Canadian inherited a US trust containing investments

Canadian inherited a US trust containing investments

Question

Hi Phil

I’m planning to book a consultation with you shortly for my questions below:

I inherited a trust last year that I need help with. I think I received bad advice early last year and need to get proper advice on the trust given how many investments are currently in the trust. The trust was automatically setup upon my father’s passing and I am the only beneficiary and my uncle who lives in the US is the trustee. The trust contains various stock market investments totalling around $4,000,000 USD.

Here are my questions

1. My current accountant said that none of the distributions from the trust will be taxable in Canada if the investments are all US
2. After some reading online I worry that he was wrong. I also am looking for a new accountant for next year
3. I’ve only taken a small distribution last year, but I would like to take about $200,000 from the trust for a downpayment on a property
4. I’m not a US citizen. My Dad moved down to the US many years ago and never returned to Canada

How should I handle this?

Answer

Hi XXXXXX

Thanks for the email. There’s lots to review here and a quick email likely don’t do. Let me outline the issues you’ll likely face and we can jump on a call later to round out the issues and any planning items that could help going forward.

To address your points above:

Your current accountant is wrong about his assessment of Canadian tax. To the extent that distributions are made from trust income these distributions will be fully taxed in Canada as “foreign trust income”. You will however be able to receive a foreign tax credit up to 15% on any distributions. The trust will need to properly withhold for any income distributions at the 15% rate.

You’ll also need to file from T1142 to report any capital or income distributions received from the trust:

It can also be quite a bit more complicated then simply taking distributions. For example, to the extent that capital gains are generated within the trust and paid out to you personally you could face double tax or at least much more tax than you should pay. If the trust realizes capital gains in the year, taxes the gains internally and then distributes out the income in the same year you’ll pay full Canadian rates on this income. If the trust however realizes capital gains and then waits until the next calendar period to pay out this income it will be considered “trust corpus” or “capital of the trust” and therefore will be tax-free from a Canadian standpoint. Once again, proper tax and financial planning would need to be done to assess Canadian tax on any distributions.

In most cases, assuming the trust agreement and trustee allow for it it would make sense to simply transfer the investments out of the trust at cost and move them up to Canada. Right now as the portfolio is structured all the income that will be allocated to you going forward will be fully taxable on the Canadian side. Hence you won’t receive any income that is taxed at preferential rates like capital gains or dividends. Also, foreign currency planning is likely not being done as the portfolio is all US based.

I hope that helps a little. As I mentioned above these are simply general comments and we should arrange a time to review your tax situation in more detail and assess if it makes sense to move the investments up to Canada. This could save a significant amount of tax going forward and also reduce your tax compliance in a big way.

Cheers

Phil

phil@philhogan.com

250-661-9417