Trust And Company Formation In Canada
Here we shall examine trusts and company formations in Canada and why people elect to establish themselves and their wealth within Canada.
Everyone wants to retire with money, but some are lucky to have a lot more than others. For those with some wealth, how best to pass it on to the next generation (without a big tax hit) becomes a big issue. There are many strategies one can use to mitigate taxes and make sure children are looked after, but one option that's becoming more and more popular is a trust.
A trust is a legal arrangement where money is kept in an account and administered by a trustee. The person opening the trust, also known as the settler, can dictate exactly how that money is administered. Gone are the days where trust funds were just for snooty socialites; now, anyone with a bit of cash to pass down can have one.
1. See where your money goes
Most people pass down money through a will. What fun is that? You can't see how your money's used or the benefit it has on family members. Trusts can be set up for after death too, but for this story we're talking about inter-vivos trusts, or trusts that are created while the settlor is still alive.
2. Do whatever you want with the assets
One of the benefits of a trust is that the settlor can instruct how his or her money should be distributed. A gift, which is another way people pass down money, doesn't come with any strings attached, so the people receiving the money can do whatever they want with it. That works for some people, but not for others.
For instance, you might want to help fund a grandchild's education. You can set up the trust so that a certain amount of money is released before every school year, rather than at one time. Or, if you have a spendthrift kid, you can give them money from the trust at certain times of the year.
3. Avoid probate
Assets in a trust are not subject to after-death probate taxes. While the trust will have to pay capital gains tax on investments or property that gains in value (either every 21 years or when an asset is sold), no other taxes have to be paid when the settlor dies. This could save an estate a ton of money.
4. Pass down more than just money
While most trusts contain investments or cash, you can put pretty much anything in a trust. One common asset that gets the trust treatment is property, like a cottage. It's often an easier way to get kids to share a vacation home than by letting them figure out the details themselves. That's because you can dictate a set of instructions covering things such as who gets to use it when and how taxes and maintenance are covered. The trust will pay the expenses, either out of the trust itself or by having the trustee collect cash from the kids.
5. Keep your wealth a secret
When you die your will becomes public. Anyone can find out what assets you had and who got what. That, not surprisingly, irks a lot of people, especially Canadians who have a lot of money. A trust keeps all those details private. You can do whatever you want with your money and no prying eyes will ever find out.
You can also appoint any trustee you want, such as a family friend, a trusted coworker or even a trust company. Whoever it is, make sure you can, well, trust them with overseeing your assets.
Two main types of trust:
1. Testamentary trust
A testamentary trust is created in your will and takes effect upon your death. The assets relating to a testamentary trust form part of your estate, so they are subject to any estate fees or taxes that apply. The trust can be changed at any time before your death by simply having a new will prepared.
2. Living trust
When you establish a living trust (also known as an inter vivos trust), property ownership is passed immediately to your beneficiaries. You can add more property to the trust over time. Because the transfer of ownership is during your lifetime, the trust assets do not form part of your estate and are not subject to probate.
7 common uses for trusts
Whether it’s best to establish a trust during your lifetime or upon your death will depend on the intended use and your personal situation.
1. You have children from a previous marriage
If you remarry, a trust can provide support for your spouse during their lifetime, while ensuring that your children from a previous marriage eventually inherit any remaining assets.
2. Your spouse lacks financial expertise
If your spouse needs help with money management after you die, a testamentary trust allows a qualified trustee to manage the trust assets on behalf of your spouse.
3. Your spouse or child is disabled
A trust can be used to ensure a disabled spouse or child receives an appropriate level of care and has sufficient assets to maintain this care after you die.
4. You want to provide a gift to minors
You can use a trust to provide income to minor beneficiaries (for example, children or grandchildren) in their younger years and to pay out the capital when they reach a specified age.
5. Tax planning
Income earned in an inter vivos or living trust is taxed at the highest marginal tax rate, but any trust income that is distributed to adult beneficiaries is taxed in their hands. So if your beneficiaries are in a lower tax bracket, the investment income can be taxed at their lower rate.
Beginning in the 2016 tax year, testamentary trusts will no longer enjoy graduated tax rates. Instead, income earned in a testamentary trust will be taxed at a flat rate of 29%, the top federal personal tax rate, plus the top provincial or territorial tax rate. As a result, there will no longer be an opportunity to pay less tax by retaining income in a testamentary trust before paying it out to beneficiaries in the top tax bracket.
However, an estate that arises upon death and is a testamentary trust will be able to use the graduated rates for 36 months from the date of death. Graduated rates will also continue to apply to a trust if the beneficiaries are eligible for the federal Disability Tax Credit.
6. You want to provide a future gift to charity
You can use a trust to provide trust income to your beneficiaries for their lifetime. Upon their death, the remaining money in the trust is donated to the charity you’ve specified.
7. You want to bypass probate
With a living trust (but not a testamentary trust), you bypass probate for any assets held in the trust, and gain the certainty of knowing that assets are transferred and distributed as you intended. This also offers greater privacy for trust assets, as probate is a public process and anyone can access these records.
Setup A Federal Corporation (Canadian Company)
Standard authorised share capital is CAD10,000. Minimum paid up share capital is CAD1.
Classes of Share Available
Registered shares, preference shares, redeemable shares and shares with or without voting rights.
Restrictions on Trading
Banking, insurance, assurance, reinsurance, fund management, collective investment schemes, trust management, trusteeship business provision are not permitted.
Registered Office Required
Yes, must be maintained in Canada.
The minimum number of directors is one. Director can be of any nationality and need not be resident but at least 25% of directors must be a resident of Canada.
The minimum number of shareholders is one.
Publicly Accessible Records
Nominee Shareholders and Nominee Directors
Location of Meetings of Directors and Shareholders
Personal Presence Required
Federal Corporate Income Tax 11-16,5%. Provincial or territorial corporate tax rate varies from province to province.
Double Taxation Treaty Access
Algeria, Argentina, Armenia, Australia, Austria, Azerbaijan, Bangladesh, Barbados, Belgium, Brazil, Bulgaria, Cameroon, Chile, China (PRC)1, Croatia, Cyprus, Czech Republic, Denmark, Dominican Republic, Ecuador, Egypt, Estonia, Finland, France, Germany, Guyana, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Ivory Coast, Jamaica, Japan, Jordan, Kazakhstan, Kenya, Korea, Republic of, Kuwait, Kyrgyzstan, Latvia, Lithuania, Luxembourg, Malaysia, Malta, Mexico, Moldova, Mongolia, Morocco, Netherlands, New Zealand, Nigeria, Norway, Oman, Pakistan, Papua New Guinea, Peru, Philippines, Poland, Portugal, Romania, Russia, Senegal, Singapore, Slovak Republic, Slovenia, South Africa, Spain, Sri Lanka, Sweden, Switzerland, Tanzania, Thailand, Trinidad & Tobago, Tunisia, Ukraine, United Arab Emirates, United Kingdom, United States, Uzbekistan, Venezuela, Vietnam, Zambia, Zimbabwe.
Requirements to File Accounts
Requirement to File Annual Return
Language of Name
Words such as “Assurance”, “Bank”, “Building Society”, “Royal”, “Trust Company”, “Trustee Company” etc. will require justification.
Name of a CompanyThe words Limited, Limitée, Incorporated, Incorporée, Corporation, Société par actions de régime fédéral or Ltd., Ltée, Inc., Corp., S.A.R.F. must be part of the name of every company.
Time to Incorporate
For advice and support in all areas of establishing a company or trust in Canada speak to our experts today.