Bob Gauvreau explains how trusts work in Canada: an agreement where a trustee manages assets for beneficiaries, files a T3 return, and can split income across family members. Trusts are hard to change once set up, so they need expert help to match your family and business goals.
Questions this video answers
A T3 (trust return).
$100,000 (used as a numeric example).
Chapters
So we want to understand how to set up a trust. Or when we think of a trust, what does that actually mean? Sometimes it's a trust fund where we have beneficiaries that we want to set up and make sure are financially taken care of in the future. Let's talk about a trust. So there's different types of structures that we can actually utilize for a business or for personal. So we think of proprietorship. That's essentially an unincorporated business that gets taxed as an individual, or we assume all the risk as an individual. Probably not the preferred approach. We have a corporation. A corporation is a separate legal entity. It has its own birth certificate. It has its own filing obligations. It is completely separate. One great thing about using a corporation is that we have a little bit less risk associated with our personal by setting up a corporate structure. Super important if we're looking at risk mitigation. Now let's enter in a trust. What is a trust? Well, it's actually not a separate legal entity. It's not an individual. It's actually just really an agreement. But it does have a separate tax filing called a T3 or a trust return. Now, why would we set up a trust? Well, a trust is essentially an agreement that says this trust or this agreement owns something. So if we think of a corporation, for example, a trust can own a corporation. It can be the main shareholder inside a corporation. Typically, we don't have trusts owning any assets. There's no assets owned inside a trust. It's owned in another entity or by another being. But what we would probably try and do is any assets you have would be inside a corporation owned by this trust. Let's talk about this trust. So inside a trust, there's a few key important things. One is, who are the beneficiaries? We're not owners. We're not shareholders. We were beneficiaries. What does a beneficiary mean? It means that someone inside this trust who's a beneficiary is entitled to receive any of the earnings or wealth accumulated from the ownership of this agreement. So, for example, for myself, I have a trust with my wife and my two kids in there. All of us are beneficiaries. At the end of the day, if my company makes money, let's say I make $100,000 this year, I $100,000 can go into the trust and I can allocate that income to any beneficiaries I like. There's some rules around it, but that's how the beneficiary component works inside A trust. What else do we need to know about a trust? Well, there's trustees. Trustees are essentially the people who are in charge of the direction of the trust. So for example, that $100,000 comes in. I'm the only trustee on a trust. I've got my beneficiaries there. I can allocate this income to any of them, but I don't want to. I want to allocate it to me. So because I'm the trustee, I'm entitled to giving that direction. So I take the $100,000. So it's important to understand that trustees are really the people who have the voting rights of that agreement, essentially. And then there's a few other weird components that come into a trust. A settler. A settler is someone who officially essentially engages the trust to be active. Typically they have to donate something to the trust in exchange for the trust to be in existence. They are not, they are not a beneficiary, they are not a trustee, really. They're a one time contribution to a trust. Very strange. But it's an old school, old legislation that's never really been updated. So why would a trust be beneficial? Well, ultimately, when we have multiple beneficiaries, we can income split. So if the corporation or whatever assets you own are earning income, we can split it with all the beneficiaries. In fact, we can actually create a corporate beneficiary as well. Where if our company makes money, but we want those funds out of our operating business to protect it, we can actually transfer it up through the trust and into a corporate beneficiary and we can protect our assets up there. Trusts get to be a little bit complicated and it's not something that you want to do on a cost effective basis to get it set up. You want a trust set up according to your goals, your ambitions and your family. Because if a trust does not get set up properly, there's not really a way to amend that trust to fix it in the future. We have to start over. So when you are creating a trust, we need to be very clear on the objectives of the trust and make sure that we give it as much flexibility as we possibly can on its formation. This is not something you want to create on your own. You definitely want the advice and guidance of an expert. But using a trust definitely gives us opportunity for transition of future assets, future net worth, and also the minimization of tax along the journey as we can split it with our multiple beneficiaries. If you want to learn more about trusts, make sure that you talk to someone on our tax team who can certainly support you in getting this set up the right way.
