Congratulations on setting up that family trust allowing you to split income with your children and better support them in their educational and lifetime endeavors. It feels good to know that you are supporting your children by allowing them to access the results of your keen business sense, but how are you going to feel when the CRA comes asking questions? Are you going to be concerned that you have done something wrong? Or are you one of the people who have maintained the trust appropriately throughout its existence, allowing you to rest easy even when the CRA calls.
If you are the latter, give yourself a pat on the back because you are among the minority. A lot of taxpayers and their advisors put trusts in place in the midst of transaction planning but don’t bother to maintain that trust after the fact. This lack of maintenance can have two effects; first it could result in your great tax planning becoming mediocre tax planning by not taking advantage of income splitting potential. Secondly and much more concerning is that it could become a liability.
In the first scenario you may have missed the opportunity to dividend out to a beneficiary who is over the age of majority and earning minimal or no income. In 2013, you could have paid out $40,145 in dividends to each beneficiary over the age of majority and incurred no tax in Ontario other than the $600 Ontario health premium. This same amount paid out to a high tax bracket family member would result in $13,075 of taxes payable. Obviously, with a little advanced planning and some support from your accountant, you can set up a plan that maximizes the potential tax savings in the trust. This type of scenario is really a missed opportunity, but in the end carries no real liability.
The second scenario does however carry liability. In this scenario, the CRA has contacted you for one of many reasons; unfilled trust tax returns, suspected misuse of the trust, etc. If this is the situation and you haven’t properly maintained your trust accounts, you may be subject to penalties, interest and in extreme cases there is a risk of legal action resulting in fines or jail time.
There are ways to avoid the second scenario and while I can’t detail all of them, I have provided a list of common items below:
- File the T3 tax return on time (90 days from year end)
- Retain all supporting documentation for the trust:
- Original settled property
- Original indenture or trust deed
- Annual trustee minutes
- Supporting trustee resolutions
- Financial statements
- Promissory notes for any loans due to or from beneficiaries
- If the trust has a lot of transactions a separate bank account is ideal to avoid co-mingling of personal funds
The last thing I will mention is the new estate and trust division of the CRA. This new division is looking more closely at all trusts and the transactions surrounding them. This is resulting in more requests for information specific to individual trusts. The CRA is likely to ask for the items listed above and may ask for other information depending on your particular trusts activities. It can be time consuming to gather and document all of the information above particularly if some of the information (trustee minutes and resolutions) have never been signed or written down.
If you find yourself in this situation or in a situation where your trust was set up with no further support, it might be time to seek some professional advice. Lucky for you, Welch professionals are never more than a phone call (613-236-9191) or click away.
Joshua Smith, CPA, CA
Manager, Business Incentives