Revocable Trusts

Revocable trusts are common estate planning tools for US persons who live in the US. They are effective structures that function like a combination of a will and a power of attorney document.

Unfortunately, US revocable trusts trigger Canadian tax consequences.

The IRS views US revocable trusts as flow-through entities. As such, the IRS taxes income earned by US revocable trusts at the grantor’s personal income tax rate. In contrast, the CRA regards US revocable trusts as separate from the grantor. This discrepancy creates the potential for double taxation.

There are Canadian tax rules that may allow US citizen-Canadian residents to avoid double taxation on their US revocable trusts in the short-term; however, cross-border issues remain.

For instance, once a US person moves to Canada, their US revocable trust may be deemed a Canadian-resident trust that then requires cumbersome reporting to both the CRA and the IRS. Keeping up with this reporting can be costly and time-consuming. Moreover, exposure to the 21-year deemed disposition rule in Canada may trigger double taxation.

US citizens living in Canada who retain a US revocable trust may ultimately choose to revoke their trust to avoid the consequences discussed above. Creating a cross-border trust, or an alter ego/credit shelter trust, to hold US-situs assets might be a preferable cross-border planning solution.