December 2001 volume 5, issue 3 

by Stephen Thompson, CA, CFP, TEP

Using an Alberta Trust is not a new strategy. It has been around for a number of years. However, with the reduction in personal tax rates in Alberta and the introduction of legislation allowing for the creation of Joint Spousal and Alter Ego Trusts, this strategy is becoming more popular for high net worth entrepreneurs.

The overall concept of an Alberta Trust is straight-forward. Alberta has a low personal income tax rate, so if we can have income taxed in Alberta, tax will be saved. Normally, in order to do this, you would have to move to Alberta and become a resident of that province. Or alternatively, you could transfer some income producing assets into a trust that becomes a resident of Alberta, and then the income of the trust is taxed at the Alberta tax rate. And that is basically the strategy. Rather than you moving to Alberta, we move some of your assets.

Establishing Residency of the Trust

The key to the strategy is that the trust must be resident in Alberta. In order for the Trust to be considered a resident of Alberta, the trustees with majority voting control must reside in Alberta. If you are not an Alberta resident, the voting control of your Trust will therefore, be in the hands of someone else. The risk of this delegated authority can be mitigated somewhat by limiting the powers of the trustee. This is typically done by legally requiring the trustees to follow precise guidelines for the operation of the Trust. However, ongoing decision making must lie in the hands of the Alberta resident trustees.

Benefiting From Alter Ego and Joint Spousal Trusts

Alberta has long had low tax rates, so why the sudden interest in Alberta Trusts? The reason, the passing of legislation this summer allowing for the creation of Alter Ego and Joint Spousal Trusts. These trusts are new and have several unique features, not the least of which is the ability to transfer assets into the trust tax free. Normally, when you transfer investment assets into a trust you will be considered to have sold those assets at the time of the transfer. This limits the immediate benefit of using the trust because any accrued gains can’t be transferred into the trust. With these new trusts, the accrued gain can be transferred tax free into the trust. This means a substantial portion of your wealth can be easily transferred into a trust and if that trust is resident in Alberta, it will be taxed at the Alberta tax rates.

Another significant benefit to using an Alter Ego and Joint Spousal Trust, is the ability to avoid probate fees on assets held within the trust. Upon passing, the assets of the trust transfer automatically to the next beneficiaries that you have specified in the trust agreement. Probate is avoided and the transfer is done easily and automatically. There are, however, two important limitations to using Alter Ego and Joint Spousal Trusts:

1. To establish an Alter Ego Trust, you must be at least 65 years old. With a Joint Spousal Trust either yourself or your spouse must be at least 65 years of age.
   
2. In the case of a Joint Spousal Trust, you and your spouse can be the only capital and income beneficiaries of the Trust. With an Alter Ego Trust, you alone can be the only capital and income beneficiary of the trust. With both Trusts second tier beneficiaries (such as your children) can be named, but during your lifetime, only you and your spouse can be direct beneficiaries.

Determining Whether You Have Sufficient Income

When determining sufficient income, it is important to review your own income level, as well as the income levels of your spouse and your family members, if appropriate. For an Alberta Trust strategy to be tax effective, your annual taxable income should exceed $100,000, since the first $100,000 is taxed at a reduced rate in Ontario. If this is the case, the strategy would be first to have the income taxed in the hands of the various family members (thus “using up” lower Ontario tax rates), and then transfer the remaining income to your Alberta Trust where it would be taxed at the lower Alberta top marginal rate.

Using a Family Trust

As mentioned earlier, Alter Ego and Joint Spousal Trusts can only be established if you or your spouse is over the age of 65. The transitional part of your tax reduction strategy would be to set up a Family Trust. This works in the following way:

1. An “estate freeze” is performed, which usually requires reorganizing the capital of your company, and exchanging all the existing common shares for redeemable preferred shares.
   
2. The Family Trust then purchases the common shares of the company. Income earned on the common shares is then taxable in the hands of the Trust. However, the accumulated wealth attached to the preferred shares would remain in your hands. After turning 65, this accumulated wealth can be transferred into an Alter Ego or Joint Spousal Trust, enabling you to benefit from the lower Alberta tax rates on this wealth.

If you live in a province other than Alberta, and your income exceeds $100,000, you should consider the benefits of establishing an Alberta Trust as part of your tax planning strategy. For more information, please contact your Wilkinson & Company LLP Client Services Partner.

Steve Thompson, CA, CFP, TEP is a tax partner and Certified Financial Planner with Wilkinson & Company LLP. He is a graduate of the Canadian Securities Course, and author of the best-selling tax guide, Beat the Taxman: Easy Ways to Save Tax in Your Small Business.