The world seems to be shrinking. When I am now in the Eaton Centre – I find myself trying to guess whether the shopper next to me is from Sao Paulo or from Rio de Janeiro by their accent or from some other part of Brazil. Fourteen years ago hearing Brazilians in the food court would have been a novelty to such an extent that they likely would have been invited home for dinner. Now I just smile and walk by guessing the origin of the accents. I of course never stop listening for a Dutch accent from South America. This quest to speak Dutch however is not so strong anymore with the advance of Skype and believe it or not finding my elementary class mate from de Juliana School. I found Jozef only a year ago although both Jozef and I have been living in Canada since the early 1980s. I had heard he had immigrated to Canada but had never been able to find him. Thanks to Facebook I was able to find Stuart from the home country and through him Jozef.
I am not rambling dear reader – the whole point I am trying to make is that with so many of us here in Canada with origins elsewhere and with relatives remaining outside of Canada – we should not lose sight of tax planning opportunities. I already mentioned the immigration trust vehicle which however does not make sense for those of us longer than 5 years in Canada.
What makes sense and should be considered is the Granny Trust for those of us with relatives back home and where such relatives wish to contribute to the welfare of those in Canada. Of course an outright gift could be made to the Canadian beneficiaries but as an advisor I caution against direct gifting of large sums. Direct gifting subjects the funds to claims from creditors, from ex-spouses and can be depleted quickly with poor spending habits of the beneficiaries.
The Granny trust is named as such because it was set up by one grandparents for the benefit of the grandchildren in Canada. However it is not restricted to intergenerational gifting. The name Granny is a misnomer. It is a foreign trust set up for Canadian beneficiaries by a non-resident settlor and is not limited to grandparents setting up a trust for their grandchildren. As the trust is known as a Granny Trust, I will continue to refer to it as that. A Granny trust set up correctly allows the Canadian beneficiary to receive capital from the trust free of Canadian income tax.
To ensure the Granny trust is not deemed a Canadian trust, the trust has to be managed and controlled outside of Canada. There can be no Canadian contributors to the trust at any time. Only a non-resident can contribute to the trust. The trust can be a testamentary trust which means it is created upon death through the will of the settlor. The trust can also be set up during the life of the settlor. A trust set up during the testator’s life time is referred to as an inter-vivos trust.
The trust must be settled by a non-resident of Canada and must be managed and controlled outside of Canada. At no time can there be a Canadian contributor. At all times, the trust contributions must be made by a non-resident of Canada. Income and gain accumulated in the trust can be added to the capital of the trust which can then paid out free of Canadian income tax to the beneficiary situated in Canada.