Trusts may arise for a variety or reasons including, but not limited to, on the death of a loved one or as part of estate planning to minimize taxes and effect a transfer of property to the next generation.
A fairly basic definition of a trust is a relationship in which trustees hold property for the benefit of the beneficiaries, who can be individuals or corporations. The trust is established through a deed that will set out details of the trust such as the power and limitations of the trustee(s). The trust may have more than one trustee. Trustees administer the trust in accordance with terms of the deed. They are also responsible for distributing trust funds to beneficiaries in accordance with their respective interests/terms of the deed. While it is not a separate legal entity, a trust is considered a separate entity for income tax purposes. As a result, it must file T3 Trust Income Tax and Information returns and pay income taxes on any net income received that is not distributed to the trustees. Income distributed to the beneficiaries are reported on the income tax return of the beneficiary.
A trust may own significant assets, including corporations, and receive significant amounts of income. In the context of matrimonial matters, trusts may add a significant layer of complexity to the situation. Establishing who has control over the trust may impact the appropriate treatment of the net assets the trust owns and the income the trust generates. Unfortunately, it is not always easy to make this determination. The issue of control is a legal question that is either agreed to by the parties or determined by the trier of fact. Some factors that may be considered in determining who has control of a trust’s assets and income include:
- Who is/are the trustee(s)?
- What authority is granted to the trustees? Do all trustees have equal power/authority?
- Who has voting control?
- Who has the power/authority to appoint new trustees and/or replace current ones?
- Are the trustee’s arm’s length parties?
- Are there restrictions placed on one or more of the trustee’s which impact their ability to distribute trust funds?
- Who is/are the beneficiaries?
- Do all beneficiaries receive an equal share, or may distributions be made in varying amounts or to the exclusion of one or more other beneficiaries?
- What is the history of distributions?
An example that we often encounter relates to a trust created for estate planning purposes in which a business owner transfers ownership of the common shares of the corporation to a family trust. The trustees include the business owner, with provisions in place for the business owner to have voting control over both of the trust’s assets and income distributions. The beneficiaries can include the family and/or corporations owned by the business owner or family, and decisions governing distributions are at the sole discretion of the trustee(s).
While the determination of control and the proper treatment of the net assets and income available from the trust is a legal issue, in this situation we are often asked to assume full control rests with the business owner, effectively looking through the trust. In this scenario, the fair market value of the trust, reflecting the fair market value of all assets held by the trust less any liabilities) is included in the net family property statement as an asset of the spouse who is the business owner.
Similarly, any income generated by the trust is treated as income of the business owner and subject to attribution as if the trust did not exist. For situations in which control and/or entitlement to the assets and/or income of the trust is unclear, we may be asked to provide calculations and conclusions assuming differing levels of ownership/income attribution (i.e. If there are four beneficiaries then a 25% interest or share of income is allocated to each beneficiary).
Another example we encounter relates to a spouse being a beneficiary of a trust for which they have no control. Often this control lies with a parent and/or a non-immediate family member. In situations in which the spouse has no ability to control, distribute or otherwise access the funds and/or income held by the trust, we may be asked to assume the net assets of the trust are $nil for net family property statement purposes. Similarly, we may be asked to assume income available for support from the trust is limited to actual distributions, if any.
Due to the complexity that a trust may add to a matrimonial matter, we recommend discussing the potential complications and approaches with one of the Chartered Business Valuators at SB along with legal counsel.
