When it comes to assets and borders, things can get a little hazy, especially when Canadian laws are cross-checked with another country’s laws. If you’re dealing with assets in more than one country or have a family outside Canada, a cross-border trust might be a solution to your international estate problems.
Here, we’ll be talking about cross-border trusts, what they are, how they work, and why people are using this type of trust. But if things are still blurry, hiring a lawyer who is a pro in this area of the law would be your best option to make things clearer.
What is a cross-border trust?
A cross-border trust is created by a settlor (also called grantor, originator, or trustor) in Canada, which is ideal when any of these situations happen:
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they have properties, either real properties (e.g. lands) or personal properties (e.g. shares of stock), outside Canada
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their heirs or their potential beneficiaries to the trust, are living in another country, either as a resident or a citizen
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a trust is set up in another country, but its settlor, including the heirs and beneficiaries, are all residents of Canada
Here, the settlor will create a trust agreement with a trustee, so that their properties are managed properly and eventually transferred to their heirs and beneficiaries. This can happen when they die or become incapacitated or after a period following these events. Although such an agreement can also be contained in the settlor’s will.
Simply, it’s like your usual trust; it’s just that there’s some foreign element to it because of the situation of the settlor, the beneficiaries, or the properties.
In cross-border trusts, trustees are usually law firms and companies that have knowledge of the different laws on estates, succession, and taxation in both countries. People engage in creating cross-border trusts because of certain tax and property transfer benefits.
One type of cross-border trust is a cross-border income trust (or CBIT). Watch this video to learn more about it:
If you’re interested in learning more about cross-border trusts, reach out to a specialized lawyer working in this area. For your search, you can use our directory of the Lexpert-ranked lawyers in the Lexpert 500 Cross-Border Guide.
How to create a cross-border trust
Creating a cross-border trust follows the usual steps involved in a usual trust; but here, there are some special considerations because of its uniqueness.
As a settlor, here are the steps to follow if you want to make a cross-border trust:
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decide on certain terms: examples are the conditions on how the properties will be administered by the trustee, the terms on the transfer of properties to the beneficiaries, or the compensation of your trustee
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know your beneficiaries and assets: make an inventory of all your assets (in and out of Canada, both real and personal, no matter how large or small) and your beneficiaries, considering who your heirs are
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structure the cross-border trust: with the help of your lawyer, you’ll start building on your trust agreement, mapping out the estate and tax planning laws of Canada and the other countries involved in it
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secure documentation: with a lot of legal documents involved (the trust agreement, a will, powers of attorney, etc.) you, your lawyer, and your trustee should have everything in file and properly secured
Aside from lawyers experienced in cross-border transactions, you can reach out to an estate and tax planning lawyer if you decide to create a cross-border trust.
What are the features of cross-border trusts?
On top of the things that your common trust has to offer, a cross-border trust has more features, making it proper for dual citizens and non-residents of Canada. For the most part, a settlor does not have to worry anymore if their property in another country is neglected or that their beneficiary is left behind.
To help you decide if a cross-border trust is suitable for your case, below are some of its advantages and features:
A revocable trust
As with any other trusts, cross-border trusts are usually revocable. This means that the trust agreement itself, or just some of its provisions, can either be changed or revoked by the settlor.
For instance, if a non-resident beneficiary eventually settled in Canada, then a cross-border trust can be converted into a simple family trust.
However, no law prohibits a settlor from structuring their trust as an irrevocable one. Whether to have a revocable or irrevocable trust is a question that must be answered with your lawyer.
To transfer properties
One way of legally simplifying the transfer of properties from the settlor to the beneficiaries is through a cross-border trust. This is especially true when either are non-resident of Canada or when the property itself is in a foreign country.
In a trust, properties will be managed by the trustee for the benefit of the beneficiaries. These beneficiaries may someday own the properties depending on the terms of the trust agreement.
With this process, the usual—and longer—process of transferring the assets from one to another is effectively skipped. Plus, a settlor is assured that, through the trustee, the assets will be protected for the beneficiaries until they're ultimately transferred to them.
To avoid probate fees
One of the advantages of using trusts is that it’s one way to avoid probate, especially inter-vivos trusts (trusts that are created while the settlor is still alive). Under Canadian laws, properties that are transferred in a trust are not part of the deceased’s estate. This means that if the estate must undergo probate, those that are under the trust are exempt from it.
Part of cross-border estate planning
An estate plan is created so that one’s assets will be distributed according to their wishes, even after they’ve passed away. Part of this plan can be writing a will or establishing a trust, among other things.
This plan is beneficial since it will ensure the future of one’s family, even long after their death. It also guarantees the management of the assets left behind, especially those that are income-generating.
However, if not all assets or beneficiaries are in Canada, then another option would be to create a cross-border estate plan. Part of the plan can be a cross-border trust to be set up in the country depending on the settlor’s case.
This video discusses the benefits of a cross-border estate plan for Americans and Canadians:
Visit and bookmark our Legal FAQs page for more articles, covering different practice areas of the law.
What are the tax implications of cross-border trusts?
One important feature of cross-border trusts is that they help minimize the tax burden on one’s properties. This is helpful, especially when there are conflicting laws between Canada and the other country where the properties or beneficiaries are in.
For example, the federal tax laws of Canada and US are different. In Canada, we have the capital gains tax when someone dies. On the other hand, the US imposes estate taxes, gift taxes, and inheritance taxes, which are not levied in Canada. Rather, Canada has a “deemed disposition” regime of taxes upon one’s death.
Also, there are even more tax laws within each country. Each province and territory in Canada may other laws affecting the taxes on a person, just as each state in the US also has its own laws.
For this, lawyers for cross-border transactions can advise clients on how to structure their trust, so that those hefty taxes can at least be avoided—legally, that is. We’ll briefly discuss below how Canada’s taxes work in relation to cross-border trusts.
Double taxation of trusts
As part of estate planning, a cross-border trust must be carefully created, so that it will not result in double taxation. This occurs when a similar transaction is taxed twice, such as:
- once by the Canada Revenue Agency (CRA) and again by the taxing authority of the foreign country
- twice by the similar country, under different tax laws
For example, there is double taxation when the selling of a property is taxed, plus it’s again taxed when transferring it to the trust.
In preventing double taxation, there may be a tax treaty which Canada and the other country are signatories of. But to be sure, it can still be avoided through a tax-free trust.
Knowledge of these treaties is a must, for which your lawyer for cross-border transactions is an expert at, so that no potential double taxation exists.
Residency of the cross-border trust
Finding out the residency of the trust is important for taxation purposes because a trust is taxed by the country where it is a resident of. This is because, unlike individuals and corporations, taxation of cross-border trusts does not just depend on where the parties physically are.
To determine whether a cross-border trust can be taxed by Canada, the CRA says that a trust can either be a resident, non-resident, or deemed resident of Canada:
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resident: when the trust passes the factors (below) for it to be considered as a Canadian resident
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non-resident: includes foreign trusts and those where the factors (below) are not applicable to
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deemed resident: when there’s a resident contributor or a resident beneficiary under the trust
However, a trust is not a deemed resident for the purposes of:
- calculating a Canadian’s liability when paying the trust
- determining a Canadian resident’s foreign reporting requirements
Factors to decide the trust’s residence
These are the factors that the CRA looks at in deciding whether the trust is a resident or non-resident of Canada:
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a trust resides in the place where its real business is carried on
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a trust’s business is where its central management and control takes place
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management and control of the trust rests and is exercised by any of the following:
- trustee
- executor
- liquidator
- administrator
- heir
- other legal representative of the trust
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the trustee’s residence (or other representative of the trust) does not always determine the trust’s residence
If the trust is not taxable in Canada, it may be taxable by the foreign country in which it is a resident of. This again highlights the importance of consulting a cross-border lawyer, who can guide you on the ways to minimize the impact of taxes on your trust.
In any case, your Canadian lawyer would have a counterpart in other countries where Canadians usually have properties in. With the help of both lawyers, your cross-border estate plan and trust are guaranteed.
Cross-border trusts: for borderless asset control
Managing assets in more than one country doesn’t have to be a legal blur. With a well-structured cross-border trust, settlors can skip the headaches since their assets will be well maintained and passed on to their heirs and beneficiaries as they wish. In structuring this type of trust, settlors can rely on lawyers, so that everything is crystal clear.
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