What Are the Three Certainties Required to Form a Valid Family Trust in Canada?
Canadian common law requires three certainties for any valid trust: certainty of intention (the settlor must clearly intend to create a trust, not a gift or loan), certainty of subject matter (the trust property must be identifiable), and certainty of objects (the beneficiaries must be ascertainable). The Federal Court of Appeal in Antle v The Queen voided a trust that failed certainty of intention. Get the deed drafted by counsel experienced in Canadian trust law.
Who Should Be the Trustee of a Canadian Family Trust?
Choosing a trustee separate from the settlor and the primary beneficiary is essential. If the settlor is also the trustee with sole discretion to distribute, courts may find the trust a sham. Common structures use a spouse, an adult child, a trusted professional, or a corporate trustee. The trustee owes fiduciary duties to all beneficiaries and is responsible for tax filings, distribution decisions, and proper record keeping.
How Are Discretionary Family Trusts Taxed in Canada?
An inter vivos family trust is taxed at the top marginal rate on income retained within the trust. Most family trusts distribute income to beneficiaries annually so that income is taxed at the beneficiaries' personal rates. The 21-year deemed disposition rule applies: every 21 years from settlement, a Canadian trust is deemed to have sold its capital property at fair market value. Plans typically include a tax-deferred rollout to beneficiaries before the 21-year date.
What Asset Protection Does a Family Trust Provide and What Does It Not?
A properly structured discretionary family trust shields trust assets from any individual beneficiary's personal creditors because beneficiaries hold no fixed interest. It does not protect against creditors of the trust itself, against CRA collection of trust-level tax liabilities, or against transfers made after a claim has arisen. Timing remains decisive: settle the trust and transfer property while solvent and without notice of any anticipated claim.
Key Takeaways+
- A valid Canadian family trust requires the three certainties of intention, subject matter, and objects.
- Keep the settlor and the primary controlling trustee as separate persons to avoid the sham trust doctrine.
- Discretionary trusts shield trust assets from a beneficiary's personal creditors but not from the trust's own creditors.
- Plan for the 21-year deemed disposition rule from settlement onward.
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