Navigating the Capital Gains Maze: Tax Strategies for Life Interest Trusts
Adrian C. Spitters FCSI?, CFP?, CEA? President, Author, Private Wealth Advisor
I Execute Tax-Efficient Investment Portfolio Solutions So That Your Business, Family, And Estate Assets Are De-Risked And Protected Against Financial Risk, Economic Threats, Inflation And Higher Taxes.
To ensure you continue to receive ALL my posts, Click on the NOTIFICATION BELL below my profile picture.
Source Article: Estate-planning trusts will be hit hard by CGIR hike
The Conundrum of Life Interest Trusts
As the federal government prepares to increase the capital gains inclusion rate (CGIR) from 50% to two-thirds, affluent Canadians are grappling with the potential implications for their investment strategies and estate planning. One area of particular concern is the impact on life interest trusts, often used for probate planning, privacy, and other estate-planning purposes.
According to the budget document, no trusts were explicitly excluded from the CGIR increase. However, as of press time, draft legislation has yet to be tabled, leaving many questions unanswered.
Proactive Planning for Life Interest Trusts
Clients with life interest trusts may consider allocating gains to beneficiaries before death if the trust deed permits it. Alternatively, they may be able to transfer property out of a life interest trust on a tax-deferred basis while the beneficiary is alive, allowing the beneficiary to sell the property and access the 50% CGIR on the first $250,000 of gain in a year.
"What we want to avoid is the deemed gain being trapped in the trust on the death," explains tax expert Jamie Pryor. However, he cautions against transferring assets out of the trust if it defeats the original purpose, such as providing income for a spouse during their lifetime while preserving capital for a residual beneficiary.
Maximizing Tax Efficiency
In cases where the trust's terms do not allow for capital allocation, clients could elect out of the tax-deferred rollover of property into the trust on or after June 25. This would mean the gain on the property would be taxed in their hands, and the trust would receive the asset at the new higher cost base.
"That would give us an opportunity to use our $250,000 threshold," Pryor notes. "It also allows us to use up our personal [capital] losses ... to offset [gains]."
Trusts will continue to have access to the 50% inclusion rate until June 25. However, the budget document did not address the rate at which gains realized in a trust prior to June 25 but allocated to beneficiaries between June 25 and the end of the year will be taxed in the hands of beneficiaries.
领英推荐
"I would allocate [gains] out [before June 25]," Pryor advises. "I wouldn't take my chances and hope they get it right [in the legislation]."
Understanding Life Interest Trusts
A life interest trust, such as an alter-ego trust or joint spousal/common-law partner trust, is set up by an individual aged 65 or older for their own benefit or that of their spouse. Spousal trusts can be established at any age for the benefit of a spouse.
To qualify as a life interest trust, the settlor and/or spouse beneficiary must be entitled to receive all trust income arising before their death, and no other person can receive or obtain the use of the trust's income or capital before their death.
Asset transfers to these trusts can typically take place on a tax-deferred or rollover basis, with an option to elect out of the rollover and trigger a deemed disposition at fair market value.
A Partnership for Holistic Wealth Management
To navigate this complex financial landscape, I have partnered with one of Canada's leading private wealth management firms serving high-net-worth clients nationwide. This firm offers professional investment management and comprehensive wealth planning from a client-first perspective, providing affluent Canadians access to sophisticated strategies and solutions usually reserved for the ultra-affluent.
As the legislative process unfolds, proactive planning and expert guidance will be crucial for affluent Canadians seeking to preserve their wealth and minimize their tax liabilities. By understanding the nuances of life interest trusts, individuals can position themselves to weather the changes while safeguarding their financial future.
To learn more or schedule a complimentary consultation, email us at [email protected] or use my Calendly Link.
To continue receiving my posts, please follow Adrian C. Spitters FCSI?, CFP?, CEA?, then click on the NOTIFICATION BELL below my profile picture to ensure you do not miss any of my posts, and finally sign up for my LinkedIn Newsletter, Lasting Financial Security?.
Please also check out and join my new group, The Counter Narrative?.