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Consider an Alberta trust even if you don't live there

If you're like me, you can probably name more than a few people in your life who have filed for divorce. And there are some strange but true stories about divorce, as published by the Bathroom Reader's Institute (no kidding).

Consider the man in Hazard, Ky., who divorced his wife because she "beat him whenever he removed onions from his hamburger without first asking permission." Then there was the woman in Frackville, Pa., who filed for divorce because her husband insisted on "shooting tin cans off of her head with a slingshot."

And how about this one: A friend of mine was tempted to divorce her husband last week when he suggested they move from Toronto to Calgary where tax rates are lower.

Okay, the story isn't as eccentric as the others. In fact, I told her that maybe her husband was on to something. After all, Alberta is about as close to a tax haven as you'll get in Canada. Then I told her she might be able to take advantage of Alberta tax rates without actually moving to Alberta. I'm talking about an Alberta trust.

Alberta taxpayers

It's no secret that the top marginal tax rate in Alberta is lower than any other province or territory. Take a look at the table to see the difference in top tax rates in Alberta, Ontario, British Columbia, and Manitoba.

Wouldn't it be nice if you could add an Alberta taxpayer to the family to share your tax burden? Where the amount of taxable income is high enough, an Alberta trust may make sense. The spread between the tax rates in Alberta and the other provinces can be pure tax savings to you.

Alberta trusts

The key to taking advantage of Alberta tax rates, short of moving to Alberta, is to establish a trust that is resident in Alberta. You can then transfer certain income-producing assets to this trust. Since the trust will be resident in Alberta, income earned in the trust will be taxed at Alberta tax rates. It's important to note that, for the trust to be resident in Alberta, a majority of the trustees must reside in Alberta (a lawyer, accountant, friend, associate, or trust company could do the job), and the management and control over the trust assets must be exercised in Alberta.

How much tax can this idea save? Consider the example of a business owner in Ontario who wants to sell her business that is worth, say, $5-million.

Instead of selling her business to a third party directly, she could transfer the private company shares to an Alberta trust set up for the benefit of her husband (a spousal trust), with no tax to pay on that transfer.

The trust could then sell the shares to a third party, which would trigger a tax bill of $975,000 in Alberta. If the owner had sold her shares personally, she would have paid tax of $1,160,000 if she is in the highest tax bracket in Ontario. The tax savings would be $185,000 in this case.

In addition to tax savings, you may save probate fees since assets that pass to beneficiaries under the terms of a trust are generally excluded from the estate of a deceased person.

Other issues

Keep in mind a few things here.

First, the strategy is not for everyone. You'll have to be in the highest tax bracket for an Alberta trust to make sense. The higher your income and the value of your assets, the better. In any event, it will be important for a tax professional to provide a cost/benefit analysis to see if the idea is worthwhile in your situation.

Finally, your province of residence may not appreciate the strategy. In Quebec, for example, legislation has been introduced to curtail the use of Alberta trusts. Speak to a tax pro about any provincial risks.

tcestnick@aic.com

Top personal tax rate comparison, 2003

........................Regular.......Capital.......Canadian

........................Income........gains.........dividends

Ontario...............46.41%........23.20%......31.33%

Alberta..............39.00%........19.50%.......24.08%

Spread................7.41%.........3.70%.........7.25%

*****

British Columbia....43.70%........21.85%.......31.85%

Alberta...............39.00%.......19.50%........24.08%

Spread.................4.70%.........2.35%.........7.50%

******

Manitoba.............46.40%........23.20%........35.08%

Alberta...............39.00%.......19.50%.......24.08%

Spread.................7.40%.........3.70%........11.00%

SOURCE: AIC LTD.



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