Estate Planning in Canada: Some basic considerations

Canada is a country which does not charges any taxes under the name of the estate tax. This is true but the taxes for the state fall under the category of the deemed deposition tax. The deemed disposition tax includes the taxes which are similar to the estate taxes and are applicable when a person is dead.

Thus while having the estate planning for yourself in Canada you must be aware of certain small things which includes the issues related to the taxation policies. The deemed deposition tax is names as it is deemed at the time of the disposition of the person i.e. the death. The capital gains that are made by the sale also includes the retirement accounts and the income which is received from the stocks, real estate investments, treaties, bonds and other plans such as the life insurance which proceeds in the death year for any person which starts from the first day of January and continues up to any month. The final tax returns also include the tax gains which are filled in the year of death. The final taxation under the real estate is substantial and consists of the tax rates up to 29 percent. This also includes the provincial and the probate tax.

A good thing about the disposition tax is that it is also transferable under the surviving spouse. The taxes are also deferred even if the assets are transferred to the surviving partner. The taxes are also deferred in case the spouse sells the assets and the tax is applied. When the person also dies and the assets are passed on to their successors, the half of the capital gains which are earned from the stocks, bonds and other real estate investments. 

A better option is to make a will before the death. This is beneficial because if you make the will the successors would get the real estate property according to the person’s choice. In the otherwise situation the Canadian province has the right to decide the distribution of the same without the wish. According to the laws which are followed by the policies, the amount in cash or the property up to first $50000 is deposited to the surviving partner and the rest are distributed among the spouse and the children

If there is no spouse or the child then the parents enjoys the amount, which is followed by the brothers and sisters.

If the person dies without the payment of the will then it would also lead to the delays and the payment of the extra expenses.

These considerations are also applicable in case of an offshore trust which is the offshore trust involving the offshore jurisdiction. Now it is very important to have the offshore trust in order to consider the trustee for any kind of real estate. This is because it is of prime importance to have a trustee during the real estate buying and selling. The settling or the transferring of the policies is also managed under the offshore trusts.

Offshore Trust – An Overview

The only way to protect your wealth or part of it is through a trust. It could be through an onshore discretionary trust or an offshore discretionary trust. A trust is an arrangement where a person (the settler) creates a trust and the trustees hold and manage assets (the trust fund) for the benefit of others (the beneficiaries). An offshore trust or overseas trust is a trust that is resident outside the "resident country" for tax purposes. The residence status of an overseas trust is important because it determines how the trust and the beneficiaries are taxed in your resident country for income tax and capital gains tax. The resident status of a trust does not directly affect the inheritance tax in most cases.

While the tax advantages of using offshore trusts are limited, they can still play a key role in estate and financial planning to help you preserve and enhance your wealth.

You may benefit from using an offshore trust if you are a Canadian resident and:

• You have assets in various locations throughout the world;
• You intend to distribute assets to individuals living outside Canada during your lifetime;
• You have recently immigrated to Canada; or
• You intend to leave Canada. If you are not a Canadian resident, an overseas trust can:
• help you distribute assets to Canadian residents tax effectively, either during your lifetime or through your will; or
• provide significant tax benefits if you plan to immigrate to Canada

An offshore trust is established under the laws of another country and is administered by a non-Canadian trustee, typically a financial institution. An overseas trust has a settler, a trustee and beneficiaries. If you are the settler of the trust, you will fund the trust either by giving or lending property to it. A trust is separate from you and your beneficiaries, and is governed by the laws of the country in which the trustee is resident.

The trustee becomes the legal owner of the trust property and is required to manage the property as directed in the trust deed. The trustee is also responsible for distributing trust assets to the beneficiaries you have named in the trust deed. The trustee has full decision-making powers over trust assets based on the provisions of the trust deed, and it is essential that you have complete confidence in your choice of trustee.

If you are planning to immigrate (or have recently immigrated) to Canada, the assets in an offshore immigration trust can earn income and capital gains from foreign sources free from Canadian income tax for up to the first 60 months of the immigrant’s Canadian residency. Because the duration of the Canadian tax holiday is based upon the time you are resident in Canada, setting up the trust prior to the move to Canada maximizes the benefits. However, setting up such a trust may generally still provide some benefits even if established within 60 months after immigration to Canada.

Because of the complexity of the rules governing overseas trusts, you should obtain expert advice from experienced Canadian tax specialist who is familiar with your particular situation. You will need tax, legal, and investment advice to ensure that the trust is structured for your maximum advantage. Your tax specialist will also need to consult with reputable advisors in the jurisdiction where the trust will be established to ensure familiarity and compliance with local laws as well as jurisdictions in which the beneficiaries reside.

Characteristics of An Offshore Trust

Many are not aware of what is an offshore trust. The definition in the modern sense does not differ much from the traditional concept. However, today it is held at an offshore financial instruction. The offshore trust functions like a normal tourist. The offshore assets are protected which is a great advantage of having an offshore trust. It is formed through an arrangement that is entered into by a person or a group that is referred to as a trustee. The trustee and the settler come into an agreement. The settler is a group of people or a distinct person. The provisions are made in the form of a legal agreement. It is known as a deed of trust that is formed between the trustee and the settler.

Why form A Trust Fund?

Why an offshore trust formed and what are the benefits? Overseas trusts are formed due to the distinct asset protection that is provided. One can hold assets as well as funds and property and these assets are then managed in accordance with the rules laid down in the deed of trust. There are offshore tax benefits that one can avail of as well which are preferred to the taxes residing in one’s country. The distribution of the funds or the benefits of the assets among the group of persons who are known as beneficiaries of the trust fund is also dictated by the deed of trust.

Characteristics of Overseas Trusts

Thus, when you are talking of offshore trusts the following characteristics are highlighted:

• One will get additional benefits in terms of offshore asset protection than what is available onshore

• The tax benefits are better in case of an offshore trust as compared to onshore tax liabilities

• The trustee of a trust fund as well as the offshore trust company is entrusted with the management of the trust

• These parties are bound by fiduciary duty to uphold the terms of such an agreement

• There are requirements that are set out in the deed of trust

• There is a trusting arrangement which is in writing and by its terms they need to provide for the beneficiaries

Reasons Behind Such Funds

Why are offshore trusts formed? It is formed for a variety of reasons and many of the clients use such a trust in order to ensure their financial security in their retirement time as well as to provide funding for school fees, university fees and other requirements. When one has decided to set up an offshore trust, they need to decide what kind of trust it will be as well as the duration of the trust and other criteria regarding a trust. One also needs to decide on the following criteria:

• Will the trust be revocable or not

• Will the trust be discretionary

• Specifying the rights as well as duties and obligations as well as expectations of the trustee.

These points need to be considered when setting up such a trust fund.