I had the benefit of attending the Law Society of Ontario’s replay of the Annotated Alter Ego Trust and Discretionary Trust. This program covered a range of practical topics including the taxation of trusts, establishing trusts, client retainers and, of course, a review of the annotated alter ego and discretionary trusts. While all of the presentations were insightful, I would like to highlight the presentation of David Stevens of Gowling WLG (Canada) LLP on the alter ego trust.

As with many trusts, the alter ego trust can be a useful tool for tax and estate planning purposes. Generally speaking, a transfer to a trust is taxable under the Income Tax Act, 1985 (“ITA”) except for three circumstances that are identified in sections 73(1.01) and 73(1.02) in which a transfer is taxed on a deferred basis. One of those circumstances is where an eligible transferee is a trust created by an individual. An alter ego trust falls within this category. This type of trust is characterized by the following features:

1. It is an inter vivos trust established after 1999;
2. The settlor must be entitled to receive all of the income of the trust that arises before their death, and no person other than the individual may receive or obtain the use of the income or capital of the trust prior to the settlor’s death; and
3. The settlor must be at least 65 years of age when the trust is created.

Assets that are transferred to an alter ego trust will not form part of the settlor’s estate and therefore, will not be subject to estate administration tax. This can eliminate or significantly reduce the estate administration tax payable. This is notable considering that estate administration tax is payable at a rate of 1.5% on the value of the deceased’s estate where the estate’s value exceeds $50,000. Taxation of an alter ego trust occurs when the settlor of the trust passes away, in the form of a deemed disposition of the trust assets at fair market value.

Given the nature of an alter ego trust, it is typically the case that the settlor is also a capital beneficiary and a controlling trustee. As such, section 75(2) of the ITA would apply with the effect that the all of the income and capital gains of the trust will be deemed to be income and gains of the person.

While an alter ego trust is not a complete substitute for a will, it may achieve some of the objectives of the testator and is worth considering in the right circumstances.

Thanks for reading,

Ashley Naipaul