Alter Ego Trusts and Joint Partner Trusts – A Primer

Readers have offered me several suggestions for topics over the last few months. The three most popular requests have been: (1) an update on Tax On Split Income (“TOSI”), which was covered off in late February; (2) a discussion on gifting and leaving money to grandchildren, which you can look forward to in the next month or two; and (3) a discussion on what exactly Alter Ego and Joint Partner Trusts are and the benefits of these trusts.

Your requests are my direction and today I present a primer on Alter Ego and Joint Partner Trusts, by Katy Basi. In two weeks, I will post another blog by Katy, which uses a sample situation to reflect when these types of trusts may be helpful. It will also discuss some of the income taxes associated with these trusts.

If you are a reader of this blog, Katy needs no introduction. If you are a new reader of the Blunt Bean Counter, check out Katy’s past guest posts, including Power of Attorney for Personal Care – Mental Capacity and Medical Assistance When Dying, Estate planning for Extended Families, New Will Provisions for the 21st Century - Your Digital Life, and Cottage Trusts.

I thank Katy for her assistance with this blog post.

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By Katy Basi

Alter Ego Trusts (“AETs”) and Joint Partner Trusts (“JPTs”) are relative newcomers to the estate planning scene, having been introduced into the Income Tax Act (Canada) (the “ITA”) effective January 1, 2000. As the popularity of AETs and JPTs has increased over the last few years, we thought it would be helpful to provide a simplified description of these trusts and some of the circumstances in which they can be useful.

An AET is generally set up for the benefit of one person: a JPT, for the benefit of spouses or common law partners. (In this post when we refer to “spouse” we mean “spouse or common law partner.”) These are inter vivos trusts, meaning that they are set up during a person’s lifetime, unlike testamentary trusts, which are created as a result of the death of a person, generally by being incorporated into the person’s will. (For more on trusts in general, see this great explainer piece.)

The conditions

AETs and JPTs allow a transfer of capital assets to the trust on a tax-deferred basis. In order to obtain this deferral, the ITA sets out a number of conditions.

Some of the key conditions are:

1. The settlor, meaning the person who transfers assets to the trust, must be at least 65 years of age at the time the trust is created. A JPT sometimes has two settlors being the two spouses.
2. For an AET the settlor must be entitled to receive all of the trust’s income before death.
3. For a JPT, the settlor and/or their spouse must be entitled to receive all the trust’s income prior to the surviving spouse’s death.
4. No one apart from the settlor or, for a JPT, the settlor and their spouse, is entitled to receive any assets from the trust prior the settlor’s death (or the death of surviving spouse in the case of a JPT).
5. The settlor(s) must be Canadian.
6. A majority of the trustees must be Canadian, as the trust must be a Canadian resident trust.

Why use an AET or JPT?

AETs and JPTs are not income splitting vehicles and are subject to income attribution. Hence when spouses both contribute assets to a single JPT, it is important to track the income derived from each spouse’s contribution, in order to ensure that the tax reporting is accurate. (In the case of contributed investments, often a JPT would have separate investment accounts for the purpose of tracking the income attributable to the assets originally belonging to each spouse.)

However, AETs and JPTs offer some other important benefits, including the following:

1. Probate is not required for assets held by AETs and JPTs. For several provinces — notably Ontario, British Columbia, and Nova Scotia — this can save an estate thousands of dollars in probate fees or taxes. Other provinces, such as Quebec and Alberta, have minimal to no probate fees or taxes, and thus AETs or JPTs would not generally be used to avoid these fees.
2. Wills that are probated are documents available in the public domain; however, an AET or JPT is not submitted for probate and remains private (provided that no litigation ensues requiring production of the AET or JPT deed in court).
3. These trusts can save substantial professional costs that can be associated with probating and administering an estate, such as legal fees and executor compensation.
4. As probate is not required for assets owned by an AET or JPT, upon the settlor’s death these assets are available to the trustees on a fairly quick timeline (it is critical to ensure that the settlor is not the only trustee named in the trust deed).
5. The settlor is often one of the trustees of an AET or JPT. If the settlor becomes incapacitated, the trust deed is usually drafted to permit the other trustees to manage the trust assets. These trusts can therefore be viewed as an alternative to a financial power of attorney.

The downside of AETs and JPTs

You should watch out for several challenges when using an AET or a JPT:

1. There are upfront legal setup costs and ongoing accounting and tax administration expenses.
2. There are issues where U.S. persons or U.S. assets are involved or there are potential U.S. estate tax concerns.
3. AETs and JPTs can restrict the tax benefits of charitable giving, both during a settlor’s lifetime and upon their death.
4. Losses realized by a settlor personally may not be able to be utilized against gains realized by an AET or JPT, and vice versa.
5. Capital gains exemptions may be left unclaimed as capital gains realized on assets in the trust will not qualify for the exemption.

If this blog has piqued your interest, check out our next AET/JPT blog in a couple of weeks, which will set out a sample fact situation where an AET or JPT could be a helpful planning tool.

Katy Basi is a barrister and solicitor with her own practice, focusing on wills, trusts and estates. Katy practised income tax law for many years with a large Toronto law firm, and therefore considers the income tax and probate tax implications of her clients' decisions. Please feel free to contact her directly at (905) 237-9299, or by email at katy@basilaw.com. More articles by Katy can be found at her website, basilaw.com.

The above blog post is for general information purposes only and does not constitute legal or other professional advice or an opinion of any kind. Readers are advised to seek specific legal advice regarding any specific legal issues and for their specific province.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

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