Different Types of Trust?

A trust is either a testamentary trust or an inter vivos trust. The following are different types of trusts and definitions taken directly from the 2005 T3 Trust Guide on the Canada Revenue Agency website:

1. Alter ego trust
2. Communal organization
3. Deemed resident trust
4. Employee benefit plan
5. Employee trust
6. Insurance segregated fund trust
7. Joint spousal or common-law partner trust
8. Master trust
9. Mutual fund trust
10. Non-profit organization
11. Personal trust
12. Retirement compensation arrangement (RCA)
13. RRSP, RRIF, or RESP trust
14. Salary deferral arrangement
15. Specified personal trust
16. Spousal or common-law partner trust
17. Unit trust - ( commonly referred to as "Income Trusts" ~ Income Trust FAQ's)

See Also: USES OF TRUSTS

TESTAMENTARY TRUST

A testamentary trust is a trust or estate that is generally created on the day a person dies. All testamentary trusts are personal trusts. The terms of the trust are established by the will or by court order in relation to the deceased individual's estate under provincial or territorial dependant's relief or support law.

Generally, this type of trust does not include a trust created by a person other than a deceased individual, or a trust created after November 12, 1981, if any property was contributed to it other than by a deceased individual. Contact Canada Revenue Agency for rules about testamentary trusts created before November 13, 1981.

If the assets are not distributed to the beneficiaries according to the terms of the will, the testamentary trust may become an inter vivos trust.

Under proposed legislation, for taxation years ending after December 20, 2002, if the trust incurs a debt or other obligation to pay an amount to, or guaranteed by, a beneficiary or other person or partnership with whom any beneficiary of the trust does not deal at arm's length (all of whom will be referred to here as the beneficiary), the testamentary trust may become an inter vivos trust.

This does not apply for a debt or other obligation:

• incurred by the trust in satisfaction of a beneficiary's right to enforce payment of an amount payable by the trust to the beneficiary or to receive any part of the trust's capital;
• owed to the beneficiary as a result of services provided by the beneficiary for the trust; or
• owed to the beneficiary as a result of a payment on behalf of the trust for which property was transferred to the beneficiary within 12 months of the payment and the beneficiary would have made the payment had they been dealing with the trust at arm's length.

Back to top

INTER VIVOS TRUST

An inter vivos trust is a trust that is not a testamentary trust.

Grandfathered inter vivos trust

A grandfathered inter vivos trust is one established before June 18, 1971, which:

• was resident in Canada without interruption from June 18, 1971, until the end of the taxation year;
• did not carry on any active business in the taxation year;
• did not receive any property as a gift since June 18, 1971;
• after June 18, 1971, did not incur any debt or obligation to pay an amount to, or guaranteed by, any person with whom any beneficiary of the trust was not dealing at arm's length;
• did not receive any property after December 17, 1999, as a transfer from another inter vivos trust, where:
• the other trust is not grandfathered; and
• there is no change in the beneficial ownership of the property on its transfer; and
• for taxation years beginning after 2002, was not a trust which received a contribution of property (as defined on page 5) after June 22, 2000.

Note:
When a trust has elected to be treated as a deemed resident trust for 2001 or 2002, this additional condition will apply to the determination of the status of the trust as a grandfathered inter vivos trust for those taxation years as well.

Alter ego trust

This is an inter vivos trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor is entitled to receive all the income that may arise during his or her lifetime, and is the only person who can receive, or get the use of, any income or capital of the trust during the settlor's lifetime. A trust will not be considered to be an alter ego trust if an election is filed with the trust's return for its first taxation year asking not to have this provision of the Act apply.

Communal organization

We consider an inter vivos trust to exist when a congregation:

• has members who live and work together;
• adheres to the practices and beliefs of, and operates according to the principles of, the religious organization of which it is a part;
• does not permit its members to own property in their own right;
• requires that its members devote their working lives to the congregation's activities; and
• carries on one or more businesses directly, or manages or controls the businesses through a business agency, such as a corporation or trust, to support or sustain its members or the members of another congregation.

The communal organization has to pay tax as though it were an inter vivos trust. However, it can elect to allocate its income to the beneficiaries. For more information, see Information Circular 78-5, Communal Organizations in the Canada Revenue Agency website.

Back to top

Deemed resident trust

This is a trust resident in another country, but which is considered resident in Canada for certain tax purposes. Usually, such a trust has received a contribution from a resident or former resident of Canada. A trust is a deemed resident if:

• a resident of Canada transferred property to the trust and is either beneficially interested in the trust (for example, as a beneficiary of the trust), or is related to such a person (including an aunt, uncle, nephew, or niece of the beneficiary); or
• the beneficiary acquired an interest in the trust by way of purchase or as a gift or inheritance from a Canadian resident who transferred property to the trust.

Under proposed legislation, for the 2003 and subsequent taxation years, a trust will generally be considered to be a deemed resident if it acquired property from a person who is resident in Canada or if any of the beneficiaries are resident in Canada and a contribution of property was made by a resident or former resident of Canada. If you need help in determining whether the trust is a deemed resident of Canada, contact Canada Revenue Agency.

Employee benefit plan

Generally, this is any arrangement under which an employer makes contributions to a custodian, and under which one or more payments will be made to, or for the benefit of, employees, former employees, or persons related to them.

For more information, and for details on what Canada Revenue Agency consider to be an employee benefit plan and how it is taxed, see Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts, and its Special Release.

Filing note: An employee benefit plan has to file a return if the plan or trust has tax payable, has a taxable capital gain, or has disposed of capital property.

Because the allocations are taxed as income from employment to the beneficiaries, report the allocations on a T4 slip, not on a T3 slip. For more information, see the guides called Filing the T4 Slip and Summary Form and Filing the T4F Slip and Summary Form.

Employee trust

This is an inter vivos trust. Generally, it is an arrangement established after 1979, under which an employer makes payments to a trustee in trust for the sole benefit of the employees. The trustee has to elect to qualify the arrangement as an employee trust on the trust's first return. The employer can deduct contributions to the plan only if the trust has made this election and filed it no later than 90 days after the end of its first taxation year. To maintain its employee trust status, each year the trust has to allocate to its beneficiaries all non-business income for that year, and employer contributions made in the year. Business income cannot be allocated and is taxed in the trust.

For more information, see Interpretation Bulletin IT-502, Employee Benefit Plans and Employee Trusts, and its Special Release.

Filing note: An employee trust has to file a return if the plan or trust has tax payable, has a taxable capital gain, or has disposed of capital property.

Because the allocations are taxed as income from employment to the beneficiaries, report the allocations on a T4 slip, not a T3 slip. For more information, see the guides called Filing the T4 Slip and Summary Form and Filing the T4F Slip and Summary Form.

Back to top

Insurance segregated fund trust

Considered to be an inter vivos trust, this is a related segregated fund of a life insurer for life insurance policies. The fund's property and income are considered to be the property and income of the trust, with the life insurer as the trustee.

Filing note: You have to file a separate return and financial statements for each fund. If all the beneficiaries are fully registered plans, complete only the identification and certification areas of the return and enclose the financial statements. If the beneficiaries are both registered and non-registered plans, report and allocate only the income that applies to the non-registered plans.

Joint spousal or common-law partner trust

This is an inter vivos trust created after 1999 by a settlor who was 65 years of age or older at the time the trust was created, for which the settlor and the settlor's spouse or common-law partner are entitled to receive all the income that may arise from the trust before the later of their deaths, and are the only persons who can receive, or get the use of, any income or capital of the trust before the later of their deaths.

Master trust

This is an inter vivos trust. A trust can elect to be a master trust if during the entire time since its creation it met all of the following conditions:

• it was resident in Canada;
• its only undertaking was the investing of its funds;
• it never borrowed money except for a term of 90 days or less (for this purpose, the borrowing cannot be part of a series of loans or other transactions and repayments);
• it has never accepted deposits; and
• each of its beneficiaries is a registered pension plan or a deferred profit sharing plan.

Filing note: A master trust is exempt from Part I tax. A trust can elect to be a master trust by indicating this in a letter filed with its return for the taxation year the trust elects to become a master trust. Once made, this election cannot be revoked. However, the trust must continue to meet the conditions listed above, to keep its identity as a master trust. After the first T3 return is filed for the master trust, you do not have to file any further T3 returns for this trust. However, if the trust exceeds the foreign content limit, you may have to file a T3D, Income Tax Return for Deferred Profit Sharing Plan (DPSP) or Revoked DPSP, or a T3P, Employees' Pension Plan Income Tax Return. For more information, get a copy of these returns.

Back to top

Mutual fund trust

This is a unit trust that resides in Canada. It also has to comply with the other conditions of the Act, as outlined in section 132 and the conditions prescribed by Regulation 4801.

Non-profit organization

This is an organization (for example, club, society, or association) that is usually organized and operated exclusively for social welfare, civic improvement, pleasure, recreation, or any other purpose except profit. The organization will generally be exempt from tax if no part of its income is payable to, or available for, the personal benefit of a proprietor, member, or shareholder. For more information, see Interpretation Bulletin IT-496, Non-Profit Organizations.

Note that if the main purpose of the organization is to provide services such as dining, recreational, or sporting facilities to its members, we consider it to be an inter vivos trust. In this case, the trust is taxable on its income from property, and on any taxable capital gains from the disposition of any property that is not used to provide those services. The trust is allowed a deduction of $2,000 when calculating its taxable income. Claim this on line 54 of the T3 return.

For more information, see Interpretation Bulletin IT-83, Non-Profit Organizations - Taxation of Income From Property.

Filing note: A non-profit organization may have to file Form T1044, Non-Profit Organization (NPO) Information Return. For more information, see the Income Tax Guide to the Non-Profit Organization (NPO) Information Return.

Personal trust

This is either:

• a testamentary trust; or
• an inter vivos trust in which no beneficial interest was acquired for consideration payable either to the trust, or a person who contributed to the trust.

The person or related persons who create an inter vivos trust may acquire all the interests in it without the trust losing its status as a personal trust.

After 1999, a unit trust is not a personal trust.

Back to top

Retirement compensation arrangement (RCA)

This arrangement exists when an employer makes contributions for an employee's retirement, termination of employment, or any significant change in services of employment.

For more information, see the Retirement Compensation Arrangements Guide.

Filing note: You have to file a T3 return for the portion of an RCA that is treated as an employee benefit plan. A T3-RCA, Part XI.3 Tax Return - Retirement Compensation Arrangement (RCA), has to be filed to report the income of the other portion of the plan.

RRSP, RRIF, or RESP trust

Filing note: An RRSP, RRIF, or RESP trust has to complete and file a T3 return if the trust meets one of the following conditions:

• the trust has borrowed money and paragraph 146(4)(a) or 146.3(3)(a) of the Act applies;
• the RRIF trust received a gift of property and paragraph 146.3(3)(b) of the Act applies; or
• the last annuitant has died and paragraph 146(4)(c) or subsection 146.3(3.1) of the Act applies. If this is the case, claim an amount on line 43 of the T3 return only if the allocated amounts were paid in accordance with paragraph 104(6)(a.2) of the Act.

If the trust does not meet one of the above conditions and the trust held non-qualified investments during the taxation year, you have to complete a T3 return to calculate the taxable income from non-qualified investments, determined under subsection 146(10.1) or 146.3(9). If the trust is reporting capital gains or losses, it has to report the full amount (that is, 100%) on line 01 of the return.

If the trust does not meet one of the above conditions and the trust carried on a business, you have to complete a T3 return to calculate the taxable income of the trust from carrying on a business. Do not include the business income earned from the disposition of qualified investments for the trust.

Salary deferral arrangement

Generally, this is a plan or arrangement (whether funded or not) between an employer and an employee or another person who has a right to receive salary or wages in a year after the services have been rendered.

For more information, see Interpretation Bulletin IT-529, Flexible Employee Benefit Programs.

Filing note: If a salary deferral arrangement is funded, we consider it a trust, and you may have to file a T3 return. The deferred amount is deemed to be an employment benefit, so you report it on a T4 slip, not a T3 slip. The employee has to include the amount in income for the year the services are rendered. The employee also has to include any interest, or other amount earned by the deferred amount. For more information, see the guides called Filing the T4 Slip and Summary Form and Filing the T4F Slip and Summary Form.

Back to top

Specified personal trust

This is a personal trust but does not include: an amateur athlete trust; an employee trust; a master trust; a trust governed by a deferred profit sharing plan, an employee benefit plan, an employees profit sharing plan, a foreign retirement arrangement, a registered education savings plan, a registered pension plan, a registered retirement income fund, a registered retirement savings plan, or a registered supplementary unemployment benefit plan; a related segregated fund trust; a retirement compensation arrangement trust; a trust whose direct beneficiaries are one of the aforementioned trusts; a trust governed by an eligible funeral arrangement or a cemetery care trust; and a communal organization.

Spousal or common-law partner trust

A post-1971 spousal or common-law partner trust includes both a testamentary trust created after 1971, and an inter vivos trust created after June 17, 1971, for which the living beneficiary spouse or common-law partner is entitled to receive all the income that may arise during the lifetime of the spouse or common-law partner, and that spouse or common-law partner is the only person who can receive, or get the use of, any income or capital of the trust during his or her lifetime.

A pre-1972 spousal trust includes both a testamentary trust created before 1972, and an inter vivos trust created before June 18, 1971, for which the beneficiary spouse was entitled to receive all the income during the spouse's lifetime, and no other person received, or got the use of, any income or capital of the trust. These conditions must be met for the period beginning on the day the trust was created, up to the earliest of the following dates:

• the day the beneficiary spouse dies;
• January 1, 1993; or
• the day on which the definition of a pre-1972 spousal trust is applied.

Unit trust (see Income Trust FAQs for more information)

This is an inter vivos trust for which the interest of each beneficiary can be described at any time by referring to units of the trust. The trust must reside in Canada, and its only undertaking is the investing of its funds in property (other than real property, or an interest in real property), and/or acquiring, maintaining, improving, leasing, or managing real property or an interest in real property that is capital property of the trust. The trust also has to satisfy the other conditions of the Act, as outlined in subsection 108(2).

Back to top

More: Tax Tips

More: Trust FAQs

More: Legal Trust Information