Partner, Cassels Brock & Blackwell LLP
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All my kids went to the U.S. for graduate school. To get a student visa, the school and the U.S. government will require proof that you can cover tuition and living expenses. In some cases, they’ll want to see money in a bank account, or you can get a letter from your financial institution guaranteeing your ability to pay.
The simplest thing for Assaf and Peggy to do is open a bank account, deposit $44,000, and name it “Assaf and Peggy in-trust for Samir.” The parents would be the only signing parties. If they intended to loan the funds to Samir rather than gifting them, the parents might draw up a promissory note. Since Samir is under the age of majority, any promissory note that he’d sign would be unenforceable [so they may want to wait until he turns 18]. The note should indicate whether there will be interest charged on the loan. If the parents are devout Muslims, [they should know] that under Sharia law, interest cannot be charged on the loan.
If funds are gifted to Samir, some types of income earned (such as interest and dividends) while he is under the age of majority may be attributed back to the parents for Canadian tax purposes.
Rather than investing the funds in interest-bearing securities, for example, the parents can buy publicly traded securities with the money in the account. If they incur capital gains, the amounts will, generally, not be attributed back to the parents for tax purposes.
The parents might have Samir sign a promissory note and a General Security Agreement (registered in the U.S. under the Uniform Commercial Code) if they are loaning funds to him. Effectively, Samir would be charging and assigning his rights to future contracts to his parents, to the extent of his indebtedness.
If the parents are truly optimistic about Samir’s future and they anticipate contributing substantial money to him, they and Samir could enter into a limited partnership arrangement. Samir would provide his athletic services through the LP, and the parents could share in an agreed percentage of his future income for an agreed period of time.
Expenses incurred to earn income, and funded by the parents as limited partners, might be tax deductible (although CRA may not agree, since there needs to be a reasonable expectation of profit). But, unless the expenses are substantial and Samir has real prospects, it may not be worthwhile to undertake the expense and complexity of this type of arrangement.
This question raises potential for family law issues and, specifically, issues related to the parents’ obligation to support their child.
That aside, I wouldn’t recommend an in-trust account. Rather, the parents can just hold on to their money and pay the $11,000 annual expenses directly to the university. If the parents want to be paid back for the money given towards Samir’s education, a promissory note might make more sense, which he can only enter into once he turns 18. I would recommend Samir get independent legal advice before signing the promissory note.
The promissory note could provide that the loan be repayable on demand (meaning Samir doesn’t have to pay until his parents demand he pay) or be repayable on certain conditions (e.g., when he gets drafted by a major league).
Having the promissary note repayable on demand may be preferable because, under Ontario law, the limitation period for a demand obligation doesn’t begin to run until a demand is made. As such, if Samir gets a really good non-hockey job and the parents still wish to be paid back for the money spent, they can seek repayment at that time.
Having a Canadian trust with a U.S. resident as a beneficiary creates cross-border tax issues. If Peggy and Assaf set up a trust and act as trustees, the trust would be Canadian.
To avoid U.S. tax issues, they’d need a U.S. trustee. However, no trust company would want to act as a trustee for $44,000.
Normally, a trust company won’t agree to act unless it’s at least $300,000. [In contrast], the legal cost to draft a promissory note may be about $500.
Originally published in Advisor's Edge
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