A Tale of Two Countries – Trusts in the U.S. and Canada
They love football, we love hockey. Their zee is our zed – and their Trump is our Trudeau. While we share a common border with the U.S., there are many differences between our two nations – and the reasons for setting up a trust can differ significantly by country as well.
The U.S. has a high estate tax for wealthy individuals – up to 40% on assets, with the first $5.5 million or so exempt. Not surprisingly, trusts are used aggressively in many situations to reduce estate values and minimize this estate tax as much as possible.
In Canada, there is no estate tax per se – although there is an estate administration tax (probate fee) in some provinces and there are often taxes payable on capital gains. But with no capital gains taxes on principal residences, the need for trusts as part of U.S.-style estate planning simply isn’t there.
This doesn’t mean that trusts aren’t a valuable planning tool in Canada. They can still be used to shift income from higher-taxed family members to those in lower tax brackets, or to provide dedicated funding for dependants, such as a disabled spouse or child, or as means of creditor protection amongst many other reasons. But there’s a kinder, gentler push behind trust planning in Canada, owing to the less punitive (in most cases) taxation of estates here.
This Globe and Mail article provides a good overview of the many potential uses of trusts in Canada today, and why a more aggressive approach isn’t needed here: https://www.theglobeandmail.com/globe-investor/personal-finance/a-tax-tool-thats-not-just-for-trust-fund-babies/article22996097/
The complexities of cross-border beneficiaries
Trust issues can be clean and tidy in Canada and the U.S. when everything about a trust stays fully north or south of the border. But what happens when trust worlds collide?
In short, it can get complicated, and specialized planning is often needed to avoid additional taxation. While avoiding a cross-border trust arrangement is one way around these issues, avoidance isn’t always possible, such as when a Canadian trust is settled with a Canadian beneficiary, but that individual moves permanently to the U.S. and becomes subject to U.S. tax laws.
This Collins Barrow advisory offers a more detailed discussion of some of the cross-border issues relating to Canadian/U.S. trusts: http://www.collinsbarrow.com/en/cbn/publications/u.s.-citizens-and-canadian-trusts.
Thank you for reading … Have a great day!