Canada Income Tax Trusts Not Real Trusts

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Canada Income Tax Trusts Not Real Trusts

Canada Income Tax Trusts are Not Real Trusts

Canada income tax trusts are not real trusts. This is because our tax research concludes Canada deems the trust parties are handling Canada’s money. Picture: whoswhoandnew.blogspot.com.au.

Summary

Canada income tax trusts are NOT real trusts. This is because our tax research concludes Canada deems the trust parties are handling Canada’s money. Therefore, they already have trust relationships with Canada. It seems this is why Canadian laws can control, and tax, such trust property.

A Canadian Income Tax Act trust is not a real trust!

Canada Income Tax Trusts: Background

King Henry VIII enacted the 1536 Statute of Uses. People were using real trusts to avoid taxes.

King Henry VIII enacted the 1536 Statute of Uses because people were using real trusts to avoid taxes.

Trusts originated for protecting against land seizures – and also for avoiding taxes[1]. This is because a real trust splits the title. The trustee has legal title (legal ownership). The beneficiary has beneficial title (legal use). The trustee and the beneficiary are different people. The title, split between two people, makes it difficult to tax or seize such trust property. This is because trustees own the trust property, but don’t have it; beneficiaries get to use the trust property, but don’t legally own it.

Apu’s Theory Explains Canada Income Tax Trusts?

Apu’s Theory[2] is our research on how Canada’s Income Tax Act[3] (“ITA”) seems to really work. Since the ITA taxes trusts, for our theory to have merit, it has to explain how the ITA treats trusts, such as:

  1. Deeming Canada income tax trusts as ITA “individuals”;
  2. Requiring Canada income tax trusts file information returns;
  3. Deeming trust property as any trust party’s income.

1 Canada Income Tax Trusts: Deemed as ITA “Individual”

Waters' Law of Trusts discusses Canada income tax trusts.

Waters’ Law of Trusts discusses Canada income tax trusts.

Canadian law books[4] state trusts are contracts between grantors and trustees. As such, they are normally not subject to laws[5] or even the Charter[6]. This means such trusts cannot be a legal person. And since trusts are about property rights, if you choose, your trust can then be under Provincial[7] jurisdiction. So how can Canada’s ITA deem a trust as a federal legal person, as an ITA “individual”[8]?

Applying Apu’s Theory, Canada can do this if grantors and/or trustees are handling trust income as Canada’s “public money”[9].

2 Canada Income Tax Trusts: Must File Information Return

Canada income tax trusts are not real trusts. Trust parties are deemed as handling trust income as Canada's money. This means they already have a trust relationship with Canada. Is this why Canadian laws can control and tax such trust property?

Canada income tax trusts must file T3 tax and information returns.

Being ITA “individuals”, ITA trusts must file tax returns. But why, unlike other ITA “individuals” (even if it has no income), do they must file information returns?

This makes sense if the trust property is deemed as Canada’s public money. The owner, Canada, wants information on who is handling its property. It also wants information on the contractual relationships between such trust parties.

3 Canada Income Tax Trusts: Can Deem Trust Property as Any Trust Party’s

Canada can also deem the ITA trust property as belonging to any trust party. But, from earlier, that is normally not possible if it is a real trust.

However, since Canada can deem any trust party as handling that trust’s income as Canada’s public money, it makes sense Canada can also deem the trust property to belong to any such trust party.

Conclusion

A Canada income tax “trust” is NOT a real trust. Apu’s Theory offers plausible explanations of how the ITA treats ITA trusts. In conclusion, it seems ITA trust treatments corroborate Apu’s Theory.

  1. The 1535 Statute of Uses is one of the King’s attempts to tax trusts.
  2. See also: Apu’s Theory, Part 2; Apu’s Theory, Part 3; and Apu’s Theory, Part 4.  
  3. Trusts are in the Income Tax Act, s.104 to 108
  4. For example, Tax Planning Using Family Trusts, 2nd Ed., page 4, Canadian Institute of Charted Accountants: “Unlike a corporation, a trust is neither a person nor an entity”. Three lawyers wrote it.  
  5. Quoted from CICA. 
  6. The Charter of Rights and Freedoms, 1982. 
  7. Real trusts are under the jurisdiction of the Constitution Act, 1867, s.92(13), being a property and civil right within the Provinces. It is also why Provinces have their own Trustee Acts
  8. By ITA s.104(2), as an “individual” defined by ITA s.248(1)
  9. “Public money” defined by section 2 of Canada’s Financial Administration Act. Also called Canada’s Consolidated Revenue Fund.

 

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