Transcript Document

RBC DS Family Trust
Canadians pay a lot of tax
 You’re taxed when you earn
 You’re taxed when you save
 You’re taxed when you spend
 You’re taxed when you die
 So what options are there for
you and your loved ones to
save tax?
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RBC DS Family Trust
Three main benefits of RBC DS Family Trust:
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Tax savings – takes advantage of the tax rule that each child in
Canada with no other income can earn up to $18,000 of capital
gains every year tax-free
2
Access to capital – parent loans monies to trust, thereby never
losing access to loan capital
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Fund children’s expenses – the investment income in the trust
can be used by trustee to pay for expenses that directly benefit
the child
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Why do people use trusts?
Many reasons, such as:
 Income splitting
 Control
 Creditor protection
 To hold assets for disabled or spendthrift beneficiaries
 To control the timing and amount of gifts/bequests
 Part of an estate freeze of a business
 Probate tax avoidance
 Privacy
 Etc, etc, etc
RBC DS Family Trust is primarily used for income splitting
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Two main types of trusts – Inter-vivos and testamentary trusts
Inter-vivos trust
Testamentary trust
Time of
creation
Established during lifetime Established at death
of settlor
Taxation
Income taxed in trust at
top marginal tax rate
unless paid or payable to
beneficiary
If income taxed in trust then
taxed at graduated tax rates
Taxation
year
Calendar (Jan 1 – Dec 31)
Executor can choose any 12
month period
Attribution
Must consider attribution
rules
No attribution after death
RBC DS Family Trust is an inter-vivos trust
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Who is involved in a trust?
Definition
RBC DS Family Trust
Settlor
Person that legally creates the
trust by gifting property to
trust
Typically one parent or grandparent
(“settlor”) will gift a $20 bill to the
trustee(s). This person will then lend
cash to the trustee for investment
Trustee
Individual and/or corporation
that legally holds assets and
makes decisions in the best
interest of the beneficiaries
1 Trustee – cannot be settlor/lender
3 Trustees – majority rule;
settlor/lender can be one of the 3
trusees but cannot be Investment
Trustee
Beneficiary
Persons that will ultimately
benefit from the trust assets
Typically children and grandchildren –
cannot be settlor/lender
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Comparing the trust options at DS – key differences
RBC DS Formal
Trust
RBC DS Family Trust Discretionary
RBC DS Family
Trust – Age 40
Maximum # of
beneficiaries per trust
6
Unlimited
1
# of trustees
1 or 2
1 or 3
1 or 3
Contributions
Irrevocable gifts
Loan - $50,000 minimum
Loan - $50,000 minimum
Parent’s access to capital
None – must be used for
beneficiary’s benefit
Full access to loan capital
Full access to loan capital
Beneficiary’s rights to
income that was payable
to them but reinvested
Immediate
Immediate
If earned prior to age 21 then
as late as age 40, if earned
after age 21 then immediate
Can trust income be used
to pay beneficiary’s
expenses
Yes
Yes
Yes
Annual DS
administration fees
NIL
$150 or $250
$150 or $250
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RESP vs. RBC DS Family Trust – key differences
RESP
RBC DS Family Trust
Maximum lifetime
contribution
$50,000
No maximum
Government grant
Yes - $7,200 maximum
No
Parent’s access to capital
Contributions can be returned to
parent (not recommended until child
in post secondary school)
Full access to loan capital anytime
Beneficiary’s access to
accumulated investment
earnings
When enrolled in post-secondary
education
At age of majority (later if Age 40 trust used)
Can earnings be used to pay
beneficiary’s expenses
Yes but only for reasonable post
secondary expenses
Yes – broader category; even while minor
Taxation
Grows tax-deferred; withdrawals
taxed to child
Capital gains taxed to child (generally taxfree); interest/dividends attributed to parent
if funded via interest-free loan
Annual fees
$50 for DS admin fee
$150 or $250 for DS admin fee plus tax return
fees
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RBC DS Family Trust Candidates
 Clients with surplus capital
 High-income parents with minor children (i.e. executives, professionals,
IAs, business owners, etc)
 High-income grandparents that want to
provide funds to grandchildren
 Children in private school or have
other high expenses (sports, lessons, etc)
 Parents that have no RESP or started
it late
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Benefits of income splitting
Reason #1: Progressive tax rates
Annual taxable income
Tax rate
Under $37,000
21%
$37,000 - $75,000
31%
Over $75,000
43% – 46%
Potential annual tax savings by income splitting
with one family member
$15,000 per year
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Reason #2: $9,000 basic exemption
If taxable to parent
$18,000 Capital gains
$18,000 x 50%= $9,000
Tax payable = $4,000
Investment
Account
If taxable to child
$18,000 x 50%= $9,000
Less basic exemption = ($9,000)
Tax payable = $0
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Three strategies to split investment income with children
Strategy
Pros
Cons
Gift to RBC DS Formal Trust
Capital gains taxed to child*
Loss of capital
Attribution of interest and
dividends if minor
Loan at CRA prescribed rate
(currently 5%) to RBC DS
Family Trust
Can call back loan capital
Interest, dividends, capital
gains* taxed to child
Parent must declare 5%
interest income
Interest-free loan to RBC DS Can call back loan capital
Family Trust
Capital gains taxed to
child*
Parent declares no interest
on loan
* If trust is structured correctly
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Attribution of interest and
dividends regardless of age
Trust “super” attribution rule – subsection 75(2)
 If trust is not set up properly then it is possible that
even capital gains will be attributed back to lender
thus achieving no income splitting!
 To avoid capital gain attribution the following rules
must be followed (confirm with tax advisor):
1. SETTLOR/LENDER CANNOT BE SOLE
TRUSTEE, INVESTMENT TRUSTEE OR A
BENEFICIARY
2. SETTLOR/LENDER CAN BE ONE OF 3
TRUSTEES WHERE DECISIONS MADE BY
MAJORITY RULE
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RBC DS Family Trust Structure
Gift $20 and
then loan
cash (not from
joint account)
1 or 3
Trustee(s)
Tax-free
Capital gains $
Settlor/Lender
Smith
Family
Trust
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Beneficiaries
Children are expensive
 It can cost over $150,000 to raise
one child from birth to age 18
 Most of these costs are not taxdeductible by the parents
• Schooling (i.e. private
school)
• Camps
• Lessons
• Sports equipment
• Gifts
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A strategy to pay for child’s expenses with tax-free capital gains
No strategy
Family trust pays private school fees
Parent’s T4 income
$250,000
Parent’s T4 income
$250,000
Tax
(100,000)
Tax
(100,000)
After-tax
$150,000
After-tax
$150,000
Family expenses
(100,000)
Family expenses
(100,000)
Private school fees (2 kids)
(30,000)
Surplus
$20,000
Parent’s cash assets
Capital gains earned (6%)
Tax
Surplus
Loan cash to family trust
$500,000
$500,000
Capital gains earned (6%)
$30,000
$30,000
Tax (split between 2 kids)
NIL
(7,000)
Net portfolio
Surplus
Total portfolio
$50,000
Private school fees
$523,000
Net portfolio
$20,000
Surplus
$543,000
Total portfolio
(30,000)
$500,000
$50,000
$550,000
Tax savings of $7,000 in first year and parent can get back $500,000 loaned to trust anytime
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Using the trust income to pay for children expenses
 Additional documentation and administration!
 Inter-vivos trust – income and capital gains taxed in trust
at top tax rate unless paid or payable to the beneficiary
 CRA has long standing administrative policy (IT-NEWS
No. 11) that income taxed to child even if trustee uses
trust income to pay for expenses that directly benefit
child
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Using the trust income to pay for children expenses (continued)
 No official list of approved expenses from the CRA
 IT-NEWS No. 11 – “expenditure for the child’s benefit, i.e. amounts
paid for the support, maintenance, care, education, enjoyment and
advancement of the child, including the child's necessaries of life. “
 Expenses must unequivocally benefit the child
 Expenses used on ordinary household expenses or benefiting
someone other than beneficiary will result in double taxation!
 Clients should consult with tax advisor on this matter
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RBC DS Family Trust Fees
Set up fees
NIL(*)
Annual trust tax return
$350 if using Royal Trust
(RT) ($450 in Quebec)
Alternatively can use own
accountant
Investment fees
Depends on investments
chosen in family trust
Annual DS administration fee
$150 if RT prepares T3
$250 if RT not used
(*) RBC DS charges no set up fees, however client’s tax and legal advisors will likely
charge fees to review legal agreements and provide advice to client and trustees at
time of set up.
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RBC DS Family Trust Considerations
 Additional administration – documentation, trustee
recordkeeping, etc
 Renewal of demand promissory note
 Investment risk and volatility of earning capital gains
 Lender loses rights to future investment income
 Lender should review Will re loans at death
 Tax deductibility of investment management fees
 Additional fees and tax returns
 21 year deemed disposition rule – can be mitigated
 Meetings with tax and legal advisors
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Thank you
This presentation has been prepared for use by RBC Dominion Securities Inc.*, Royal Mutual Funds Inc., RBC
Private Counsel Inc. and RBC DS Financial Services Inc., Member Companies under RBC Investments. The
Member Companies, Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company
are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by Royal
Mutual Funds Inc. or RBC DS Financial Services Inc. and each is licensed as a financial services firm in that
province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc.,
Royal Mutual Funds Inc. or RBC Private Counsel Inc. Insurance products are only offered through RBC DS
Financial Services Inc., RBC DS Financial Services Inc., RBC DS Financial Services Inc., subsidiaries of RBC
Dominion Securities. *Member CIPF.
The strategies, advice and technical content in this presentation are provided for the general guidance and benefit
of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or
completeness.This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult
their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will
ensure that their own circumstances have been considered properly and that action is taken on the latest available
information. Interest rates, market conditions, tax rules, and other investment factors are subject to change.
™Trademark of Royal Bank of Canada, used under licence. RBC Investments is a registered trademark of Royal
Bank of Canada, used under licence. ©Royal Bank of Canada 2007.
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