving CRA having to assess an amended T3 because we didn’t get the slips needed to file the T3 until after 90 days.
T3 on an AlterEgo trust should (IMO) always be NIL as the requirement is that all income be allocated to the beneficiary. (Same for Joint Partner Trust, but 2 beneficiaries.)
Two issues occur in them AFAIK: loss treatment and expenses.
Allocating expenses can be tricky…generally I allocate first against interest, next against foreign as both are fully taxable…lastly against either gains or dividends as both produce inefficient results.
Losses can only be carried forward. So for a year like 2022 with (generally) poor results, there is no ability to mitigate personal gains with AET losses, either in the current or prior years.
Also, for people with AETs or JPTs, frequently the Principal Residence is added by way of Deed of Gift to the Trust (PR is in Trustees’ personal name(s) on Land Titles as a Trust can’t be Registered for ownership), so a UHT return (no tax though) may well be applicable. It was for last year at least, and I’m trying to clarify whether it still applies for 2023 and forward.
…and, if you’re in BC, the AET needs to file a Land Owner Transparency Report.
I see your point. I also have a spousal trust that I have been filing for 10 years with MANY T3 slips that often don’t arrive before the deadline. I have found myself on the fund’s website looking up tax factors. I have even called investor relations for the companies to try to estimate the tax factors. It’s a huge pain and you are right that if ALL of the income is allocated to the beneficiary anyway, what difference does it make? I have never filed it as a nil return. I would assume there would be penalties as the slips are made out to the trust, not the individual so the income needs to flow through.
This year, the spousal trust beneficiary qualifies for the disability tax credit and I will be electing to have it treated as a Qualified disability trust. This is the first time I am doing a QDT so hoping the election is accepted, otherwise I will have a huge mess to clean up!
It’s a NIL return because there is no tax due…not one empty of data. The income is reported on the return, subject to various deductions and credits, and then T3’d out to the beneficiaries. There is no tax due on the T3 return itself, so there is no penalty calculation.
File an amended T3 return and amended slips when the final ones are received. Happens every year for my AET and others.
Alter ego trusts are probably one of the most straight forward returns you can do. The allocation of property income in trust goes all to yourself, and the result should be NIL. There are no graduated rates however, as @Nezzer mentioned. This can lead to tax discrepancies’ if not properly allocated. You would report the applicable slips on your T1 thereafter.
Won’t dive into anything else since that was all you inquired about. GL!
Hi,
very good info. I have a few clients that created AET this year. To roll the assets in do i show disposition at ACB on the T1 S3 and the trust aquires them at the ACB as result?
Yep. Don’t forget the PR (or share of PR) if that is also “transferred” by Deed of Gift, even though there is no change at Land Titles. In the case of cash and investments, the accounts indeed should have had funds moved between Settlor and Trust Account.
Sec 86 is for corporate reorgs - where’s the corporation in this scenario?
T2017 is for the capital gains reserve - when the buyer is making payments over several years - how would that apply in this case?
I think your associate is quite confused, or else you’re not telling us the whole story…
quite tired actually. He was thinking along the line of re-0rg as in contributing or rolling the assests into the trust. AET aren’t an everyday thing. thankfully the board members here confirmed my view of the S3 requirements.
Section 86 rollovers aren’t applicable unless there was a reorganization on the underlying company’s capital structure, meaning the actual articles themselves were amended to include the addition or retraction of specified share classes, at which point you would exchange a entire class of shares for another class.
Nothing to do with trusts, unless the trust is the recipient of the exchange, or if the trust is structured with unitholders.
