What Assets Should Not Be Put Into a Trust in Canada?

Why Are Some Assets a Poor Fit for a Trust?

Certain assets have built-in tax advantages or direct beneficiary designations, and adding a trust can alter or cancel those benefits.

For example, registered accounts like RRSPs and TFSAs, life insurance policies with named beneficiaries, vehicles, and pensions are not the ideal fit for a trust. In addition, if you put your home in a trust, it may limit the principal residence exemption if the trust doesn’t meet certain rules.  

Creating a trust entails legal and administrative costs, so smaller or simpler assets may not justify the added complexity.

Finally, a trust may limit flexibility, making it harder to access or adapt those assets as your needs change over time. As you can see, a trust isn’t a one-size-fits-all solution. 

Written By Tiffany Woodfield, Financial Advisor, TEP®, CRPC®, CIM®

What Assets Should Generally Not Be Put Into a Trust?

Trusts are a powerful planning tool, but they aren’t meant to hold everything you own.

In some cases, if you put the wrong assets into a trust, it can create unnecessary taxes, add complexity or even cancel the benefits you would otherwise receive. 

Registered Accounts Like RRSPs and TFSAs

Registered accounts like RRSPs and TFSAs already have built-in tax advantages and beneficiary designations, so moving them into a trust usually doesn’t make sense.

Putting an RRSP or TFSA into a trust can create unnecessary tax consequences or eliminate certain benefits. It’s usually more efficient to name a beneficiary directly rather than transferring ownership to a trust.

Principal Residences and Personal Use Property

Your principal residence can lose part of its tax-free status if it is placed into a trust that does not meet strict rules. This can potentially create a tax bill.

Putting personal use property, such as your home or cottage, into a trust can also add complexity and costs without providing meaningful benefits. So, unless there is a specific need, such as a blended family, it generally isn’t recommended.

Assets With Transfer Restrictions

Some assets cannot be easily transferred into a trust due to legal or contractual restrictions, such as certain pensions or insurance agreements.

Trying to transfer them can cause delays, extra fees, or even trigger unintended taxable events.

Certain Business or Partnership Interests

Business or partnership interests often come with agreements that limit who can own them, making transfers to a trust complicated or restricted. Moving them without proper planning can disrupt operations or trigger taxes.

A careful review should be done before including a business or partnership interest in a trust.

What Happens If You Put the Wrong Asset Into a Trust?

Putting the wrong assets into a trust can create unexpected tax bills and legal complications that reduce the value of your estate.

For example, some assets may trigger immediate taxes upon transfer or incur ongoing taxes within the trust that are higher than if you held them personally. In certain cases, the trust may also face future tax events, like the 21-year rule, which can create a large tax bill even if nothing is sold. 

What Does It Mean to Put an Asset Into a Trust in Canada?

Putting an asset into a trust means you are legally transferring ownership of that asset from yourself to the trust. 

The trust is then managed by a trustee, who follows the rules you set out to take care of the asset for the benefit of the beneficiaries. Once the asset is in the trust, you no longer personally own it in the same way — even if you still have some control through your role as trustee or through the trust terms.  

The terms of the trust are outlined in the trust deed, which you can think of as the “rulebook.” The trust deed outlines when a beneficiary can receive an asset and how the asset is to be managed.

Case Study: Using a Trust Incorrectly Created a Big Tax Hit 

John and Mary were told that trusts are a smart way to protect assets, so they decided to move most of their assets into the trust.

They thought that moving everything into a trust would simplify things.  In fact, it did the opposite. 

Unfortunately, John and Mary created a do-it-yourself trust online without professional advice. A professional would have advised them not to put everything in the trust. 

The trust was not properly set up, and they triggered a taxable event when they transferred all their assets into it. The investment portfolio changed ownership from John to the trust, triggering a deemed disposition, which is a taxable event. A deemed disposition is when an asset is “deemed” to have been sold for tax purposes. When that happens, you owe tax on the capital gains. 

In addition, John and Mary put their RRSPs into the trust. 

Doing this didn’t make sense as they already had named beneficiaries. They didn’t gain anything by putting it in the trust. Moreover, during their lifetime, the income earned from their non-registered investments was taxed at high rates. It could have been taxed more efficiently if it had been held in their personal names rather than in a trust.

This is a clear example of how getting the right advice is critical if you want to ensure you have a properly structured estate rather than a tax fiasco. Trusts are complex, and your assets may not be the ideal fit. 

On the other hand, if you have substantial assets and a complex estate, a trust may be critical. Without the right advice, you can easily make costly mistakes. 

What Matters Most When Making Estate Planning Decisions?

Estate planning tools are powerful, but the right approach depends on what you are trying to achieve. 

There is no single strategy that works for everyone.

Many people delay estate planning out of fear, while others over-engineer plans in an attempt to control every outcome. In both cases, decisions are often made without first clarifying what truly matters.

Ask yourself, “What matters most to me?” 

Get clear on what matters most so you can be sure that you’re making the right decisions based on your values, goals, and the legacy you wish to leave.

Estate planning decisions are not purely technical. 

Emotions and family dynamics all play a role. 

When clarity comes first, legal and tax strategies can be evaluated more effectively and aligned with your goals. Approach your estate planning as an opportunity to connect with what matters most to you so that you can leave a legacy that truly reflects your values.

Summary of Key Points 

• Some assets lose tax benefits or flexibility when transferred into a trust.
• RRSPs, TFSAs, pensions, and insurance often should stay outside a trust.
• Putting the wrong assets into a trust can trigger unexpected taxes and legal complications.
• Trusts can help complex estates, but are not appropriate for every asset.
• Professional estate planning advice can prevent costly trust and tax mistakes.

Get Professional Guidance

Before creating a trust, speak to an estate lawyer about your goals, assets, and specific situation.  

Mistakes can be difficult to fix later, which is why proper advice is important from the outset.  Keep in mind the courts generally do not reverse transactions just because they resulted in “bad tax outcomes.”

In addition, after death, the wrong asset structure can lead to delays, confusion, or disputes among beneficiaries, making the estate harder and more costly to settle. 

Speak with your financial advisor about your estate plan and work with an estate planning expert in your region to properly structure your estate.

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Read More:

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💎 How Much Money Can You Put in a Trust in Canada?

💎 What Are Reasons to Not Have a Trust in Canada?

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