What are Trust's and What are they Good for?


What is a Trust? Before we can fully understand the uses to which Trusts can be put we must first have a firm understanding as to what exactly a Trust is. A Trust is one of the earliest legal relationships to develop out of the Common Law. Its origins date back to feudal England. It was originally developed as a method for avoiding estate taxes. When an individual died who owned significant amount of property the transfer of the property from his name into the names of his children would attract significant taxes. These taxes eventually made it difficult for the land owner to transfer his estate to his children. In order to avoid this, a concept was developed wherein individuals would obtain the use of the property without owning legal title. Legal title would be held in another’s name although the beneficial interest was reserved for the family for generations. Eventually the law surrounding this type of relationship developed into what we now know as the Common Law Trust. The Trust was an effective way of avoiding the feudal taxes and the King was in no way amused with its benefit. Just as the Canada Revenue Agency is prone to step on any tax planning vehicle which effectively reduces taxes, the King made certain changes to the law enabling the Trust to be taxed.

Despite the fact that some of the tax benefits for which the Trust was originally developed have disappeared the Trust remained a valuable tool for Estate Planning in feudal England. Many of the same benefits and attributes which inspired the original development of the Trust are still useful in today’s society to enable a more flexible method of dealing with various assets. We will look at what attributes are necessary in order to establish a Trust in a very basic manner and then go into the more common uses of the Trust in today’s business, tax and estate planning contexts.

The Three Certainties

In order to establish a Trust under the Common Law it is necessary for the Trust to have three distinct attributes or “certainties”.

Certainty of Objects

The Certainty of Objects is a requirement that the persons for whom the Trust is established must be clearly ascertainable. This is commonly known as the beneficiaries of the Trust. In order for this certainty to be met the persons administering the Trust must be able to look at any individual and determine whether or not they are qualified as a beneficiary of the Trust or not. This does not mean that beneficiaries must be specifically named. It is possible to describe a beneficiary by being a member of a class of individuals who are beneficiaries. For example, your designation may include “my children”, “the employees of XYZ Corporation” or “any registered charity in Canada”. All of these definitions while not naming a specific beneficiary have a class which is clearly ascertainable by the criteria which is given. If a Trust is established to “do good things” it would not meet the certainty of objects as it is not clearly enough established as to who should benefit from the Trust. Alternatively, "doing good things for all lawyers in the Province of Alberta" should qualify under the certainty of objects although highly improbable.

Certainty of Subject Matter

In order for a Trust to be validly established it must be clear to the persons charged with administering the Trust, what assets are to be administered and distributed pursuant to the conditions of the Trust deed. In other words it must be clear what the Trust owns. You will commonly have a Trust settled by way of a gold or silver coin or gold wafer. The reason that this is done is to clearly identify the certainty of Subject Matter. The reason that a coin is often used is that it will not be accidentally disposed of and is something purchased by the Settlor. Therefore, as long as the coin is in existence and is retained by the Trust there should not be any difficulty with establishing the fact that the Trust is properly settled with a clear certainty as to the Subject Matter. Additional items may be added to the Subject Matter of the Trust, however, it is always good to maintain the original Subject Matter so there is no question with respect to this certainty.

Certainty of Intention

In order for the Trust to be validly established it must be clear that the person establishing the Trust had the intention of doing so. The person who gifts the original property (i.e. the coin) is called the Settlor. It must be clear that they intended to transfer the property to the persons charged with the administration of the Subject Matter (the Trustees) and that the Trustees clearly understood that this was the intention as well. In short, it must be clear to all parties that the Trustees hold the assets not for their own benefit but for the benefit of someone else (the beneficiaries). In general, this intention is clearly set out in a document known as a Trust Deed. This is simply a written agreement which sets out the terms and conditions under which the Settlor is granting the property to the Trustees.

Trusts Under the Current Legislative Environment

Under Alberta Law a Trust will be limited to specific investments and specific activities pursuant to both the Common Law and the Trustees Act. Both the Trustees Act and the Common Law have put very specific restrictions on what Trustees can or cannot do with Trust funds. These restrictions will often make it impossible for the Trustees to accomplish the real purposes for which the Trust was established. The legislation however, allows the Trust Agreement to override these restrictions, provided the intention of the Settlor is clearly set forth. This makes the drafting of the Trust Agreement of utmost importance in insuring that the Trust is still a valid Trust under Alberta Law while insuring that the Trust will be capable of meeting all of the necessary requirements and capable of giving the flexibility desired. It should be noted that where Trusts are designed to specifically interact with a piece of legislation the drafters must insure that the Agreement meets any additional restrictions which may be imposed by the legislation.


Now that we have a basic understanding of what a Trust is the question becomes, how are the various types of Trusts used in common personal, corporate, estate and tax planning.

The Family Trust

One of the most common and valuable uses of Trusts today are the Family Trusts. These Trusts are generally designed for tax and estate planning purposes. There is simply no other vehicle available today which offers the same flexibility, control and benefit which a Family Trust can offer. The best way to illustrate this flexibility is by way of an example. Consider the following situation:


  1. Mr. and Mrs. X each own fifty percent of a successful active business;
  2. they have four children ages 20, 18, 16 and 14;
  3. they have not determined whether or not they wish to sell the business or transfer it to their children;
  4. the business has a value of approximately $1,000,000;
  5. it is anticipated that the business will grow significantly in value over the next five years;
  6. it is desired to benefit all of the family members including the children, however, they are concerned about issuing shares to their children due to the fact that they will not know how to deal with an asset of significant value at this time. Nor are they sure that they want to hand over control;
  7. can you issue shares to minors?


The planning which we would suggest in order to solve this problem is to introduce a discretionary family trust and freeze out the existing shareholders by way of the issuance of preferred shares. This structure will address all of the issues which the taxpayer has provided to us. Without triggering any immediate tax, Mr. and Mrs. X can transfer the growth of their Corporation to the Family Trust. This Trust will be a fully discretionary Trust enabling Mr. and Mrs. X to administer it for the benefit of the family as they see fit.

Income Splitting

If dividends are paid to the Trust they may be allocated to the Beneficiaries as the Trustees deem appropriate. This enables beneficiaries to receive funds out of the Trust on a discretionary basis. If done properly, this can reduce the overall tax paid by the family as a whole. Be careful of the payment of dividends from a private Corporation to minors. If the children, ages 14 and 16 were to receive dividends through the Family Trust, they would be taxed at the highest marginal tax rate as a result of the "Income Splitting Rules". In addition, any income left inside the Trust on an annual basis will be taxed at the highest marginal tax rate. Any payments made to the children, ages 18 and 20 will be taxed at their low marginal tax rates and this may provide some significant amount of income splitting.

Capital Gains

If the Trustees determine that the children should eventually own the shares of the Corporation - they can distribute them in any proportion which they feel is appropriate, all while deferring the capital gains tax. If "on the other hand" the Corporation is to be sold to arms length parties, Mr. and Mrs. X will now be able to allocate the capital gain out to any of the beneficiaries which will enable them to multiply the capital gains exemptions to as many beneficiaries as they may wish to benefit. For example, they could shelter a $2,000,000 gain inside the Trust by simply allocating the gain to their children. This will be in addition to the $1,000,000 capital gains exemption which Mr. and Mrs. X have personally on the preferred shares.


Often times individuals are unwilling to give up control of their Corporation and are concerned about a Family Trust. In this example, Mr. and Mrs. X are the majority of the Trustees and therefore, will control all decisions made with respect to the shares of the Corporation. If they determine at any point, for whatever reason, that they wish to hold the shares personally once again, the shares can be rolled out at their ACB to the beneficiaries of the Trust. Therefore, with no adverse tax consequences, they can be put back in direct control of the Corporation.


The Family Trust will also remove the negative tax consequences associated with death. As the individual does not own the shares, the death of any one beneficiary will not trigger the deemed disposition at death (other than to the extent that Mr. and Mrs. X own preferred shares).

Creditor Proofing

Trusts are commonly used to facilitate creditor proofing of both individuals and Corporations. Consider the following example:


  1. Mr. X has $1,000,000;
  2. Mr. X has no creditors at this time;
  3. Mr. X is involved in a business which transfers hazardous materials;
  4. Mr. X wishes to protect his assets against potential creditors as well as maintaining control over the funds for the benefit of himself and his family.


Mr. X will transfer his $1,000,000 to a Trust. This Trust will be for the benefit of himself and his family members. The Trustees of the Trust will be himself, his wife and an arm’s length party. The Trust is a fully discretionary Trust which means that any distribution of income or capital from the Trust will only be made at the discretion of the Trustees.


If Mr. X were to be sued as a result of his truck rolling over and spilling hazardous material into a playground, all of his personal assets may be subject to the claims of his creditors. If he had not done this planning, the assets would have been held by him personally and therefore subject to the claims of his creditors. The assets were however transferred to a Trust. Because Mr. X is only a beneficiary of the Trust, he will only obtain the benefits which are allocated to him.

In short, the creditors will not be able to access the $1,000,000 as he owns legal title only and does not hold any beneficial interest. We note that he would immediately be removed as a Trustee if this was to occur. Creditors would have the ability to seize any benefit he had coming out of the Trust, however, due to the fact that it is a fully discretionary Trust we can anticipatethat no allocations will be made to him for as long as his creditor problems exist. The funds will simply grow in value and any benefits which are paid out will be made to the other beneficiaries being his spouse and children. In effect, Mr. X has not lost control of the funds nor has his family lost the use of the funds to creditors.

There is specific legislation in Canada to prohibit fraudulent preferences. This is designed to stop individuals from defrauding existing creditors by simply transferring assets out of their name. You will note that this planning specifically assumed that at the time of the planning, there were not any existing creditors.

The transaction described above may not have advantages from a tax perspective. All of the income received by the Trust or Beneficiaries may be taxed in the hands of Mr. X in accordance with the various attribution provisions of the Income Tax Act. This planning was only for creditor proofing and not for any kind of tax benefit.



Better Business Bureau Lunch and Learn

Date: September 26, 2019
Check-in/Registration: 11:45am
Lunch: 12-1pm
Seminar: 12-1pm

Location: The Winston Golf Club - 2502 6 Street NE Calgary, AB T2E 3Z3


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