What is an alter ego trust used for?
It is a Canadian planning vehicle for someone who wants their assets to pass without going through probate, while leaving the tax position during their lifetime roughly where it was. The settlor transfers property in, remains entitled to the income and capital during life, and the trust is built so that the transfer itself does not trigger the tax a disposition would normally cause. The attraction is administrative as much as fiscal: the assets are already held in a structure when the settlor dies, so they do not have to be collected and re-titled through an estate.
Does an alter ego trust save tax or only probate?
Mostly the second, and it is important to be clear about that before one is set up. The structure defers rather than removes: the tax that would have arisen on the settlor's death still arises, at the point the trust reaches its own deemed disposition. What changes is administration and privacy — no probate file, no waiting for a grant before assets can be dealt with, no public record of what was held. Those are real benefits. Treating the arrangement as a way of avoiding the death-year charge is a misreading, and it tends to be discovered by the next generation.
Is an alter ego trust a bad idea if I am a US citizen?
It is the case in which the structure often turns out to be the wrong one. The design assumes a single tax system. Where the settlor, a beneficiary or the assets have a connection to the United States, the trust can be characterised quite differently on that side, with reporting and tax consequences the Canadian planning never contemplated and which can easily cost more than the probate saving is worth. That does not mean nothing can be done. It means the question has to be asked before the property is transferred, because unwinding one of these afterwards is its own taxable event.
Can I put a US property into an alter ego trust?
That is a question to ask before rather than after. United States assets carry their own rules about who is taxed on them when the holder dies, and those rules are driven by where the asset is rather than where the owner lived — which is precisely why a structure designed around a Canadian probate process may not help with them at all. There is also a practical layer: a custodian holding United States assets can decline to release them until it is satisfied about the position, and a transfer certificate, Form 5173, may be what it wants to see. Design around that rather than discover it.
Who reports the income of an alter ego trust while I am alive?
The settlor, for practical purposes, and that is by design: the point of the structure is that the tax position during life looks much as it did before the transfer. Income and gains flow back to the person entitled to them while they are alive, so there is normally no shifting of income to other family members and no reduction in tax during the settlor's lifetime. Anyone who has been told the arrangement will bring their annual tax bill down has been told something the structure was not built to do.
What happens to an alter ego trust when I die?
The deferral ends. The trust reaches the point at which it is treated as having disposed of what it holds, the gain that had been carried is recognised, and the tax falls in the trust rather than on a final personal return. The assets themselves can usually be dealt with quickly, because they are already held in the structure and do not wait on a grant of probate. The two halves are often remembered separately: families plan for the speed and not for the tax bill that lands in the trust.
Do Canada and the United States share tax information?
Yes, through more than one channel. The treaty has an exchange-of-information article that supports both routine and on-request exchange. Separately, an intergovernmental agreement has Canadian financial institutions identify US-reportable accounts and report them to the CRA, which passes them to the IRS, with the reverse flow for Canadian residents. Most other country pairs use the Common Reporting Standard for the same purpose. See FATCA reporting.
What is double tax relief and how is it given?
Three mechanisms, and which one you get depends on your residence country's law and the treaty. Exemption leaves the foreign income out of the residence-country base. Credit taxes it and then subtracts the foreign tax, capped at the residence-country tax on that income. Deduction merely reduces taxable income by the foreign tax, and is usually the weakest. Canada and the United States lead with credit; several treaties give exemption for specific income types. See claiming the credit.
