Family Trusts in Ontario: Common Types of Trusts and What to Consider

Family trusts are often seen as a tool reserved for wealthy families and are frequently associated with saving tax. In practice there are many kinds of trusts, each with a different purpose, and every trust carries ongoing costs. Based on the Canada Revenue Agency's descriptions of trust types, this article introduces the trusts most often discussed in Ontario estate planning and the questions worth considering before setting one up.

The Basic Idea

In general terms, a trust is an arrangement in which a settlor transfers property to a trustee, who holds and manages it for the benefit of beneficiaries. The settlor, trustee and beneficiaries may be different people, and in some arrangements the roles overlap.

By timing, the CRA broadly distinguishes trusts created during the settlor's lifetime (inter vivos trusts) from trusts that arise on death, including under a will (testamentary trusts).

Is There a Minimum Size for a Family Trust?

The CRA's description of trust types does not set any minimum value of assets for a trust. Whether a trust is worthwhile usually depends on its purpose, the problem it is meant to solve, and the drafting, accounting and annual maintenance costs. For families with modest assets and simple goals, a will and beneficiary designations may be sufficient, but that depends on the circumstances.

Trusts Commonly Used in Ontario Estate Planning

What follows is an overview only. The requirements and tax treatment of each type should be confirmed against CRA guidance and with professional advice.

Testamentary trusts

Created in a will and taking effect on death. Common uses include holding an inheritance for minor children with staged distributions, or providing long-term support for a family member who needs care.

Spousal trusts

According to the CRA, a spousal or common-law partner trust may be created by will or during the settlor's lifetime; the surviving spouse or partner is entitled to all of the trust's income during their lifetime, and no one else may receive or use the trust's income or capital during that time.

Alter ego and joint partner trusts

According to the CRA, an alter ego trust is a trust created after 1999 by a settlor aged 65 or older, under which the settlor is entitled to all of the trust's income during their lifetime and is the only person who may receive or use its income or capital during that time. A joint spousal or common-law partner trust is similar: created after 1999 by a settlor aged 65 or older, with the settlor and their spouse or partner being the only persons entitled to the trust's income or capital until the later of their deaths.

Bare trusts

According to the CRA, a bare trust generally refers to an arrangement where the trustee has no significant powers or responsibilities and only holds legal title, such as a child holding a home on title for a parent. Our related article discusses this further.

Trusts for family members receiving disability benefits

Planning for a child or family member who receives government disability benefits often involves an arrangement commonly called a Henson trust. Because it is closely tied to benefit eligibility rules, it needs separate assessment and is not covered in detail here.

Ongoing Obligations

Filing

The CRA's FAQ lists the circumstances in which a trust must file a T3 return, such as having tax payable, being asked to file, or disposing or being deemed to dispose of capital property. Trust reporting rules have changed in recent years, so annual filing obligations should be confirmed with an accountant.

Deemed dispositions

The CRA's T3 Trust Guide explains that a trust is deemed to dispose of its capital property on specified deemed disposition days. For many trusts this is tied to the 21st anniversary of the trust's creation and recurring periods after that, while spousal trusts, alter ego trusts and others follow different rules, such as the date of a relevant person's death. This can matter significantly for trusts holding real estate or shares long term.

Can a Trust Save Tax?

Trusts are sometimes used in tax planning, but Canada's trust tax rules are complex. The circumstances in which the CRA requires a T3 return include situations involving attribution rules (for example, holding property subject to subsection 75(2) of the Income Tax Act). Simply placing assets in a trust does not necessarily produce a tax benefit and may add filing and compliance burdens. Any tax-driven trust arrangement should be reviewed in advance by an accountant or tax lawyer.

Questions to Think Through First

• What should the trust achieve: caring for minor children, protecting a family member with special needs, holding business shares, or something else?
• Who will act as trustee, and is that person willing to take on the role for the long term?
• Who are the beneficiaries, and on what terms should property be distributed?
• Do any family members or assets sit outside Canada?
• Are the annual accounting and filing costs acceptable?

Frequently Asked Questions

Sources

• CRA: Trust types and codes
• CRA: Enhanced reporting rules for trusts and bare trusts, FAQ
• CRA: T3 Trust Guide