CANADA Law and Practice Contributed by: Ian Hull, Suzana Popovic-Montag and Nick Esterbauer, Hull & Hull LLP
who will act solely at the settlor’s direction should be treated with caution, in order to avoid creating a “sham trust”. The Income Tax Act does not permit taxpayers to avoid income tax consequences through the use of trusts where the settlor retains a right of reversion over the trust property and/or the right to direct the distribution of the trust property. 3.3 Taxation of Trusts, Foundations and Similar Entities Located in Other Jurisdictions The involvement of a Canadian resident as a ben - eficiary or trustee of a foreign trust can expose the trust and its beneficiaries to significant Canadian tax liabilities. A foreign trust may be deemed resident in Canada if a Canadian resident is a beneficiary and a Canadian contributor transfers property to the trust. In that case, the trust is taxable on its worldwide income under the Income Tax Act, and the contributor, the trust and the Canadian resident beneficiaries may be jointly and severally liable for the Canadian tax. A foreign trust’s residence may also be affected if one of its fiduciaries is a Canadian resident. If the trust is resident in Canada for tax purposes, it will be taxable on its worldwide income. Otherwise, it would generally only be taxed on its Canadian source income. 3.4 Tax Consequences of Fiduciary and Beneficiary Roles A settlor should generally not serve as the sole trustee of a trust. Under Subsection 75 (2) of the Income Tax Act, income and capital gains from property trans - ferred to a trust may be attributed to the settlor if that settlor retains sufficient control over that property. This rule applies where: • the trust property may revert to the settlor; • the settlor retains the power to determine the trust’s beneficiaries; or • the property cannot be disposed of without the settlor’s consent or direction. Subsection 75 (2) will not generally apply simply because the settlor is one of several trustees, unless the trust terms require the settlor’s consent to trustee decisions. Accordingly, if the settlor is also a trustee,
the trust should always have at least two trustees. If the settlor becomes the sole trustee, their pow - ers should be limited to appointing an additional or replacement trustee.
4. Family Business Planning 4.1 Asset Protection
Insurance is the most common means of asset pro - tection in Canada. Life and/or disability insurance can be used to satisfy liabilities (including tax liabilities) arising from a business in the event of the incapacity or death of a business owner, thereby facilitating the succession of a business. Failing to consider asset protection in an estate plan may frustrate a succession plan. If tax liabilities aris - ing from the deemed disposition of business interests exceed the liquid assets available to the estate, it may be necessary to dissolve the business. Several factors should be considered in determining the extent of insurance required, including: • whether the owner’s interest will be purchased in the event of their death; • whether insurance is intended to benefit benefi - ciaries who are not receiving an interest in the business (and who may challenge the gift of the company because it disinherits them); and • whether the business will require additional staff following incapacity or death. Several options exist for disability or life insurance pol - icies intended to protect a business. Surviving family members, the deceased’s estate, the company itself or a surviving shareholder can be beneficiaries. The insurance policy can be owned by the business owner or the corporation. Alternatively, holding corporations can be used to pro - tect assets required by a business so those assets cannot be seized by creditors. However, such struc - tures should be implemented when the assets are acquired or developed, to ensure that a creditor can - not claim that they were created to prefer, defeat, hin - der or delay creditor claims.
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