Home > Personal Strategies > Estate Planning & Wealth Preservation > Family Trusts & Income Taxes
As Canadians, not only do we have high marginal tax rates, but those high marginal tax rates also apply at lower levels of income. Our tax laws however do provide certain ways to minimize or defer taxes.
Do you have a Registered Retirement Savings Plan?
An RRSP is a form of a trust, where the Trustee holds your investments, to be paid out to you when you retire or to your beneficiaries after death. Tax laws provide that not only will contributions to an RRSP be deemed tax deductible, but income earned within the trust will not be taxed until actually paid out.
The Family Trust
Another trust which can be used to save income taxes is the family trust. Where the trust owns income producing assets (for example a management company which supplies staff to a business or a leasing company which leases equipment to a business), the income earned by the trust can be allocated to the beneficiaries of the trust. If those beneficiaries are children or a spouse with little or no income, then the beneficiaries will not be taxed on that income. Such beneficiaries can receive tax-free income of approximately $21,000 each annually, saving an individual with a 39 percent marginal rate (in Alberta) about $8,190 each year.
The income earned by the trust need not be paid to the beneficiaries each year, but must be allocated to them and declared in their individual tax returns. Because parents are responsible for the basic needs of their children, including shelter, clothing and food, the Canada Revenue Agency has taken the position that the children's trust income cannot be used for these purposes; however, such trust income can be used to pay for the children's non-essentials, such as sporting activities, vacations and education. Where possible, these activities should be paid for directly by the trust on behalf of the children, rather than just reimbursing the parent.
The costs of starting up and administering such a trust are much lower than the annual tax savings.
In the normal course, you will incur these "non-essential" expenditures for your children in any event. Why not take advantage of the tax saving made available to you by our current tax legislation? You are encouraged to contact us to obtain more information or discuss this matter.