A Primer on Trusts in 2024

A trust, unlike a person or a corporation, is not a legal entity... A trust is simply a legal  relationship between the trustee, who holds legal title to the subject property of the trust and the beneficiaries, who hold beneficial title to that subject property. However, there is one exception to the general rule: a trust is a legal entity for tax purposes.  Subsection 104(2) of the Income Tax Act (Canada) specifically provides that a trust is an individual for tax purposes and, thus, is considered a separate taxpayer.

And there are other complexities. Since a trust is not a legal entity in itself, a trust cannot sue. The trustees can sue on behalf of the beneficiaries however.  Further, a trust cannot own property. The trustees own the property on behalf of the beneficiaries. In similar vein, a trust cannot enter a contract: The trustees enter the contract on behalf of the beneficiaries.

Learn more about how a trust is created and defined, along with the recent changes to trust filing requirements, penalties and more.

Establishing a Trust

The person who contributed the assets to the trust, by placing them in the name of the trustee and stating an intention to create a trust relationship, is called the settlor. Every trust will have at least one trustee, at least one beneficiary, and at least one settlor.

The three parties to a trust are the:

• settlor,
• trustee and
• beneficiary

In order to establish a trust, the settlor must: 

(i) demonstrate his or her intention to create a trust;

(ii) identify the property that is to be held for the benefit of the beneficiaries or purpose of the trust; and,

(iii) specify the persons or purpose that are to benefit from the trust or provide a means by which to identify such persons or purpose. 

Sometimes a person can wear more than one hat.  A person can be the trustee of a trust and also be a beneficiary of the trust. 

There may, however, be income tax and other implications to wearing more than one “hat” at a time. Section 75(2) of the Income Tax Act is a trap for a trust.  The settlor and the trustee cannot be the same without adverse tax attribution consequences.

Common Uses of Trusts

Trusts are used to accomplish three main objectives:

• Protection
• Control
• Tax planning.

Both inter vivos and testamentary trust can be used to accomplish these objectives. Not all objectives are necessarily present in all trusts although they may be. Most trusts have an intergenerational intention to hand down property from parents to their children and grandchildren. Occasionally, trusts are created to support charitable causes.

Next time: The Three Certaintities

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