Recreational Residence Trust Package

Transcription

1 Recreational Residence Trust Package Fees: $6,000 Documents: 1. Recreational Residence Trust, with related documents, as required: If registered in the Land Title Office: Form A Transfer Property Transfer Tax Return If not registered in the Land Title Office: Transfer of Beneficial Interest Agency Agreement Bare Trustee Agreement Trust Minute Book 2. Trust Minute Book Issue 1: Choosing a Beneficiary and Management As a recreational property is not divisible, a decision has to be made of which child will receive the property, or how it will be shared between the children. Recreational properties are often considered special assets in families, which may result in the desire to preserve the property at all costs, even if selling and distributing the sale proceeds equally between the children is an easier option. Issue 2: Capital Gains Assuming you do not designate your recreational property your personal residence for tax purposes, the transfer, a sale during your lifetime will trigger a gain (or loss) that will be the difference between the proceeds of disposition, less the cost of the property, and any expenses incurred in disposing of the property. 50% of the capital gain must be reported in your tax return as a taxable capital gain in the year of disposition. Unfortunately, if you experience a loss on the property, you will not be entitled to claim that loss against other capital gains, as the losses on personal use property and deemed to be nil. If you do not sell your property during your lifetime, then it will be deemed to have been disposed of at the time of your death, unless it is left to a spouse, in which case the property will be deemed to be disposed of in the year in which the surviving spouse sells

2 the property or dies. When a recreational property is transferred to a family member during your lifetime, other than a spouse, either by way of gift or sale, the transfer will result in a disposition for tax purposes. Solution: A Trust A possible solution to leaving a vacation property to more than one family member is to transfer it to a trust. In addition, a trust affords benefits such as creditor protection, the ability to defer capital gains taxes on capital assets and centralized asset management. Multiple Beneficiaries, Centralized Management and Creditor Protection The trust can be structured to govern who is entitled to benefit from the property, how it is managed and what to do if the trustees can t agree. The trustees of the trust could be one or more individuals who would have the power to make certain decisions, and the beneficiaries could include not only children, but potentially grandchildren or other relatives. An advantage to a discretionary trust is that none of the beneficiaries have any vested right to the property they will only be entitled to use the property as the trustees allow and/or when the trustees decide to distribute the property to them. In the meantime, if a beneficiary dies, there will be no tax liability resulting from their interest in the trust. If a beneficiary suffers a marriage breakdown or experiences creditor issues, they will have a strong argument that they have no interest in the vacation property, and that it therefore should not be subject to asset division or seizure. Tax Considerations When an asset is transferred into a trust, the transfer will trigger a deemed disposition of any unrealized capital gains (except in the case of a spousal, alter ego or joint partner trust). Once the property is transferred into a trust, it can grow in value in the trust and the death of a beneficiary will not trigger any tax liability. There will be a deemed disposition of the property held in the trust every 21 years thereafter. This means that any unrealized capital gain in the value of the recreational property will be triggered on the 21 st anniversary of the trust and the tax will have to be paid (unless the trust property is distributed to a successor trust or Canadian resident beneficiaries prior to the 21 st anniversary). The property in the trust will not be subject to probate fees, currently approximately 1.4% of the gross value of the estate (and subject to being increased by the acting Provincial government of the day). Primary Residence Capital Gains Exemption Issue The Income Tax Act allows a home owned by a personal trust to qualify as a principal residence if the recreational property was ordinarily inhabited in the calendar year ending in the relevant fiscal year of the trust by an individual beneficiary of the trust or a child, spouse or former spouse of such a beneficiary. A beneficiary who satisfies this test is referred to as a specified beneficiary. 2

3 A personal trust is defined by subsection 248(1). Generally, a personal trust is either a testamentary trust or an inter vivos trust where all of the beneficiaries received their interests as gifts. In order to limit the types of taxpayers who can benefit from the principal residence exemption in respect of a home held through a trust, a number of limitations are placed on the ability of a personal trust to claim the benefit of the exemption. Pursuant to paragraph (c.1) of the definition of principal residence in section 54, a taxpayer that is a personal trust may designate a property as a principal residence if: the designation is made in the prescribed form and manner; each individual who in the calendar year ending in the taxation year, is beneficially interested in the trust and ordinarily inhabits the housing unit, or has a spouse, former spouse or child that ordinarily inhabits it, is listed in the designation; no corporation other than a registered charity or partnership is beneficially interested in the trust at any time in the year; no other property has been designated for the year as a principal residence by a specified beneficiary of the trust, by the beneficiary's spouse (other than a spouse who was throughout the year living apart from and was separated pursuant to a judicial separation or written separation agreement from, the beneficiary), by a person who was the beneficiary's child (other than a child who was during the year a married person or 18 years of age or over) or where the beneficiary was not during the year a married person or a person 18 years of age or over, by a person who was his or her mother or father, or his or her brother or sister who was not during the year a married person or a person 18 years of age or over. The designation which must be filed by the trust must specify each individual who was a specified beneficiary of the trust in the calendar year ending in a relevant fiscal year of the trust. A designation by the trust is not valid if any of the following persons have designated any other property as their principal residence: a specified beneficiary of the trust; a spouse of a specified beneficiary unless the spouse is living apart from the specified beneficiary pursuant to a judicial separation or a written separation agreement; a child of the specified beneficiary unless the child is at least 18 years old or married; a parent of the specified beneficiary unless the specified beneficiary is either married or at least 18 years old; or a sibling of the specified beneficiary unless either the sibling or the specified beneficiary is either married or at least 18 years old. A property which is validly designated as the principal residence of a trust is deemed to have been designated by every beneficiary of the trust as that person's principal residence for the calendar year ending in the relevant fiscal year of the trust. This rule prevents the trust beneficiaries from designating any other property as their principal residence for the year. 3

4 How will the Trust be set up? Once the form of the Trust has been agreed upon, we will arrange a meeting to set up the trust where the following will occur: Trust o the trust will be settled by the client with $10.00 in Canadian currency. This means that on the date when the trust agreement is to be signed, the client should bring with her $10 for this purpose; o the client will sign four original trust documents as Settlor; o o the client will sign all four documents as Trustees; Our office will retain two original trust documents, one original will be given to you and one will be used for Land Title Purposes at a later date o three notarially certified copies will be made for your accountant who will file the income tax returns and for the purposes of you opening a bank account in the name of the Trust; Transfer of Beneficial Interest, Agency Agreement and Bare Trust Agreement o If you intend to defer the payment of property transfer taxes, you will sign a document called a Transfer of Beneficial Interest, and Agency Agreement and an attached Bare Trust agreement which will operate to transfer beneficial ownership of your recreational property (and vehicles) to the Trust. You will each continue to hold these assets in your own name as bare trustee on behalf of the Trust; o The reason for the Agency Agreement is to first establish that there is a relationship of principal and agent between the parties. Having established the relationship, then the principal directs that the agent hold the property as a bare trustee for the beneficiary (who is also the principal). The main reason for pairing these documents is to make it absolutely certain that the bare trustee relationship is not seen as a real trust attracting income tax consequences and the necessity of making filings as a trust with the Canada Customs Agency (CRA). Specifically, the CRA has accepted that as long as there is absolutely no discretion held by the bare trustee, then that party was not effectively a trustee; Form A Transfers o you will sign three copies of two different Form A Transfers, one transferring legal title to your recreational property from your name as bare trustee to your name as Trustee of the Trust and the other a blank Form A Transfer (which would allow your Trustees to avoid Property Transfer taxes completely after your death by transferring legal title to your recreational property to a subsequent third party purchaser); Wills and Enduring Powers of Attorney Although the Trust will operate to act as a substitute will with respect to the recreational property, your will remains in place in case it is required at some point in the future. In addition, the Trust will permit an alternate trustee to manage the recreational property if you cannot during your lifetime, but your power of attorney will be in place in case it is required as well, i.e. to file tax returns. 4

5 Banking Arrangements Subsequent to the meeting setting up the trust, you will need to set up a bank account in the name of the Trust with you as the signing authority. In addition, you will need to arrange for ownership of your cash and investment assets to be transferred from you personally into the name of yourself as Trustee of the Trust. We can assist you with this. Trust Minute Book We will prepare a Trust Minute Book, to include the following: o The original signed trust document; o Copies of any cheques or descriptions of any property given to the trust; o List of trustee names and addresses; o A record of all decisions and financial transactions of the trust (i.e. minutes of trustee meetings and copies of resolutions including any resolutions paying income to you, paying capital from the trust to you, regarding any unused income and regarding the payment of bills relating to the trust such as legal or accounting fees); o Copies of income tax returns; and o A checklist of deadlines o Fiscal year end (Dec 31); o Preferred beneficiary income tax filing (March 31 or March 30 in a leap year); o Trust income tax and information return filing (March 31 or March 30 in a leap year); and o Information slip filing (such as a T3 Supplementary) Feb 28 or Feb 29 in a leap year. Property Transfer Tax Issue A transfer to a trust will trigger property transfer taxes under the BC Property Transfer Tax Act (1% of the first 200,000 and 2% of the balance). There is a way to work around this issue where legal title to the investment property will continue to be held by you as bare trustee on behalf of yourself as trustee of the Trust for the benefit of the beneficiaries of the Trust. The mechanisms to effect this transfer are an Agency Agreement, a Bare Trust Agreement, a Transfer of Beneficial Interest and a duly executed Form A Transfer. Legal title to your investment property in the name of the Trust will not be registered until after you pass away and the property transfer taxes will be payable at that time by the trust. It is important to note that while this strategy will avoid the payment of property transfer taxes at this time, there is a risk that a creditor could register a judgment against the property against you as bare trustee. That said, there is a large amount of unregistered trust property in existence and you may be prepared to accept this risk. 5