The Life Of A Trust Part Two : Trustees’ Duties

Article by Donna Matthews

Once appointed, a Trustee is subject to a number of duties. A Trustee’s overriding duty is to act in the best interests of the beneficiaries of the Trust. This article considers and gives an overview of the most important trustee duties.

Comply with the terms of the trust deed

An obvious and fundamental requirement of a Trustee’s role is to read and understand the terms of the trust document.  It is essential that a Trustee complies with the terms of the trust deed when exercising its powers.

Duty to exercise reasonable care and skill

The statutory duty of care is set out in section 1 Trustee Act 2001 (the “Act“):-

“Whenever the duty under this subsection applies to a trustee, he must exercise such care and skill as is reasonable in the circumstances, having regard in particular-

(a) to any special knowledge or experience that he has or holds himself out as having, and

(b) if he acts as trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.”

Schedule 1 of the Act states that the duty of care applies to Trustees when:-

(a) investing the trust fund;
(b) appointing agents & nominees;
(c) acquiring land and dealing with insurance.

This statutory duty can be excluded from applying within the trust deed.

There is also a common law fiduciary duty.  This has not been “laid down with precision”. It is an evolving duty.  A Trustee must exercise the care that an ordinary prudent business person would in managing his own affairs.

The standard of care expected is judged by way of an objective test.  The conduct of Trustees will be judged with reference to the facts and circumstances existing at the time when they had to act and which were known or ought to been known to them at the time.  Decisions of Trustees are not judged in hindsight.

Professional Trustees are expected to exercise a higher standard of knowledge than that of a lay person acting as Trustee.

Duties in relation to the investment of trust funds

Generally, subject to the terms of the trust deed, a Trustee will be given power to make any kind of investment that it could make if it were absolutely entitled to the assets of the Trust.

The Trustee, in making the investment, must exercise such care and skill as is reasonable in the circumstances, having regard in particular-

  1. to any special knowledge or experience that he has or holds himself out as having; and
  2. if he acts as Trustee in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.

In exercising any power of investment, the Trustee must have regard to the standard investment criteria and must from time to time review the investments of the trust and consider whether they should be varied.

The standard investment criteria are:

  1. the suitability to the trust of investments; and
  2. the need for diversification of investments of the trust, in so far as is appropriate to the circumstances of the trust.

The general power of investment is subject to any restriction or exclusion imposed by the trust deed or by any statutory provision.

Trustees have a duty not to delegate their duties or powers unless authorised to do so.

In selecting investments, a Trustee is under a duty to consider that the Trustee is making an investment for the benefit of other people (for whom he is morally obliged to provide).

The Trustee must carefully balance the risk of investments against not using their powers to invest fully.

It is important, especially when a Trustee does not have the relevant experience or qualifications that they take appropriate legal, tax, investment, etc. advice before exercising their powers.  Please see our note on the recent Isle of Man case AB and CD (CHP 2016/7).

The Trustee must ensure fairness between the beneficiaries and act impartially in the sense of fairly and disinterestedly, between the beneficiaries

A trustee must consider the needs of all of the beneficiaries of the trust, and consider from time to time making distributions to the beneficiaries.

There is no strict duty for a Trustee to consult with the beneficiaries of a trust.  However, as the beneficiaries are the people who may sue a Trustee, it is important to maintain a good working relationship and manage expectations.

Duty of Trustee to act gratuitously unless otherwise authorised (as is usual now)

Unless there is a specific clause within the trust deed, a Trustee must act without reward and not make profit from the Trust.  Most modern trust deeds include provisions allowing Professional Trustees to charge in accordance with their usual terms of business.

Duty of Trustee to be ready with his accounts

The beneficiaries must be able to hold a Trustee to account for their actions.  Accordingly, a beneficiary has a right to a copy of the accounts of a Trust. See part five of this series for further information regarding a beneficiary’s right to documentation from the Trustee.


A Trustee must not put themselves in a position where either their personal interest or fiduciary duties as a director or trustee of a company or another trust conflict with their role as a Trustee of the Trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

The Life Of A Trust Part One: Creation

Article by Kirsten Middleton

Creating a trust involves more than simply drafting a trust document and arranging for it to be signed. A trust is a gift of, for example, money or other assets by the ‘Settlor’ to a Trustee or Trustees which binds those Trustees to deal with such money or assets for the benefit of Beneficiaries. It is enforceable by the Beneficiaries and not the Settlor. The terms of the trust are usually set out in a Trust Deed.

A trust relationship distinguishes between the legal ownership of, and equitable interest in, trust property.

By making the gift to the Trustees, the Settlor has divested himself of ownership of those assets.

The Trustees become the new legal owners of the assets on behalf of the Beneficiaries.

The three certainties

There are “three certainties” which must be fulfilled for a trust to be created, or the trust will fail:

1. Intention;

2. Subject matter; and

3. Objects.

1. Certainty of Intention

Certainty of intention is a vital element of the creation of a trust. It must be clear that the Settlor intended to create a trust and not, for example, an outright gift to the Trustees for their own benefit. On creation of a trust, it is possible to reserve powers to either the Settlor, Protector, or other third party; however case law has indicated that the reservation of too much power can be taken as evidence that there was no intention to create a trust. If a trust is challenged in court, this can result in the trust property being deemed to have been the property of the Settlor at all times which may have adverse tax consequences for the Settlor or his estate. Please note, the Isle of Man does not yet have express reserved powers legislation, but this is the subject of consultation.

2. Certainty of Subject Matter

Certainty of subject matter requires that the property that is to be settled in the trust be described with “certainty and particularity”. If it proves impossible to identify the trust property, the trust will fail. For example, if the Settlor is settling a property into the trust and the Settlor owns more than one property, it must be certain which property is the trust asset.

3. Certainty of Objects

Certainty of Objects requires that the intended Beneficiaries of the trust be named, identified or described with sufficient certainty as to allow them to be determined with certainty. Where there is a class of Beneficiaries, it must be certain as to the individuals which fall within that class.

Who is the Settlor?

As set out above, a trust is created when a person (the Settlor) transfers assets to one or more persons (the Trustees) with instructions that they are held for the benefit of others (the Beneficiaries). The first question is “who is the Settlor”. If the Settlor is not an existing client, a trust service provider will need to satisfy its due diligence requirements. The following information (along with any internal requirements) must be obtained:

1. Proof of identity, source of wealth and source of funds for anti-money laundering purposes;

2. Check that the Settlor is capable of creating a trust and that all relevant tax advice is obtained and tax compliance/reporting completed; and

3. Establish whether there are any circumstances that might lead to an attack on the trust (for example, the trust is void, the trust is found to be a “sham” as the settlor intended to retain control of the assets for his own benefit, or assets are transferred to defraud creditors).

Trustees’ acceptance of their trusteeship

Trustees need to be appraised of the fullest of information before accepting their trusteeship and be aware of the potentially onerous responsibilities to be placed upon them by accepting this position.

For example, Trustees should consider:

  • the intended purpose of the Trust, why it was created
  • will they be acting alongside any co-Trustees
  • who are the intended Beneficiaries, what are their circumstances and potential needs
  • the assets held in the Trust Fund
  • the nature of any proposed transactions to be carried out
  • any liabilities of the Trust
  • the powers and duties of the Trustees as set out in the Trust Deed
  • indemnity and remuneration clauses in the Trust Deed

Each Trustee will be entitled to review such documentation needed in order to allow them to fully discharge their responsibilities. They must ensure that upon their appointment they have the Trust Fund properly transferred to them and placed under their control.

In the next part of this series we discuss the duties of Trustees during the administration of the trust.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

Principal Residence Exemption – Significant Changes

Article by Sankalp Jaggi

Collins Barrow National Incorporated

On October 3, 2016, among a series of other measures, the Department of Finance (“Finance”) introduced significant changes to the principal residence exemption rules under the Income Tax Act (Canada). The mandate of these changes was specifically to “improve tax fairness by closing loopholes surrounding the capital gains exemption on the sale of a principal residence.” The proposed changes to the principal residence exemption rules effectively limit the ability of certain taxpayers to reduce or eliminate the capital gain on the sale of their home.

General overview of the current rules

Prior to discussing the changes to the principal residence exemption rules, it would be useful to summarize the current rules:

  1. Canadian resident individuals who realize a capital gain on the sale of their home may claim the principal residence exemption to reduce or eliminate the capital gain for tax purposes. To claim the principal residence exemption, the taxpayer (together with their spouse, if applicable) must designate the property as a “principal residence” for each year the property is owned.
  2. To qualify for the exemption, the property must also be a “capital property” of the taxpayer. Very generally, a taxpayer cannot shelter a gain if they are considered to be in the business of selling real estate properties. Whether a property would qualify as a capital property or not is outside the scope of this commentary.
  3. Conceptually, “principal residence” of a taxpayer means a property which the taxpayer (or the spouse, common-law partner or child of the taxpayer) has “ordinarily inhabited.” The amount of exemption available is determined by a formula that prorates the amount of gain by the number of years in which the property was designated as the taxpayer’s principal residence (“principal residence years”) compared to the total number of years that the taxpayer owned the property.
  4. While the rules only allow one property to be designated as a taxpayer’s principal residence for a particular tax year, the principal residence exemption rules recognize that a taxpayer can have two residences in the same year – that is, where one residence is sold and another is acquired in the same year. In such cases, the formula simply adds “1” to the principal residence years to treat both properties as a principal residence (commonly referred to as a “special one-plus rule”).
  5. Where specific conditions are met, non-Canadian properties may also qualify for the principal residence exemption.
  6. It is also possible for a personal trust to claim the principal residence exemption to reduce or eliminate the gain that the trust would otherwise have on the sale of a home. For this purpose, specific conditions must be met, including: a corporation cannot be a beneficiary of the trust and the trust must designate a “specified beneficiary,” meaning a beneficiary (or their spouse, common-law partner or child) of the trust who “ordinarily inhabited” the property.
  7. Finally, a taxpayer’s designation of a property as a principal residence for one or more years is required to be made on their income tax return (Form T2091 for individuals or Form 1079 for trusts) for the year in which the taxpayer has sold the property. Where the principal residence exemption eliminates the entire taxable gain on the property for an individual, the Canada Revenue Agency (“CRA”) administratively does not require reporting of the sale or the filing of Form T2091.

Proposed changes

  1. Changes to special one-plus rule – Effective October 3, 2016, the special one-plus rule discussed above now only applies where the taxpayer is a resident in Canada during the year in which the taxpayer acquires the property. Accordingly, an individual who was not a resident in Canada in the year the individual acquired a residence will not (on a disposition of property after October 2, 2016) be able to claim the principal residence exemption for that year. This measure has been put in place to ensure that permanent non-residents are not eligible for the principal residence exemption on any part of the gain from the sale of a residence. However, it appears that the proposed rules do not provide any relief to a non-resident taxpayer who acquires a real estate property and then immigrates to Canada in the subsequent year, nor do they appear to penalize a taxpayer who emigrates from Canada while continuing to own a property that was acquired while being a resident of Canada.
  2. Additional eligibility criteria for trusts – The proposed rules introduce additional requirements in order for a property to qualify as a trust’s principal residence for a taxation year that begins after 2016. The proposed rules limit the principal residence designation to only being available to the following types of trusts with a beneficiary who is a Canadian resident and also a “specified beneficiary”:
    1. An alter ego trust, a spousal or common-law partner trust, a joint spousal or common-law partner trust (or a similar trust for the exclusive benefit of the settlor during the settlor’s lifetime);
    2. A testamentary trust that is a qualifying disability trust; or
    3. A trust for the benefit of a minor child of deceased parents.

    Transitional relief is provided for affected trusts for property owned at the end of 2016 and disposed of after 2016. If the trust owned the property before 2017, the proposed rules highlighted above do not apply in determining whether the property may be designated as a principal residence of the trust for a taxation year that begins before 2017.

    In the context of the current rules, it is a common family estate planning strategy to hold real estate properties in a personal trust with a consideration that the principal residence exemption may be claimed on that property in the future. While the personal trusts affected by the proposed rules may still continue to hold such properties, it would be prudent for affected taxpayers (beneficiaries, trustees or settlors) to assess whether the original planning objectives are still being met.

  3. Limits to the normal reassessment period and designations – Under the current rules, the CRA may at any time assess tax paid and other amounts payable by a taxpayer for a taxation year, but may not assess after the “normal reassessment period” for the year. Notwithstanding certain exceptions, the normal reassessment period for individuals and trusts is generally three years from the date of the original CRA notice of assessment.Very generally, the proposed rules clarify that the CRA has the ability to reassess tax beyond the normal reassessment period (unlimited period) if the taxpayer or a partnership does not report a disposition of a real estate property on the appropriate tax return for the year in which the disposition occurs. The scope of the proposed change is much broader as it applies to any unreported disposition of a real estate property (subject to some exceptions) and not just the disposition of a principal residence. However, the reassessment beyond the normal reassessment period under the proposed rules would only be limited to the unreported disposition of a real estate property. If the return is amended to include a previously unreported disposition of a real estate property, then the normal reassessment period for that disposition would begin from the date of the CRA notice of reassessment.The proposed rules discussed above effectively override the CRA’s administrative policy discussed earlier. The proposed rules apply to taxation years ending after October 2, 2016. Accordingly, starting with the 2016 taxation year, vendors who sell their principal residence (including deemed dispositions) on or after January 1, 2016 are now required to report the sale on their income tax return and make an appropriate principal residence designation to claim their principal residence exemption.
  4. Other compliance nuances – Where the sale of a home has been reported but an appropriate principal residence designation was not made in the taxpayer’s tax return, the CRA will be able to accept a late principal residence designation in certain circumstances, subject to a penalty (maximum $8,000). It is unclear at this time whether the principal residence designation will be allowed at all if the taxpayer reports the sale of the principal residence by amending their original return (as opposed to reporting the sale on the initial filing).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

33 Tax Tips For 2016

 Article by Silvia Jacinto, BComm, MTax
Crowe Soberman LLP

33 Easily adaptable tax ideas for you and your family

Our annual Tax Tips can assist you in your tax planning.

It presents some quick ideas and strategies. Please take the time to review your 2016 tax situation and call us for specific recommendations tailored to meet your needs. We will be pleased to work with you on these and other tax-savings ideas.

Investment income

1. Tax rates are significantly more favourable for dividend income than interest income.

  • The top personal tax rates in Ontario for 2016 are as follows:

  • The top personal tax rates are not expected to change for 2017.
  • Re-evaluate your investment strategy by comparing the pre-tax dividend rates with the pre-tax interest rates using the chart provided on page 15.

2. Defer tax on interest to the following year by investing funds for a one-year term ending in the next calendar year.

3. Defer purchases of mutual funds until early in the next calendar year to minimize taxable income allocated in the current year from the mutual fund.

4. Existing holding companies that have built up refundable dividend tax should consider paying dividends to recover this tax. Depending on its year-end, the company may have up to 24 months to enjoy the benefits of the tax refund before the shareholder is required to pay the personal tax on the dividend. The individual circumstances should be reviewed.

Capital gains and losses

5. If you own qualified small business corporation (QSBC) shares or qualified farm and fishing property, you may benefit from the lifetime capital gains exemption of $824,176. The exemption is indexed to inflation annually.

  • The government has maintained the exemption of $1,000,000 for qualified farm and fishing property. The exemption is available on dispositions made on or after April 21, 2015.

6. Consider realizing accrued losses on investments to shelter capital gains realized this year and in the previous three years.

  • Note that a loss realized from the disposition of an investment may be denied if you repurchase the investment within a short period of time.

7. If you have significant trading activity, your sales of securities may be considered a business for income tax purposes.

  • If your sale of securities is considered a business, your profits will be fully taxable as income (instead of being considered capital gains taxable at 50%), and your losses will be fully deductible against any source of income.
  • If you are concerned about your sales of securities being considered a business, you can consider filing a one-time, non-revocable election with the Canada Revenue Agency.
  • This election will treat all of your gains from dispositions of Canadian securities as capital gains (and all of your losses as capital losses) for the current year and all future years.

Charitable donations

8. Consider donating publicly-traded securities instead of cash.

  • A tax-advantaged gift of securities can be made to a private foundation as well as to public charities. Any appreciation in the value of the securities will not be subject to capital gains tax if the securities are donated to:
  • A registered charity; or
  • A private foundation after March 18, 2007. There are special rules that apply to persons not dealing at arm’s length with the foundation. For more information, please contact us.
  • The donation credit (for individuals) or deduction (for corporations) continues to be available for the fair market value of the securities donated.
  • To avoid capital gains tax on the appreciated securities, the actual securities must be transferred to the charity or foundation.
  • Similar rules will apply to a capital gain on ecologically sensitive land donated to a conservation charity.
  • Due to 2011 changes to the tax rules, the donation of flow-though securities may trigger a capital gain to the donor.

Note: The Federal Government has abandoned the proposal to have the same benefits apply on the capital gains arising from the disposition of private corporation shares or real estate.

Did you know?

The Liberal Government announced some changes to the tax rules associated with the disposition of a principal residence and the eligibility for the principal residence exemption (PRE). Please refer to Crowe Soberman LLP’s October 2016 Tax Letter (http://crow­­pal-residence-exemption-claim/ ) for details on the new tax measures. In summary, the following new rules have been introduced:

  • A non-resident will not be eligible for the PRE in respect of the year a property is acquired unless he/she was a resident of Canada in that year.
  • Only certain trusts will be eligible to claim the PRE. Many ordinary family trusts holding a principal residence that is inhabited by one or more beneficiaries will have restrictions on the PRE under the new rules. There are transi­tional rules that will allow such trusts to utilize the PRE on the accrued gain on the property up to December 31, 2016. Any future appreciation in the property would be subject to tax.
  • The property can be distributed to one of the beneficiaries (only to the extent he/she ordinarily inhabits it) on a tax-deferred basis. The beneficiary can then sell the property and claim the PRE personally. The transfer of the property from the trust to the beneficiary can occur after December 31, 2016, but the beneficiary must continue to ordinarily inhabit the property if he/she wants to fully shelter the gain with the PRE on a future sale. Note that the trust itself will no longer be eligible to claim any portion of the PRE in respect of gains accrued after Decem­ber 31, 2016.
  • All dispositions of principal residences must be reported on Form T2091, whether or not the gain is sheltered by the PRE. Penalties for non-compliance will apply. Reporting requirements apply for the 2016 and future tax years.
  • CRA may reassess a taxpayer’s return beyond the three- year normal statutory assessment period when a dis­position of a principal residence is not reported.

Deciding On The Structure Of Your Business? Things You Need To Know

Article by Jordan K.M. Brown, Patrick Fitzgerald, Matthew Gorman, Athar K. Malik, Griffith D. Roberts, Daniel L. Stevenson and Peter T. Zed

Cox & Palmer

Sole Proprietorship

In a sole proprietorship, an individual is the sole owner of the business and is personally responsible for all the debts, obligations and liabilities related to the business. All the benefits and the profits from the operation of the business are considered to be those of the sole proprietor.


  • Direct control of decision-making
  • Inexpensive to form
  • Relatively low start-up costs
  • All profits go to the sole proprietor


  • Unlimited personal liability of the proprietor (creditors can seek recourse against the personal assets of the sole proprietor to pay off any business debts)
  • Treated as self-employed for income tax purposes, which generally means higher tax rates
  • Difficulty raising capital or attracting investment
  • Difficult to provide employee incentives (no shares to issue, no option plan etc.)
  • Most established government grants or assistance programs are geared towards corporations


A partnership is a business structure where an individual carries on a business with one or more partners. The partners combine their financial resources into the business. An agreement between the partners can establish the terms of the business and protect each partner in case of a disagreement or dissolution of the company. As a partner, each individual shares in the profits and losses of the business according to the terms of the agreement.

When establishing a general partnership, the partners should have a partnership agreement drawn up with the assistance of a lawyer to ensure that their interests are protected and that issues like profit sharing, business responsibilities and dissolving the partnership are clearly established.


  • Inexpensive to form
  • Sharing of the management, assets and profits of the business (depending on terms of partnership agreement)


  • Unlimited liability (if the partnership has business debts, personal assets would be used to pay off the debt)
  • Joint and several liability – individuals can be held financially responsible for the business decisions made by their partner
  • Partners are self-employed for tax purposes, which means income is taxed at personal rates
  • Negotiations of partnership agreement can be expensive


An incorporated business is a legal entity that is considered to be separate from the shareholders (owners). Incorporation can be done at the federal or provincial level. A shareholder of a corporation is generally not personally liable for the debts, obligations or acts of the corporation. A corporation may carry on business, incur liabilities and own property and the profit or loss from these activities belongs to the corporation rather than the shareholders or directors. The income of the corporation is taxed at a rate that is applicable to the corporation (which are generally lower than personal income tax rates). It is always important to seek legal advice before incorporating.


  • Limited liability of shareholders
  • Transferability of ownership
  • Continuality of existence if wished (companies do not die)
  • Separate legal entity from the incorporators
  • More attractive to investors and easier to raise capital
  • Possible tax advantages through combinations of lower corporate income tax rates and dividend strategies
  • Ability to provide equity incentives to employees (shares and/or stock options)
  • Many government grants and programs are made accessible


  • Generally more expensive to incorporate (compared to carrying on as a partnership or sole proprietorship)
  • Corporate record keeping is required and the company has annual filing obligations
  • Potential for control issues if multiple shareholders
  • Corporations are required to file a separate tax return from the owner(s)
  • Subject to corporate legislation, there is a need for legal advice
  • Negotiation of shareholder agreements can be expensive but shareholder agreements are a key component in protecting a company with high growth potential

Corporate Name

Choosing the right name for the corporation is an important decision for most start-ups. The name should be distinctive to differentiate a corporation from its competitors. It should provide information about the product or services offered and a good name will help to attract potential customers and build the company’s brand.

Note: a business or corporate name is not the same thing as a trademark and does not provide the same protection. In many cases, a business or corporate name can also be used as a trademark, but it is important to seek legal advice on the distinction. It is also advisable to confirm you are not infringing on someone else’s rights and to seek protection for your trademarks through registration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.