Cardinal Point Wealth Management

Your Cross-Border Financial Advisor

Contact Us | Client Login
  • About Us
    • Our Story
    • Our Team
    • Our Clients
    • Legal and Compliance
    • Part 3 Form CRS
    • Relationship Disclosure Information
  • What We Do
    • Investment Management
    • Wealth Planning
    • Tax Planning and Preparation
    • Private Wealth Services-U.S.
    • Private Wealth Services-Canada
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • Business Management for Athletes
  • Cross-Border Services
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • U.S. citizens living in Canada
    • Moving to Canada from the U.S.
    • Canadians Living in the U.S.
    • Moving to the U.S. from Canada
    • Expatriates Living Abroad
  • Blog
  • About Us
    • Our Story
    • Our Team
    • Our Clients
    • Legal and Compliance
    • Part 3 Form CRS
    • Relationship Disclosure Information
  • What We Do
    • Investment Management
    • Wealth Planning
    • Tax Planning and Preparation
    • Private Wealth Services-U.S.
    • Private Wealth Services-Canada
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • Business Management for Athletes
  • Cross-Border Services
    • Cross Border Wealth Management, Financial and Tax Planning Advisor
    • U.S. citizens living in Canada
    • Moving to Canada from the U.S.
    • Canadians Living in the U.S.
    • Moving to the U.S. from Canada
    • Expatriates Living Abroad
  • Blog

How California Taxes a Canadian Trust

September 12, 2018 By Cardinal Point Wealth

As we discussed in a previous article, many Canadians are shocked to learn that California taxes their RRSPs. Canadians are often also surprised and dismayed to learn that their Canadian trust could be subject, inadvertently, to the long arm of California’s tax system. Even just having a beneficiary – think trust fund baby – of a Canadian trust who lives in California is enough to subject the trust to California tax.

California taxes a trust if the trust has (a) California source income; (b) a California trustee or co-Trustee; or (c) a California beneficiary.

California’s taxation of a trust’s income that is attributable to California sources, for example rental income from property located in California, is not a strange concept. It’s California’s taxation of non-California trusts with California beneficiaries that – to borrow a line from Gowan’s song of the same name – is a “Strange Animal” and which will be the focus of this post.

In California, having just one beneficiary who resides in the state can subject the trust income to California tax in a proportion equal to the number of beneficiaries who are California residents. With California aggressively chasing trusts with a nexus to the state for failure to file income tax returns, Canadians who are beneficiaries of Canadian trusts should be aware of the tax implications that moving to California entails. The law in California subjects some or all of the income of a non-grantor trust to California income tax if any non-contingent beneficiary is a California resident. As you can see, the key distinction in the law is that a California beneficiary’s interest in the trust must be non-contingent for California to tax the trust. Hence, a non-California trust with contingent beneficiaries residing in California will not be subject to tax in California so long as there are no distributions to the beneficiary.

So, how do we determine between a contingent and non-contingent beneficiary?

Simply put, a contingent beneficiary is one whose interest is subject to a condition that must be satisfied for the beneficiary’s interest in the trust to vest. For example, most trusts are drafted whereby a trustee may make distributions for a beneficiary’s health, education, maintenance, support, care, comfort, etc. This constitutes a contingent interest in the trust property because the beneficiary’s beneficial interest is subject to the trustee’s sole and absolute discretion.

On the other hand, a beneficiary’s interest will become non-contingent if the terms of the trust agreement subsequently remove a condition to the beneficiary’s enjoyment of trust income or principal. For example, the beneficiaries of a trust that provides for the distribution of all trust income after a certain age, or provides a stipend to the beneficiary, or allows the beneficiary a withdrawal right, would be considered non-contingent. The determination of whether a beneficiary is contingent or non-contingent comes down to the distribution standards and rights of the beneficiary under the trust agreement and the trustee’s exercise of discretion in administering the trust.

Now that we’ve covered some of the basic laws applicable to California’s taxation of a trust, let’s look at this simple example.

Joe had a long and successful career playing in the NHL. To the diehard fans of one of the teams he played for, Joe is considered a legend and the second best player, after the team’s current young phenom, to ever play for the team. Over his career, Joe managed to amass a vast fortune from both playing hockey and endorsing many products. Through some good advice from his tax professionals, Joe set up a trust in Ontario to minimize his tax bill and to provide for his only child’s future. After graduating college, Madison, Joe’s only child and the sole beneficiary of Joe’s trust, decided to move to Hollywood to pursue an acting career. Madison, for lack of a better term, is a trust fund baby. The terms of Joe’s non-grantor trust provide that the Ontario based trustee shall distribute to Madison one-third of the trust income annually for her lifetime. Because the trustee is required under the terms of the trust to distribute trust income, Madison is entitled to such amounts and her interest is not subject to a condition. As a result, Madison is a non-contingent beneficiary regardless of the fact that she is entitled to just one-third of the trust income. Because Madison is the sole non-contingent beneficiary of the trust and a resident of California, the trust will be subject to California taxation. The trust would  have to report all of its income for California income tax purposes. Specifically, Madison will be taxed on the income distributed to her, while the trust will be taxed on the remaining income.

At Cardinal Point, we specialize in working with Canadians in California and we diligently work with our clients to ensure compliance with their federal, California and Canadian income tax and reporting requirements.

Filed Under: Articles, Cross-border Tax Planning Tagged With: California Taxes a Canadian Trust, California taxes their RRSPs, California’s taxation of a trust, Canadians in California

Related Artices

ca us desk flags

Does Canada have a Tax Treaty with the US?

currency

Hedging Currency in your Portfolio

Terry Ritchie in Podcast

Terry Ritchie on Unraveling Cross-Border Financial Planning

Discuss your goals with us today
Canada US Investment Management
We can handle all of your Canada-U.S. investment management, tax, estate and financial planning complications
Wealth management strategies fit for you
Wealth Management Strategies
Our cross-border financial planning team can provide an assessment of your needs based on your unique circumstances

How We Help

  • Cross-Border Financial & Tax Planning
  • Americans Living in Canada
  • Canadians Living in the U.S.
  • Moving to Canada from the U.S.
  • Moving to the U.S. from Canada
  • Expatriates Living Abroad

What We Do

  • Investment Management
  • Wealth Planning
  • Tax Planning & Preparation
  • Private Wealth Services for U.S. Residents
  • Private Wealth Services for Canadian Residents
  • Cross-Border Financial & Tax Planning
  • Business Management for Athletes

Resources

  • Canadians in California
  • Canadians in Texas
  • Canadians in Florida
  • Canadians in Arizona
  • Canadian and U.S. Expat Tax Planning
  • Wealth Management for U.S. Citizens in Canada
  • Calgary Financial Planner
  • Custodian Closed Your Cross-Border Investment Account?

Videos & Social Media

  • Americans in Canada: Investment Basics
  • Americans Selling Canadian Homes Face Tax Issues
  • Does it make financial sense to renounce your U.S. citizenship?
    BrightScope Cardinal Point Twitter Cardinal Point Google Plus Cardinal Point Facebook Cardinal Point LinkedIn Cardinal Point
Copyright © 2023 Cardinal Point Capital Management, ULC. All Rights Reserved.

“Cardinal Point” is the brand under which dedicated professionals within Cardinal Point Capital Management, ULC provide financial, tax and investment advisory, risk management, financial planning and tax services to selected clients. Cardinal Point Capital Management, ULC is a US registered investment advisor and a registered portfolio manager in Canada (ON, QC, MB, SK, NS, NB, AB, BC). Advisory services are only offered to clients or prospective clients where Cardinal Point and its representatives are properly registered or exempt from registration. This website is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital.