Monday, February 20, 2012

No Indefinite Tax Deferral with Trusts

Ontario Real Estate Source

By Brian Madigan LL.B.

There seems to be rather common misconception when it comes to trusts, and that is, that taxes can be avoided altogether.

This is not true. A trust files annual tax returns like everyone else and pays a rate of tax which is oftentimes higher than an ordinary taxpayer. It is only a testamentary trust which pays rates at the graduated scale, but misses out on personal deductions.

Capital gains taxes can be deferred for some time, but not as long as an individual might. An individual may defer capital gains until such time as they sell the asset or die, in which case, they are deemed to have sold the asset.

However, a trust is stuck with the “21 year rule”. Every 21 years a trust is deemed to have disposed of its capital assets at fair market value, whether they have been sold in fact or not. That means that they must report and declare the capital gain in their income tax returns filed for the 21st year.

As you can appreciate, that is not always the best strategy.

Trusts are not always the most appropriate solution but they can be utilized very creatively for estate planning purposes. They, in fact, are a very useful vehicle to hold a family cottage for the benefit of a number of beneficiaries. And, it may avoid the necessity of having to sell it to strangers!

Brian Madigan LL.B., Broker is an author and commentator on real estate matters, if you are interested in residential or commercial properties in Mississauga, Toronto or the GTA, you may contact him through RE/MAX West Realty Inc., Brokerage 416-745-2300.