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The Basics of Canadian Trust Funds Thumbnail

The Basics of Canadian Trust Funds

Trust funds have long been recognized as versatile financial tools for wealth management, estate planning, and charitable giving. Let us look at the basics of Canadian trust funds and explore their structure, the key players, and the legal framework that governs them.

Understanding Trust Funds

A trust fund is a legal arrangement that allows a person or institution, known as the trustee, to hold and manage assets on behalf of another party, referred to as the beneficiary.1 Trust funds are established to achieve various financial goals, including wealth preservation, tax planning, and providing for future generations.

Trust Fund Definitions

Before we dive into the various types of trust funds, let us clarify some of the most common terms you will see when discussing trust funds.

  • Settlor: The individual who establishes the trust and transfers assets into it.
  • Trustee: Responsible for managing and administering the trust following the trust deed and legal requirements.
  • Beneficiary: The person or entity for whose benefit the trust is created; the one receiving income or assets from the trust.
  • Protector: Optional role in some trusts, appointed to oversee the trustee’s actions and protect the interests of beneficiaries.

Types of Trust Funds in Canada

There are a few different types of trust funds available for Canadian investors. They include:

Testamentary Trusts
Testamentary trusts are created within a will and activated upon the death of the settlor (the person establishing the trust).2 They’re commonly used for estate planning to manage and distribute assets to beneficiaries over time.

Inter Vivos Trusts
Inter Vivos trusts are established during the settlor’s lifetime, allowing them to transfer assets to the trust for the benefit of others.3 They are used for a range of purposes, such as tax planning, asset protection, and charitable giving. The Canada Revenue Agency (CRA) has identified 31 different types of living trusts—for a variety of beneficiaries.

Discretionary Trusts
Discretionary trusts provide the trustee with discretion in distributing income and capital among beneficiaries.4 They offer flexibility in meeting the changing needs of beneficiaries over time.

How are Trust Funds Taxed in Canada?

Trusts in Canada are subject to taxation, with specific rules governing income allocation, tax rates, and reporting requirements.5 Income earned by the trust may be taxed at the trust level or allocated to beneficiaries depending on the type of trust and its provisions. Proper tax planning is essential to optimize the tax efficiency of trust funds.

Canadian trust funds serve as powerful instruments for individuals and institutions seeking to manage and protect assets for the benefit of future generations. Whether they are used for estate planning, tax optimization, or charitable endeavors, understanding the nuances of trust funds in Canada is crucial for effective trust fund management. As with any complex financial instrument, seeking professional advice from legal and financial experts is highly recommended to successfully navigate the intricacies of trust funds.

  1. https://www.lawdepot.ca/trust-fund/
  2. https://www.investopedia.com/terms/t/testamentarytrust.asp#
  3. https://www.investopedia.com/articles/personal-finance/092115/how-set-trust-fund-canada.asp
  4. https://www.bdo.ca/insights/understanding-family-trusts
  5. https://wealthmanagementcanada.com/blog/trust-fund-canada/#

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.