RBC DS Family Trust

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Canadians pay a lot of tax

You’re taxed when you earn

You’re taxed when you save

You’re taxed when you spend

You’re taxed when you die

So what options are there for you and your loved ones to save tax?

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RBC DS Family Trust

Three main benefits of RBC DS Family Trust:

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Tax savings – Annual $10,000 basic exemption allows child to earn up to approximately $10,000 of interest income, $20,000 of capital gains or $45,000 of Cdn. public dividends tax-free every year (depending on province of residence)

Access to capital – parent/grandparent can loan monies to trust, thereby never losing access to loan capital

Fund children’s expenses – the investment income in the trust can be used to pay for expenses that directly benefit the child

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Why do people use trusts?

Many reasons, such as: Income splitting Control Creditor protection To hold assets for disabled or spendthrift beneficiaries To control the timing and amount of gifts/bequests Part of an estate freeze of a business Probate tax avoidance Privacy Etc, etc, etc

RBC DS Family Trust is primarily used for income splitting

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Two main types of trusts – Inter-vivos and testamentary trusts

Inter-vivos trust Testamentary trust

Time of creation

Established during lifetime of settlor

Established at death

Taxation Income taxed in trust at top marginal tax rate unless paid or payable to beneficiary

If income taxed in trust then taxed at graduated tax rates

Taxation year

Calendar (Jan 1 – Dec 31)

Executor can choose any 12 month period

Attribution

Must consider attribution rules

No attribution after death

RBC DS Family Trust is an inter-vivos trust

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Who is involved in a trust?

Definition RBC DS Family Trust

Settlor Person that legally creates the trust by gifting property to trust

Typically one parent or grandparent (“settlor”) will gift a $20 bill to the trustee(s). This person will then lend cash to the trustee for investment

Trustee Individual and/or corporation that legally holds assets and makes decisions in the best interest of the beneficiaries

1 Trustee – cannot be settlor/lender3 Trustees – majority rule; settlor/lender can be one of the 3 trustees but cannot be Investment Trustee

Beneficiary

Persons that will ultimately benefit from the trust assets

Typically children and grandchildren – cannot be settlor/lender

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Comparing the trust options at DS – key differences

RBC DS Formal Trust

RBC DS Family Trust - Discretionary

RBC DS Family Trust – Age 40

Maximum # of beneficiaries per trust

6 Unlimited 1

# of trustees 1 or 2 1 or 3 1 or 3

Contributions Irrevocable gifts Loan - $50,000 minimum Loan - $50,000 minimum

Parent’s access to capital

None – must be used for beneficiary’s benefit

Full access to loan capital Full access to loan capital

Beneficiary’s rights to income that was payable to them but reinvested

Immediate Immediate If earned prior to age 21 then as late as age 40, if earned after age 21 then immediate

Can trust income be used to pay beneficiary’s expenses

Yes Yes Yes

Annual DS administration fees

NIL $150 or $250 $150 or $250

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RESP vs. RBC DS Family Trust – key differences

RESP RBC DS Family Trust

Maximum lifetime contribution

$50,000 No maximum

Government grant Yes - $7,200 maximum No

Parent’s access to capital

Contributions can be returned to parent (not recommended until child in post secondary school)

Full access to loan capital anytime

Beneficiary’s access to accumulated investment earnings

When enrolled in post-secondary education

At age of majority (later if Age 40 trust used)

Can earnings be used to pay beneficiary’s expenses

Yes but only for reasonable post secondary expenses

Yes – broader category; even while minor

Taxation Grows tax-deferred; withdrawals taxed to child

Capital gains taxed to child (generally tax-free); interest/dividends attributed to parent if funded via interest-free loan

Annual fees $50 for DS admin fee $150 or $250 for DS admin fee plus tax return fees

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RBC DS Family Trust Candidates

Clients with surplus capital

High-income parents with minor children (i.e. executives, professionals, IAs, business owners, etc)

High-income grandparents that want to

provide funds to grandchildren

Children in private school or have other high expenses (sports, lessons, etc)

Parents that have no RESP or started it late

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Benefits of income splitting

Annual taxable income Tax rate

Under $37,000 21%

$37,000 - $75,000 31%

Over $75,000 43% – 46%

Potential annual tax savings by income splitting with one family

member

$15,000 per year

Reason #1: Progressive tax rates

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Taking advantage of child’s $10,000 basic personal tax exemption

If taxable to parent

Tax payable = $4,600

If taxable to child

Interest income = $10,000

Less basic exemption = ($10,000)

Tax payable = $0

If taxable to parent

Tax payable = $4,600

If taxable to child

Interest income = $10,000

Less basic exemption = ($10,000)

Tax payable = $0

$10,000 interest income$10,000 interest income

InvestmentAccount

InvestmentAccount

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Taking advantage of child’s $10,000 basic personal tax exemption

If taxable to parent

$20,000 x 50%= $10,000

Tax payable = $4,600

If taxable to child

$20,000 x 50%= $10,000

Less basic exemption = ($10,000)

Tax payable = $0

If taxable to parent

$20,000 x 50%= $10,000

Tax payable = $4,600

If taxable to child

$20,000 x 50%= $10,000

Less basic exemption = ($10,000)

Tax payable = $0

$20,000 Capital gains$20,000 Capital gains

InvestmentAccount

InvestmentAccount

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Taking advantage of child’s $10,000 basic personal tax exemption

If taxable to parent

$45,000 of Cdn Pub Co. dividends

Tax payable = $12,000

If taxable to child

Tax payable = $0

If taxable to parent

$45,000 of Cdn Pub Co. dividends

Tax payable = $12,000

If taxable to child

Tax payable = $0

$45,000 Cdn. Public Co. dividends

$45,000 Cdn. Public Co. dividends

InvestmentAccount

InvestmentAccount

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Three strategies to split investment income with children

Strategy Pros Cons

Gift to RBC DS Formal Trust

Capital gains taxed to child*

Loss of capitalAttribution of interest and dividends if minor

Loan at CRA prescribed rate (currently 1%) to RBC DS Family Trust

Can call back loan capitalInterest, dividends, capital gains* taxed to child

Parent must declare 1% interest income

Interest-free loan to RBC DS Family Trust

Can call back loan capitalCapital gains taxed to child*Parent declares no interest on loan

Attribution of interest and dividends regardless of age

* If trust is structured correctly

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Trust “super” attribution rule – subsection 75(2)

If trust is not set up properly then it is possible that even capital gains will be attributed back to lender thus achieving no income splitting!

To avoid capital gain attribution the following rules must be followed (confirm with tax advisor):1. SETTLOR/LENDER CANNOT BE SOLE

TRUSTEE, INVESTMENT TRUSTEE OR A BENEFICIARY

2. SETTLOR/LENDER CAN BE ONE OF 3 TRUSTEES WHERE DECISIONS MADE BY MAJORITY RULE

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RBC DS Family Trust Structure

Settlor/Lender

1 or 3 Trustee(s)

SmithFamilyTrust

Beneficiaries

Gift $20 and then loan cash (not from joint account)

Tax-free Capital gains $

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Children are expensive

It can cost over $150,000 to raise one child from birth to age 18

Most of these costs are not tax-deductible by the parents

• Schooling (i.e. private school)• Camps• Lessons• Sports equipment• Gifts

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A strategy to pay for child’s expenses with tax-free capital gains

No strategy Family trust pays private school fees

Parent’s T4 income $250,000

Tax (100,000)

After-tax $150,000

Family expenses (100,000)

Private school fees (2 kids) (30,000)

Surplus $20,000

Parent’s cash assets $500,000

Capital gains earned (6%) $30,000

Tax (7,000)

Net portfolio $523,000

Surplus $20,000

Total portfolio $543,000

Parent’s T4 income $250,000

Tax (100,000)

After-tax $150,000

Family expenses (100,000)

Surplus $50,000

Loan cash to family trust $500,000

Capital gains earned (6%) $30,000

Tax (split between 2 kids) NIL

Private school fees (30,000)

Net portfolio $500,000

Surplus $50,000

Total portfolio $550,000

Tax savings of $7,000 in first year and parent can get back $500,000 loaned to trust anytime

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Using the trust income to pay for children expenses

Additional documentation and administration!

Inter-vivos trust – income and capital gains taxed in trust at top tax rate unless paid or payable to the beneficiary

CRA has long standing administrative policy (IT-NEWS No. 11) that income taxed to child even if trustee uses trust income to pay for expenses that directly benefit child

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Using the trust income to pay for children expenses (continued)

No official list of approved expenses from the CRA

IT-NEWS No. 11 – “expenditure for the child’s benefit, i.e. amounts paid for the support, maintenance, care, education, enjoyment and advancement of the child, including the child's necessaries of life. “

Expenses must unequivocally benefit the child

Expenses used on ordinary household expenses or benefiting someone other than beneficiary will result in double taxation!

Clients should consult with tax advisor on this matter

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RBC DS Family Trust Fees

Set up fees NIL(*)

Annual trust tax return $350 if using Royal Trust (RT) ($450 in Quebec)Alternatively can use own accountant

Investment fees Depends on investments chosen in family trust

Annual DS administration fee $150 if RT prepares T3$250 if RT not used

(*) RBC DS charges no set up fees, however client’s tax and legal advisors will likely charge fees to review legal agreements and provide advice to client and trustees at time of set up.

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RBC DS Family Trust Considerations

Additional administration – documentation, trustee recordkeeping, etc

Renewal of demand promissory note Investment risk and volatility of earning capital gains Lender loses rights to future investment income Lender should review Will re loans at death Tax deductibility of investment management fees Additional fees and tax returns 21 year deemed disposition rule – can be mitigated Meetings with tax and legal advisors

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Thank you

This presentation has been prepared for use by RBC Dominion Securities Inc.*, Royal Mutual Funds Inc., RBC Private Counsel Inc. and RBC DS Financial Services Inc., Member Companies under RBC Investments. The Member Companies, Royal Bank of Canada, Royal Trust Corporation of Canada and The Royal Trust Company are separate corporate entities which are affiliated. In Quebec, financial planning services are provided by Royal Mutual Funds Inc. or RBC DS Financial Services Inc. and each is licensed as a financial services firm in that province. In the rest of Canada, financial planning services are available through RBC Dominion Securities Inc., Royal Mutual Funds Inc. or RBC Private Counsel Inc. Insurance products are only offered through RBC DS Financial Services Inc., RBC DS Financial Services Inc., RBC DS Financial Services Inc., subsidiaries of RBC Dominion Securities. *Member CIPF.

The strategies, advice and technical content in this presentation are provided for the general guidance and benefit of our clients, based on information that we believe to be accurate, but we cannot guarantee its accuracy or completeness.This presentation is not intended as nor does it constitute legal or tax advice. Clients should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This will ensure that their own circumstances have been considered properly and that action is taken on the latest available information. Interest rates, market conditions, tax rules, and other investment factors are subject to change.

™Trademark of Royal Bank of Canada, used under licence. RBC Investments is a registered trademark of Royal Bank of Canada, used under licence. ©Royal Bank of Canada 2010.