Trusts have increasingly proven themselves to be an effective tax and estate planning tool over the past number of decades. These vehicles have been around long enough that the tax implications of the “21st Anniversary Date Rule” are now starting to create tax challenges (in some cases, for the second time). Subject to certain exceptions, the 21st Anniversary Date Rule deems a trust to have disposed of all of its capital property at fair market value (FMV) on each 21st anniversary date of the trust. Absent planning to mitigate the implications of this rule, trusts may realize income, losses, recapture, capital gains or capital losses and the related taxes without an actual liquidity event.
This rule does not apply to a spousal trust, joint partner trust or alter ego trust as the deemed disposition of the property of these trusts is deferred until the later of the date of death of the settlor of the trust or their spouse as applicable (and every 21 years thereafter). Also, although relatively uncommon, this rule does not apply to property of a trust where all interests in the trust have vested. It should be noted that where property is transferred from one trust to another, the recipient trust will inherit the 21st anniversary date of the transferor trust. In addition, non-resident trusts (such as a US revocable living trusts) are also subject to 21st Anniversary Date Rule with respect to any Taxable Canadian Property (TCP) owned on each 21st anniversary date. This issue can be particularly troublesome in the case of Canadian real estate including cottages and chalets.
There are various alternatives available in order to mitigate the potential tax implications arising on the 21st anniversary date of a trust such as the following:
If you haven't already done so, we suggest that, while you are preparing trust returns (or filing your own) for the end of this month, you make note of and track the 21st anniversary dates of your trusts. Ideally any planning for the 21st Anniversary Date Rule should commence at least two or three years in advance of the actual date.
If you have any questions regarding the tax benefits of the use of trusts and planning for the 21st Anniversary Date Rule please contact your TSG representative.
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