Filing your Trust Return (T3)

A Trust is the legal name for a relationship whereby the ownership of property is divided between the legal owner of the property (Trustee) and the ultimate owner of the property (Beneficiary).

A common example of a Trust – A Trust can allow for a minor to have the beneficial ownership of property while the legal ownership is held by a Trustee on the minor’s behalf, therefore allowing you to work around the issues that minors cannot own property. Alternately, the Trustee can control and protect the property for the benefit of the beneficiary who may be unable or unsuited to owning and controlling the property for himself.

There are 2 basic types of trusts.

Testamentary Trust – A testamentary trust is a trust or an estate that is generally created on the day a person dies.

  • A testamentary Trust is taxed as a taxable entity in accordance with graduated marginal rates under the Income Tax Act.
  • The use of a Testamentary Trust creates two taxpayers, the beneficiary (usually a surviving spouse) and the Testamentary Trust itself.
  • With two taxpayers and using graduated marginal rates it may result in less income tax being payable.

This type of trust is often set up with the surviving spouse with the surviving spouse being the Beneficiary of the Trust for his or her lifetime. Rather than a spouse giving everything to the other spouse, they can set up a Testamentary Trust in their Will with the surviving spouse being the Beneficiary of the Trust for the remainder of their life.

It is also used to postpone the ultimate receipt of property from an estate until children or grandchildren or other beneficiaries have reached a more advanced age than simply the age of majority.

Inter Visos Trust – An inter vivos trust is a trust that is not a testamentary trust and is established by a living person.

  • This type of trust is taxed automatically at the highest marginal tax rates and are therefore not commonly used.
  • In cases where all of the income from the trust is paid to a Beneficiary of the trust, then the income is taxed in the hands of the Beneficiary rather than in the hands of the trust and this might make it a vehicle to avoid costly taxes.
  • This type of trust is sometimes used to facilitate income splitting, eg. holding shares in a private company for the benefit of the business owner’s children.

If you have an inter vivos trust you may be wondering when you are required to file your return. That day will be Sunday March 30 because 2008 is a leap year. Therefore, those trust returns must be filed by Monday March 31 to avoid a late filing penalty.

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