Alberta’s low tax rate has given rise to the “Alberta trust” — an attractive estate planning strategy for your high net-worth clients.

But the logistics and legal requirements involved mean you need to make sure your client is a good fit for an Alberta trust before recommending one as a strategy. Setting up a trust is a long-term commitment that should not be undertaken lightly.

Alberta’s top marginal rate for individual income and interest is 39%. That beats out all other provinces. For example, the 2005 rate for British Columbia was 43.70%, 46.41% for Ontario and 48.22% for Quebec.

This is important because the principal candidates for the Alberta trust strategy are clients who want to set up a trust that will take effect while they are still alive. Such trusts are known as “inter vivos” trusts. Because they are used as income-splitting vehicles, they are taxed at the highest marginal rates.

There are a number of reasons a client would want to set up an inter vivos trust instead of a “testamentary” trust, which doesn’t take effect until the client dies and thus is taxed at normal graduated rates, says Tom Junkin, senior vice president of Fiduciary Trust Co. of Canada, a national wealth-management firm based in Calgary.

For example, says Junkin, perhaps your client is going to realize a sizable capital gain on assets that he or she has been holding on to, or perhaps the client is going to take receipt of a large dividend from his or her company. In both cases, the client will want to avoid paying his or her individual top marginal tax rate.

Another justification for using an Alberta trust is Ottawa’s creation of two special trust vehicles — “alter ego” and “joint partner” trusts. Usually when a taxpayer transfers assets into a trust, a tax bill comes due. The transfer is a deemed disposition of assets, according to the Canada Revenue Agency. But taxpayers can transfer assets tax-free into one of these special trusts.

That means a large chunk of your client’s wealth could go into a trust on a tax-deferred basis, and then be taxed at the lower Alberta tax rates.

Moreover, since assets held within a trust will not form part of your client’s estate, probate fees — especially the high fees levied in Ontario and B.C. — will be avoided.

It should be noted that there are some limitations involved in creating one of these specialized trusts. To establish an alter ego trust, you must be at least 65 years old. In the case of a joint spousal trust, either your client or his or her spouse must be at least 65.

With a joint spousal trust, your client and his or her spouse can be the only beneficiaries of the trust capital and income as long as one of them is alive. With an alter ego trust, your client can be the only beneficiary of the trust, as long as he or she is alive.

When the assets finally pass to your client’s ultimate beneficiaries, presumably the children, the estate will owe taxes.

One of the key concerns with regard to taxation of Alberta trusts is residency. As a result of Alberta’s lower tax rates, some wealthy Canadians have decided to make Alberta home for tax purposes.

However, if they haven’t really cut ties with their former home province, their tax-resident status may be challenged by that province. Ties can include property, business, investment, employment and family.

The tax departments of Ontario, B.C. and Quebec have shown a strong willingness to challenge Alberta tax-residency status, says Siân Matthews, a tax lawyer and associate with Bennett Jones LLP in Calgary. The provinces want all the tax revenue to which they believe they are entitled.

However, it is difficult to challenge the residency of a trust, Matthews says. Only one court case has dealt authoritatively with the residency of a trust — the Federal Court of Canada’s decision, known as Thibodeau Family Trust. The court decided a trust is resident wherever the majority of the trustees reside and the majority of trust decisions are made.

This will not present an obstacle to clients who can appoint trustees who live in Alberta and to whom the clients can comfortably leave the decision-making — as long as the majority of trustees don’t move or die.

@page_break@However, not all clients will be willing to give up decision-making control, says Heather Evans, lawyer and partner with Deloitte & Touche LLP in Toronto. If, for example, your client is one of the trustees, he or she is not permitted to make all the decisions and leave the implementation to the Alberta-resident trustees.

Second, she says, the client has to be wealthy enough to make it worth the extra cost of setting up a trust in a different province.

Says Evans: “You have to determine whether an Alberta trust is appropriate at all.” IE