All About Estates

Shedding the Tax Light on a Blind Trust

A blind trust is a trust in which a settlor (who would also be the contingent beneficiary) reserves the right to terminate the trust but agrees to relinquish all other control over the trust i.e. administered and managed by others without updates, advice, instruction, or account to the settlor. Whether they are legislated to do so or not, individuals who hold public office use a blind trust for the duration of their tenure to avoid conflict of interest.

The Canada Revenue Agency recently shed some light in a technical interpretation on the tax implications to a blind trust on the death of the sole settlor/beneficiary who set up the trust because of the settlor/beneficiary held public office.

The income tax implications associated with a blind trust agreement depend on whether the agreement results in the creation of a valid trust for income tax purposes. Generally speaking, a trust cannot be established unless there is intent to create a trust, there is identified property to be placed in trust, and the identity of the beneficiaries of the trust is clearly set out.

Assuming the blind trust agreement created a valid trust for income tax purposes, a transfer of capital property to the blind trust is generally treated as a disposition of the property at fair market value, with the resulting recognition of any capital gain or capital loss. In certain cases like the one referred to in the technical interpretation, the decedent may have satisfied certain conditions in the Income Tax Act and was allowed to transfer property on a tax-deferred basis thereby avoiding the immediate recognition of any capital gain or loss on transfer.

When the settlor/beneficiary dies the blind trust is generally subject to the deemed disposition of its property at fair market value resulting in the recognition of any capital gain or loss.

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About Steven Frye
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