Trust planning

Tax Topics
1

Client has a family trust established 2013. Trust was audited in 2018 (year of business sale), all good. No issues just looking ahead re tax planning and 2034 when the 21 year rule kicks in. Client would like to keep the trust going. Trust has investment income which is distributed to the beneficiaries yearly.

Couple of questions:

  1. Option 1 would be recognize all gains by 2034 and start another 21 year cycle. Expecting a CRA audit for 2034. Am I correct on this?

  2. Option 2 would be to rollover into another Trust. Are there any benefits of doing this vs option (1)? Client has a new startup business and looking into another Trust. They understand LCGE is used from previous sale but amounts are proposed to increase under latest budget.

Thanks!

2

The straight forward description is appreciated. What exactly are you trying to achieve however… just maintaining the trust’s status and bypassing the 21 year disposition?

I assume the clients business is a going concern and there are no plans to dispose of the business as of now. Is this correct?

Option 1 should be your last option, wouldn’t even consider it unless the trust deed is forcing you into it (the deed doesn’t have any provisions for capital beneficiaries and such). There’s a few different strategies you can employ with regards to rolling over property and bypassing the 21 year rule, but for me to elaborate on this is beyond the scope of such a thread, there’s just too much planning (and typing) involved.

Some other factors to consider:

  • The LCGE IS increasing, so the beneficiaries have a new notional balance that can be utilized in the future.

  • You can rollover the trust property into a holding company for share consideration, and subsequently distribute the accrued gains class to said beneficiaries, thereby triggering a deemed disposition in the trust at cost (meaning the share class that holds the cost basis on redemption). From there, you can subscribe a new trust to a notional common class and start fresh… subject to a few tax provisions that need to be given future consideration (this is beyond the scope of this conversation).

  • Voting control needs to be given a heavy consideration to the above

  • You cannot simply subscribe a new trust to a going concern company without triggering a FMV clause to each beneficiary and have them get taxed on the benefit (CRA takes this standpoint). You would need to freeze the cost basis somewhere … in the trust, or with a shareholder.

  • If the trust only holds financial assets, you will need to rollover the property subsequent to the 21 year rule by way of the accrued gains method. You cannot just shift the property into a new trust, as you will be subjected to GAAR >>>

If you don’t mind me asking, when exactly did the trust acquire the financial assets to earn that investment income? and how? Was this after the sale of 2018?

3

Sorry I guess I wasn’t clear. The trust was set up to hold shares of a startup in 2013. The trust was set up by a top tier firm in Canada. In 2018, the business was sold for cash. LGCE room for all beneficiaries was utilized. Trust was audited by CRA (hence my comment about all good). Since 2018, the trust has been holding investments and distributing all income to the beneficiaries.

There is still lots of time to plan. I’m just starting to investigate options to better understand. I won’t be handling this myself but do want to understand how this is typically handled (trust hitting the 21 year rule).

Client also has a new startup in a similar situation to 2013 so likely later this year will be looking to form a new trust once they have raised funds.

Thanks!