How do trusts save on tax?
I’m often asked to help someone form a trust so that they can save on tax.
My first response disappoints them, because a trust does not save any tax in the short term, unless you abuse its purpose and use the conduit principle to syphon income out to low taxed beneficiaries. And even that can easily fall foul of s7 of the Income Tax Act.
My second response, however, always wakes them up.
If you build wealth in your own name, or even worse in a company that you own, then you will lose a third or more of it in taxes when you die (or, if you’re married, when the second of you dies).
Yes, one third!
If, sensibly, you had built that wealth within a trust structure, there would be zero tax on your death. Simply put, when you die, the trust does not die.