The Quebec trust and the common law trust have become favourite vehicles in the context of putting into place legal and tax structures.
Although the respective characterizations and legal frameworks of the Quebec trust and of the common law trust (each a "Canadian Trust") include significant differences, they are nonetheless treated in a similar way under our Canadian tax law.
The legal systems of certain countries, including France in particular, have not recognized the existence of the trust as we know it in Canadian law, at least until quite recently.
Indeed, certain trusts, including irrevocable and discretionary Canadian Trusts, were not recognized by the French legal regime.
Certain residents of France have put in place legal structures that include Canadian Trusts to hold their assets situated in France or abroad with the aim of reducing their liabilities for droits de succession et de donations (estate and gift taxes, hereinafter referred to as "DSD") as well as for l'impôt de solidarité sur la fortune (a tax on capital, hereinafter referred to as "ISF"). However, on July 6, 2011, the French Parliament adopted a new taxation system that makes Canadian Trusts and their French beneficiaries, among others, subject to French tax law (the "New Rules of July 2011").
Generally, the New Rules of July 2011 have the effect of dealing with gaps in the French statutory provisions concerning foreign trusts, including Canadian Trusts, and of lifting the veils of these entities in order to subject to DSD and to ISF the persons who would be subject thereto if foreign trusts were not used. In addition, new disclosure obligations have been put in place with respect to the existence and functioning of foreign trusts as well as the value of the property held by them. Failure to comply with the disclosure obligations will lead to the imposition of high penalties for which the trustees, the settlor and the beneficiaries of the foreign trust will be jointly and severally liable.
As mentioned above, many French residents have, over the years, used Canadian Trusts to hold their assets with the aim of reducing the amounts that they must pay in the form of DSD and ISF. With the introduction of the New Rules of July 2011, many of the structures put in place are proving to be ineffective from a French taxation perspective and substantial reorganization is required, possibly including the liquidation of Canadian Trusts.
The liquidation of a Canadian Trust may result in onerous Canadian tax consequences. That is why the analysis and putting into place of a sound and comprehensive tax plan is essential in order to minimize the potential adverse tax consequences.
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.