Alter Ego Trusts Offer Estate Planning Opportunities

by Del Elgersma

If you are over 65, the Income Tax Act of Canada permits you to use an additional type of trust to achieve your estate planning goals.

When you transfer an asset to a trust, it is no longer your personal asset (even though you might still control and benefit from it).  A trust is a legal relationship, not a separate legal entity, however a trust is still taxed as a separate individual (as if it were a legal entity).

Since a trust is taxed as a separate individual, for a Canadian under age 65, a transfer of an asset to a trust in most cases is treated by CRA as a disposition at fair market value.  If the fair market value includes capital gains, income tax is then payable.  Therefore, transfers to trusts generally happen only in situations like:

  • to a “spousal trust”, which is an exception to the general rule but has very specific rules that apply during the spouse’s lifetime,
  • transferring an asset that does not have a capital gain, such as cash or a principal residence, or new company shares as part of an “estate freeze”.

However, since 2000, a Canadian who is age 65+ is allowed to transfer assets to a certain kind of trust, either for themselves (an “alter ego trust”) or for themselves and their spouse/partner (a “joint spousal trust” or “common-law partner trust”). These trusts enjoy the same benefits of using a trust, with the added advantage of not immediately triggering liability for income tax on capital gains.

To create either of these trusts, you must be over the age of 65, and an alter ego trust must have the following terms:

  • you must be entitled to receive all of the income of the trust before you have died, and
  • no one except you can receive any of the capital of the trust before you have died.

and, likewise, a joint spousal trust must have the following terms:

  • you and your spouse/partner must be entitled to all of the income of the trust until both of you have died, and
  • no one except you and your spouse/partner can receive any of the capital until both of you have died.

An asset held by one of these trusts is not legally owned by you, so it does not form part of your estate or pass under your will.  However, during your lifetime you can continue to control the asset (as the trustee), or other(s) can manage the assets for you.

As long as you have legal capacity, you can also decide (and change) who will receive the trust’s assets after your (and/or your spouse’s) death, or even cancel the trust entirely.

Using a trust like this has many possible advantages, including:

1) Probate Costs
Transferring assets to a trust avoids or reduces the costs of applying for probate of your will, and payment of Provincial probate fees. (click here for more information about probate fees).

2) Estate Litigation
The law in British Columbia gives your spouse or children the right to apply to the Supreme Court to seek to change the gifts in your will.  However, this right does not apply to the gifts in these trusts, so using a trust discourages or avoids will challenges.  This can be particularly important for second marriage or blended family situations.

3) Centralized Management
If you were to become incapable, others you choose to be trustee, such as family members or friends, can manage the trust’s assets.  As a result, you will not require a power of attorney for the assets in the trust.

4) Privacy
If probate of your Will is required (which is very likely if you own land or other valuable assets), your will and the value of all of the assets in your estate will be publicly visible.  Also, certain people are entitled to receive a copy of your will after your death.  These requirements do not apply to a trust, so except in the case of estate litigation, the trust’s assets and beneficiaries stay confidential.

Are these trusts right for everyone? Definitely not. There are also disadvantages and other factors to be considered, including:

  • transferring real estate into a trust may require immediate payment of provincial property transfer tax,
  • real estate that is encumbered (such as by a mortgage or deferred property tax) cannot be transferred to a trust,
  • a trust costs much more than a will to create and maintain, including an annual income tax return for the trust,
  • using a trust adds complexity to your finances during your lifetime and requires co-ordination with your will,
  • if any trust assets are to be held in trust for someone after your death, using a will may get better tax treatment,
  • if any gifts are to be made to a charity, this is more difficult to accomplish using a trust than a will.

Still, although these trusts are not for everyone, they have considerable potential as an estate planning tool for Canadians 65+.

For a personal review of your estate plan, including whether a trust might be right for you, please contact us for a consultation.


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