There has been much publicity given to CRA's announced program to audit Family Trusts with a view to determine whether certain trusts offend income splitting avoidance tax rules.
While we are not aware of any trusts which have been so challenged, it is prudent to be ready for a CRA audit. In this short article, we wish to provide certain advice as to the documents which should be maintained by trustees.
A Common Problem
Many inter-vivos trusts no longer have the original asset which legally created the trust termed "the settled property". CRA seems overly perturbed about this possibility. Lawyers with whom we had conversations do not share this CRA concern.
However, if the settled property no longer exists (e.g. the coin lost or the bank account closed) an affidavit can be drawn by the settlor, the lawyer who wrote the trust indenture and/or the original trustees attesting to the existence of the settled property at the date that the trust was created.
Trust Records Which Should Be Retained
We recommend that the following documents be meticulously kept for an inter-vivos trust.
1. For a new trust, records of the original settlement (the loonie, gold coin, etc). If a loonie, paste it on to trust indenture. Take a photocopy of the loonie/coin, both back and front, and retain this.
2. Annual Trustee resolutions to allocate income before year end.
3. Promissory notes issued once amounts are finalized regarding income payable at year end. (Finalization usually occurs after year end).
4. If parents are reimbursed for expenses of the children, copies of receipts to back up the reimbursement.
5. Cancelled cheques for payments to or on behalf of children or other beneficiaries.
A testamentary trust (created via the will of a deceased person) should also retain items 2 to 5 above, where appropriate based on the actual trust activities which transpired.
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.