USE FAMILY TRUSTS to income split, grow wealth & save taxes, shift income to children & use this tax-free income to pay for expenses of your dependent children or grandchildren; take advantage of CRA low prescribed loan rate of 1% before it goes up...

1. RBC DS Family Trust

2. 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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3. RBC DS Family Trust
Three main benefits of RBC DS Family Trust:
Tax savings – Annual $10,000 basic exemption allows child to
1 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)
2 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
3 trust can be used to pay for expenses that directly benefit the
child
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4. 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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5. Two main types of trusts – Inter-vivos and testamentary trusts
Inter-vivos trust Testamentary trust
Time of Established during lifetime Established at death
creation of settlor
Taxation Income taxed in trust at If income taxed in trust then
top marginal tax rate taxed at graduated tax rates
unless paid or payable to
beneficiary
Taxation Calendar (Jan 1 – Dec 31) Executor can choose any 12
year month period
Attribution Must consider attribution No attribution after death
rules
RBC DS Family Trust is an inter-vivos trust
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6. Who is involved in a trust?
Definition RBC DS Family Trust
Settlor Person that legally creates the Typically one parent or grandparent
trust by gifting property to (“settlor”) will gift a $20 bill to the
trust trustee(s). This person will then lend
cash to the trustee for investment
Trustee Individual and/or corporation 1 Trustee – cannot be settlor/lender
that legally holds assets and 3 Trustees – majority rule;
makes decisions in the best settlor/lender can be one of the 3
interest of the beneficiaries trustees but cannot be Investment
Trustee
Beneficiary Persons that will ultimately Typically children and grandchildren –
benefit from the trust assets cannot be settlor/lender
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7. Comparing the trust options at DS – key differences
RBC DS Formal RBC DS Family Trust - RBC DS Family
Trust Discretionary Trust – Age 40
Maximum # of 6 Unlimited 1
beneficiaries per trust
# 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 Full access to loan capital Full access to loan capital
beneficiary’s benefit
Beneficiary’s rights to Immediate Immediate If earned prior to age 21 then
income that was payable as late as age 40, if earned
to them but reinvested after age 21 then immediate
Can trust income be used Yes Yes Yes
to pay beneficiary’s
expenses
Annual DS NIL $150 or $250 $150 or $250
administration fees
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8. RESP vs. RBC DS Family Trust – key differences
RESP RBC DS Family Trust
Maximum lifetime $50,000 No maximum
contribution
Government grant Yes - $7,200 maximum No
Parent’s access to capital Contributions can be returned to Full access to loan capital anytime
parent (not recommended until child
in post secondary school)
Beneficiary’s access to When enrolled in post-secondary At age of majority (later if Age 40 trust used)
accumulated investment education
earnings
Can earnings be used to pay Yes but only for reasonable post Yes – broader category; even while minor
beneficiary’s expenses secondary expenses
Taxation Grows tax-deferred; withdrawals Capital gains taxed to child (generally tax-
taxed to child 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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9. 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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10. Benefits of income splitting
Reason #1: Progressive tax rates
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 $15,000 per year
with one family member
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11. Taking advantage of child’s $10,000 basic personal tax exemption
If taxable to parent
$10,000 interest income Tax payable = $4,600
Investment If taxable to child
Account Interest income = $10,000
Less basic exemption = ($10,000)
Tax payable = $0
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12. Taking advantage of child’s $10,000 basic personal tax exemption
If taxable to parent
$20,000 Capital gains $20,000 x 50%= $10,000
Tax payable = $4,600
Investment
Account If taxable to child
$20,000 x 50%= $10,000
Less basic exemption = ($10,000)
Tax payable = $0
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13. Taking advantage of child’s $10,000 basic personal tax exemption
If taxable to parent
$45,000 Cdn. Public Co. $45,000 of Cdn Pub Co. dividends
dividends Tax payable = $12,000
Investment
Account If taxable to child
Tax payable = $0
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14. Three strategies to split investment income with children
Strategy Pros Cons
Gift to RBC DS Formal Trust Capital gains taxed to child* Loss of capital
Attribution of interest and
dividends if minor
Loan at CRA prescribed rate Can call back loan capital Parent must declare 1%
(currently 1%) to RBC DS Interest, dividends, capital interest income
Family Trust gains* taxed to child
Interest-free loan to RBC DS Can call back loan capital Attribution of interest and
Family Trust Capital gains taxed to child* dividends regardless of age
Parent declares no interest
on loan
* If trust is structured correctly
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15. 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
3. SETTLOR/LENDER CAN BE ONE OF 3
TRUSTEES WHERE DECISIONS MADE BY
MAJORITY RULE
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16. RBC DS Family Trust Structure
Gift $20 and
then loan
cash (not from
joint account)
1 or 3
Trustee(s) Tax-free
Capital gains $ Beneficiaries
Settlor/Lender
Smith
Family
Trust
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17. 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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18. A strategy to pay for child’s expenses with tax-free capital gains
Family trust pays private school fees
No strategy
Parent’s T4 income $250,000 Parent’s T4 income $250,000
Tax (100,000) Tax (100,000)
After-tax $150,000 After-tax $150,000
Family expenses (100,000) Family expenses (100,000)
Private school fees (2 kids) (30,000) Surplus $50,000
Surplus $20,000
Loan cash to family trust $500,000
Parent’s cash assets $500,000 Capital gains earned (6%) $30,000
Capital gains earned (6%) $30,000 Tax (split between 2 kids) NIL
Tax (7,000) Private school fees (30,000)
Net portfolio $523,000 Net portfolio $500,000
Surplus $20,000 Surplus $50,000
Total portfolio $543,000 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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19. 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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20. 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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21. 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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22. 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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23. 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.
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