Alter-Ego Trusts – An Effective Estate-Planning Tool
By Kam Nat , CPA , CA
Kam Nat is a senior manager in taxation services for BDO Canada LLP ( Vancouver ).
Estimates show that nearly one in six Canadians is at least 65 years of age , and according to population projections , 20 % of the population will be 65 years or older by 2024 . 1 As the population of Canada continues to age , it becomes ever more important for Canadian taxpayers to plan for their passing . A key step to executing an estate plan is the effective and efficient distribution of the deceased ’ s assets to their intended beneficiaries . Traditionally , this step has been performed through an individual ’ s will . In some circumstances , however , the distribution of assets through a will may not be efficient from a tax perspective , as it can also expose an individual ’ s estate to other risks . Accordingly , there are a number of alternative methods for transferring property that do not include the use of a will . These methods , commonly referred to as “ will substitutes ,” may involve transferring assets via a living ( or inter-vivos ) trust ( such as an alter-ego , spousal , or joint-partner trust ) in order to gift assets during the individual ’ s lifetime , or using joint tenancy arrangements ( among others ). This article focuses on the selected benefits of using an alter-ego trust ( AET ) to distribute assets as part of a comprehensive estate-planning strategy .
The basic rules of AETs As mentioned above , an AET is a type of inter-vivos trust ( as opposed to a testamentary trust , which is created on the death of an individual ). In order to qualify as an AET and function properly under the rules in the Income Tax Act 2 ( the Act ), the terms of the trust and the facts concerning the settlor must meet the following criteria 3 :
• The trust must be settled by an individual who is at least 65 years of age at the time the trust is created ;
• The individual settling the trust and the trust itself must be resident in Canada , meaning that the trustee ( s ) and / or other legal representative ( s ) who exercise management and control over the trust 4 must be resident in Canada ;
• The settlor must be entitled to receive all of the income generated by the trust during their lifetime ; and
• No one but the settlor is entitled to receive or otherwise use any of the trust ’ s income or capital during the settlor ’ s lifetime .
With regard to the final bullet above , it is important to note that while no other person is allowed to receive any of the trust ’ s income or capital , there is no requirement for the settlor to be a capital beneficiary .
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1
Statistics Canada , “ Canada ’ s Population Estimates : Age and Sex ,” The Daily ( accessed September 2015 ).
2
Income Tax Act , R . S . C . 1985 , c . 1 ( 5th Supp .), as amended , herein referred to as the Act . All section references that follow refer to the Act unless otherwise noted .
3
Subsections 73 ( 1 ), 73 ( 1.01 ), and 73 ( 1.02 ).
4
St . Michael Trust Corp ., [ 2012 ] 2012 SCC 14 .
52 CPABC in Focus • Jan / Feb 2017