Killing trusts softly: the Australia-Canada-U.S. trust paradox

This article was first published in Tax Notes International, Volume 117, Number 11, on March 17, 2025.

There was a time when moving to the United States was all the rage. One could not hop on a plane fast enough. Nowadays, the topic of relocation from one country to another is still part of civilized conversation, but the trend has been more about moving from the United States to what are perceived to be greener pastures. With President Trump’s recent tariff announcements on the country’s cross-border neighbors (who also happen be important, long-established trade partners), the issue of relocation has taken on more gravity as life in the United States, for some, is not as attractive as it used to be. A cross-border trade war with suppliers of basic necessities and not-so-necessary luxuries that leads to cost-of-living increases and higher taxes for every American may just be the final straw.

But it’s not as simple as packing your bags and leaving on a jet plane (although some have done that). If you are reading this article, there is a high probability that you’ve thought about it, or know of a few people who have gone through the harrowing ordeal of being caught unaware by the tax complexities of a cross-border move, even if it is, literally, just from the United States to Canada.¹ Your move should probably be motivated by a reason that will withstand the test of cross-border tax complexities. And that reason could be just as plain and simple as family — the kind of life-long relationship that will cause even a successful self-made philanthropist to drop everything, or an A-list celebrity to leave the bright lights of Hollywood, for the remote wind-tossed beaches of Nova Scotia. A move to Canada from the United States seems a no-brainer. After all, trade between Canada and the United States in 2024 was USD 761.19 billion,² fueled primarily by transportation equipment, oil, gas, and other chemical products.³ Just jump on one of those legendary Canada Pacific railcars and away we go!

Australia lately appears to be at the forefront of such life-changing moves. This trend has continued in recent years, as Americans have relocated (or in many cases, returned) to Australia. As we have seen, it will take more than the breadth and depth of the Pacific Ocean to keep Aussies and Americans apart, as individuals from both countries have successfully grown families, expanded businesses, enriched cultures, and made significant contributions in the economic prosperity of the other. With USD 51.27 billion⁴ in two-way trade occurring in 2024 alone, Australia cannot be overlooked as a significant U.S. trade partner. The impact of this relationship is also felt at the U.S. state level; a 2023 report confirmed at least USD 4.4 billion in exports between Sydney and California in 2024,⁵ making Australia California’s 13th largest export partner in 2023.⁶

A matter of trust

Yet behind the robust trade numbers confirming a dynamic and interdependent economic relationship between the United States and Canada, or the United States and Australia, there is a darker reality that has increased through the decades only because it lurks in the shadows, unaddressed by the governments of the three countries.

It involves trust, a word that is commonly used in the English-speaking countries to refer to many things. For example, the word “trust” can refer to a legal arrangement between parties, but can also describe the belief that someone or something is honest, reliable, or good. Others would use “trust” to convey a feeling of confidence or certainty. With our predisposition to use “trust” in our everyday communications, we are prone to assume that we all use “trust” to mean the same thing. But assumptions are dangerous.

In the context of legal relationships, in the United States we refer to trusts as revocable or irrevocable, grantor or non-grantor, simple or complex. And that doesn’t even take into account specialized retirement trusts like 401(k)s and IRAs. For Commonwealth countries such as Australia and Canada, trusts range from personal trusts (family discretionary trusts, alter ego trusts, spousal trusts, and bare trusts) to business trusts (unit trusts) and retirement trusts (registered retirement savings plans and superannuation trusts). But when it comes to trusts, there is more mistrust than trust between Australia, Canada, and the United States. That is very apparent when it comes to how Australia and Canada classify and tax a trust settled in the United States (a cross-border trust) by an individual who later becomes a resident of the other country. Of course, it goes both ways. The United States has equally imposed taxes on trusts in Australia or Canada when the individual either: (1) settled a trust in the foregoing countries and then became resident in the United States; or (2) settled a trust with an individual beneficiary who is (or becomes) a U.S. tax resident. In this series we examine cross-border trusts between the United States and Australia and the United States and Canada. 

In this first installment we navigate the twists and turns of the most maligned and mistreated trust of all: the U.S. revocable trust. Spoiler alert, they are not so revocable after an individual crosses into Australia or Canada.

U.S. revocable trusts

Generally, Aussie and Canadian expats⁷ in the United States assimilate into the fabric of their chosen communities. The seamless integration is likely attributable to the common historical, cultural, and social ties shared among the three countries, dating back to the British Empire. This serves Aussie and Canadian expats so well that they also tend to adopt the basic U.S. legal instruments and estate planning structures that typical American families use to protect their privacy, provide protection in the case of incapacity, and avoid probate fees on their estates.⁸ For those living in California, the structure of choice tends to be the revocable living trust (hereinafter, the revocable trust). It is popular because the individual who transfers property to the revocable trust maintains control of that property as trustee during life and even after death.⁹ Because of this, it is typically referred to as a will substitute.¹⁰

In the United States the transfer of assets (such as real estate or financial and personal effects) to a revocable trust is generally not a taxable event. No consideration is required to effectuate the transfer or make the trust legally binding. Generally no federal or state tax consequences are triggered by this act, because the grantor retains the right to revoke the trust at any time and take the assets back under direct ownership.¹³ Under the standard revocable trust plan, when the grantor dies, the trust converts into an irrevocable trust, which either distributes trust assets to the surviving spouse, children, or designated individuals as beneficiaries of the grantor (that is, the primary, contingent, or remote beneficiaries) or manages the assets in the trust for their benefit. With the trust assets remaining in the irrevocable trust, the grantor can retain control over how the assets are managed from beyond the grave, which means that beneficiaries remain protected from creditors, disgruntled heirs, unscrupulous spouses and partners, and most importantly, their own bad decisions.

A revocable trust exists for legal purposes but the assets are still treated as if they are owned by the grantor from a U.S. tax perspective. Because the revocable trust and its grantor are treated as the same person, any transactions between the grantor and the trust in his capacity as the trustee do not create taxable events. Similarly, for tax purposes, it is as if the transfer of assets to the revocable trust never happened. Under this legal fiction, it is as if the assets never left the grantor’s control in the first place. The one notable distinction between the grantor and his trust is that when the grantor dies, the trust does not. It continues as an irrevocable trust that could last many generations after the grantor’s death. This would be the case unless the grantor, before his death or his successor trustee’s death, decides to go back home to Australia or Canada.

Returning to Australia with a revocable trust

Becoming Australian resident pre-November 27, 2024

Revocable trusts are all well and good, but only if: (1) your assets are below the applicable lifetime exemption amount for U.S estate tax purposes when you die, or (2) you plan to die in the United States. The peace of mind provided by a revocable trust to a California-based family is short-lived if the grantor is an Aussie who decides to return to Australia and live the remainder of his or her years on a patch of white sand, blue seas, and sunny skies. This is because the revocable trust is a foreign trust from an Australian tax perspective. Once back in Australia, even the Aussie expat grantor cannot revoke the revocable trust without consequences. 

When an Aussie leaves California for any Australian state, the California revocable trust he or she created to avoid California probate application and administration continues to exist in Australia. In fact, it becomes an Australian resident trust because the Aussie expat grantor (who is also the trustee of the revocable trust) is now an Australian tax resident.¹⁴

Most Aussie expat grantors could rely on the automatic step-up in basis on the trust assets as a consolation to inadvertently turning the formerly California revocable trust into an Australian resident trust. That is, assuming the Aussie expat grantor moved back to Australia by November 26, 2024.

Until November 27, 2024, returning to Australia would result in a step-up in basis of the underlying assets of the revocable trust before it would be deemed transferred into an Australian trust¹⁷ on the day that tax residency is resumed (or established) by the expat grantor. The good news is that this deemed transfer does not give rise to CGT on a transfer to the Australian trust if it is triggered in the same fiscal¹⁸ year that the expat grantor resumed or established Australian residency for tax purposes.¹⁹ This means a subsequent disposition of the asset by the revocable trust while the expat grantor is Australian resident could result in lesser CGT because of the step-up basis in the assets at the time of the deemed contribution. 

That should be the end of the story, right? But it’s really just the beginning.

Making the entire thing more complicated, on November 27, 2024, the ATO released TD 2024/9, providing its final administrative guidance on section 99B of the Income Tax Assessment Act of 1936 and how it should be applied to distributions of trust property held in foreign trusts to Australian resident beneficiaries. Because the revocable trust is considered a foreign trust, Aussie resident trustees or beneficiaries will be taxed on distributions of trust property to the extent they represent income earned by the trust (the assessable amount). However, the assessable amount is decreased by the portion of the distribution that is the trust corpus, so long as the trust does not have an Aussie resident trustee. Before November 27, 2024, this meant that the Aussie trustee or beneficiary was taxed only on income generated by the revocable trust after the expat grantor became an Australian resident.

However, TD 2024/9 threatens to change that. The guidance outlines the ATO’s view that a change in residence for a trust is irrelevant in determining the unrealized capital gains in the trust’s assets.²⁰ This means that Aussie resident trustees or beneficiaries receiving a distribution from the revocable trust could be liable for tax on the entire assessable amount, dating back to the inception of the revocable trust — even if the untaxed gains²¹ were accrued while the trust was nonresident for Australian purposes. In addition, this means that capital gain assets held by trusts entering Australia will be taxed differently than capital gain assets held by individuals directly — the latter will still receive a stepped-up cost basis.²²

The overall impact of these changes remains to be seen. These are recent developments, and largely came as a shock to the Aussie tax community. This change was not contemplated in the draft 99B ruling released July 31, 2024,²³ and is inconsistent with other provisions in the Income Tax Assessment Act (namely, section 855.45). 

For now, however, even though this is a radical change, it must be accounted for to avoid pitfalls for the Aussie expat grantor.

Transactions while in Australia

Death in Australia

The death of the Aussie expat grantor can give rise to further cross-border complexities for the revocable trust when it occurs after the expat has returned and resumed residency in Australia. Because the revocable trust, on the grantor’s date of death, is deemed to re-contribute its trust assets into a new irrevocable trust for U.S. tax purposes, there is now a deemed transfer of the same assets of an Australian trust into a foreign trust, which continues after the expat grantor’s death. The foregoing would likely be true unless the revocable trust survives the expat grantor’s death because it is now an Australian resident trust. And unlike the typical lifespan of a U.S. revocable 20 trust, which terminates on the date of death of its grantor, the now Australian resident revocable trust will live up to 80 years, at least under Australian trust laws.

So not only will a California revocable trust create inadvertent cross-border tax complexities for the Aussie expat grantor during his lifetime, it will continue to wreak havoc, unleashing a plethora of Australian tax troubles for those who survive the Aussie decedent and are the named heirs and substitute trustees. The liability for reporting and paying those taxes to the ATO rests squarely on their shoulders. 

If the California revocable trust is not terminated before the grantor returns to Australia, it will survive the death of its grantor as an Australian resident trust, and thus, create inadvertent U.S. and Australian income tax consequences for its trustees and beneficiaries. 

Because a revocable trust can survive the death of its grantor once it crosses the Pacific Ocean into Australian territorial waters, then maybe it’s time to let the revocable trust rest in peace before the Aussie expat grantor begins the journey home.

Returning to Canada

Resuming Canadian residency

Believe it or not, a Canadian expat grantor who returns to Canada with a revocable trust in place is actually worse off than the Australian expat grantor who returns to Australia. Indeed, Canada’s treatment of a California revocable trust is as cold and frosty as the long Canadian winter, for the reasons explained below.

Surprise! You’re Canadian!

To understand the fate of a California revocable trust in Canada, one needs to first be aware that, like the United States, Canada tends to view foreign trusts with an air of suspicion. For more than a decade, the Canadian disdain for foreign trusts that are established for the benefit of Canadian residents has been codified in section 94 of the Canadian Income Tax Act (ITA). This section makes it possible for Canada to tax appreciation in foreign assets held by a foreign trust by virtue of its contributor, or a beneficiary who is related to the contributor (a.k.a. the Canadian expat grantor), becoming a Canadian resident within 60 months of settling that foreign trust.

You could say in a way that Canada will not just take you as you are on the date that you relocate to Canada. It will also take the assets that the Canadian expat grantor never intended to bring into Canada if they divested themselves of them, directly or indirectly, by transferring those assets to a foreign trust within five years of their return to or arrival in Canada. These rules under ITA section 94 are effective as of January 1, 2007.

Yes. A Canadian resident trust is subject to Canadian tax on all trust income and gains that accrue in the trust as of January 1 of the year that the Canadian expat grantor becomes resident (and not the date of their arrival into Canada, which is when they would personally become subject to Canadian tax). So the trust would be taxable on income and gains that accrued even before the Canadian expat grantor became resident. And if that’s not bad enough, it will be taxed at the top tax rates²⁵ afforded to an individual in Canada for as long as the Canadian expat grantor remains in Canada. But unlike the individual Canadian expat grantor, it would not be deemed to be resident in any Canadian province, so it will be subject to a 48 percent surtax.²⁶

But that’s not all. If the foreign trust is actually a U.S. trust, then the trust income and gains would be subject to concurrent taxation in the United States because that U.S. trust, for U.S. tax purposes, would remain a U.S.-based trust. But it would also be a deemed Canadian resident trust subject to annual tax and reporting requirements just like any other Canadian resident trust.²⁷ Double taxation would be likely and no relief would be available under the Canada-U.S. tax treaty.²⁸

To mitigate or eliminate this risk to the foreign trust, the Canadian expat grantor (turned resident) would have to depart²⁹ Canada or die. If the Canadian expat grantor was to voluntarily depart Canada within five years of becoming a Canadian resident, their departure would not generally trigger any Canadian departure taxes. But if the Canadian expat grantor does not depart Canada until after five years, their departure will come at a cost, because the Canadian departure tax will apply. And more importantly, the foreign trust itself will be deemed to depart with the Canadian expat grantor and be purged of the taint of being a deemed Canadian resident trust. But just like an individual leaving Canada, the departure of a deemed Canadian resident trust will trigger the Canadian departure tax. This means if the foreign trust departs Canada, it will be deemed to sell all of its assets at fair market value on the date of departure, resulting in a deemed disposition tax akin to a departure tax.³⁰

Grimly, given the above option, death could be a more palatable exit strategy for the Canadian expat grantor and the foreign trust. As a testamentary trust, the foreign trust would be taxed at the graduated rates applicable to individuals (without exemptions) for the first 36 months following the death of the Canadian expat grantor.³¹ However, if there are any resident Canadian beneficiaries of the foreign trust, the trust will remain deemed Canadian resident until the estate is administered and closed completely. 

When you cannot afford to revoke a revocable trust

You may be tempted to take your chances with a revocable trust rather than any other type of trust. After all, the overarching principle for a revocable trust is that it exists for your benefit, remains under your control, and therefore revocable at any time you wish. You may even think that a revocable trust that has been “exported” into Canada because of your relocation will operate the same way as it did when it was just a revocable trust in California.

Unfortunately, for a Canadian expat grantor with a revocable trust, the consequence of moving back to Canada is more acute — the trust itself will be a Canadian resident trust (not just a deemed Canadian resident) because the Canadian expat grantor, as controlling trustee and beneficiary, became a Canadian resident.³² Their continued exercise of control over the revocable trust (either in an official trustee capacity or otherwise) while resident in Canada will cause the trust itself to be subject to tax at top individual tax rates in the Canadian province where the Canadian expat grantor resides. Simply moving to Canada makes the revocable trust a factual resident of Canada.

At this point, it’s all about the silver linings. There is some consolation in that the revocable trust, as a factually resident trust in Canada, will obtain a step-up in basis of its assets³³ on the date of tax residency in Canada.³⁴ This would work particularly well for those Canadian expat grantors who have stripped themselves of U.S. tax resident and domiciliary status (either by terminating their green cards, renouncing U.S. citizenship, or filing a treaty tiebreaker claim) and who own highly appreciated assets that would be subject to U.S. CGT if disposed of while in the United States. A timely disposition of the capital gain asset in Canada would trigger a Canadian CGT liability that would be less than the U.S. CGT liability. However, the devil is always in the details. A move to Canada to specifically trigger a capital gain after crossing borders to reduce CGT on a highly appreciated asset may just be too good to be true. Or is it?

Questionable foreign tax credit relief

A primary attraction of revocable trust structures is the ability of the trust to provide privacy and probate protection to the grantor and trust beneficiaries without itself being subject to tax because the grantor of the revocable trust pays all taxes that may arise. The foregoing holds true for as long as the grantor (here, a Canadian expat grantor) remains in the United States.

All bets are off once you cross the border into Canada with a revocable trust. While it remains true that the income of a revocable trust that is itself a resident of Canada will be attributed to the Canadian expat grantor-turned-resident who transferred property to it,³⁵ you should not expect that the taxes paid to Canada by the Canadian expat grantor because of that trust income will always be offset by U.S. taxes paid by the grantor on the same income. 

When it concerns taxes paid on revocable trust income on both sides of the border, presumptions can be fatal. The type of asset and how that asset is held by the trust makes a difference.

For example, investment income such as interest, rents, royalties, dividends, and capital gains earned through a U.S. limited liability company that is wholly held by the revocable trust would be taxed in Canada as foreign accrual property income generated by a foreign corporation that is a controlled foreign affiliate under the Canadian ITA.³⁶ FAPI would be included in the income of the revocable trust (as shareholder) for Canadian tax purposes, and any tax paid by the U.S. LLC in the United States would be subject to relief in Canada through a gross-up deduction. However, because an LLC in the United States is a passthrough entity (meaning that income taxes on LLC income are paid by the Canadian expat grantor) it seems that there would be no relief under the FAPI rules for this tax. The Canadian expat grantor who paid the tax on the same LLC income for U.S. purposes can claim relief, but a Canadian corporation (which is the LLC) generally may not be able to do so.³⁷

In this regard, the outcome would be palatable if Canadian taxes paid by the expat grantor would offset U.S. taxes assessed concurrently on the same trust income.³⁸ However, one should not assume that the tax paid by the Canadian expat grantor to the United States for income generated by the revocable trust assets in the United States will be afforded the same relief.

Exchange-traded funds

Another example of when the type of asset held in the revocable trust would matter is income earned in a U.S. brokerage portfolio that invests in U.S. exchange-traded funds, private equity investments, and foreign mutual funds.

U.S. ETFs that are Delaware statutory trusts and treated as registered investment companies in the United States may be subject to tax in Canada as foreign corporations or foreign trusts. If treated as a foreign corporation, all distributions from the ETF are taxed as foreign dividends and not subject to any preferential dividend rates. If the Canadian expat grantor-turned-Canadian resident is no longer a U.S. resident for U.S. tax purposes, distributions received by a U.S. revocable trust would be subject to U.S. withholding taxes. If treated as a foreign trust, all income and capital gain distributions from the ETF are subject to tax in Canada at ordinary income tax rates as a deemed Canadian resident trust.

Because of a lack of Canada Revenue Agency guidance on the taxation of foreign ETFs, and likely adverse tax treatment of them because of the passive holdings of the ETFs, we would not recommend that a revocable trust with a Canadian expat grantor-turned-Canadian resident continue holding these investments directly. There is a risk that they would not be taxed efficiently by Canada, even if foreign tax credits for U.S. taxes paid on interest or dividend income and capital gains are available.

Private equity investments

Private equity funds that are established in the United States as limited partnerships are treated as partnerships for Canadian tax purposes.³⁹ If the limited partnership interest is held by a Canadian expat grantor through a revocable trust, the trust itself would be the owner of the limited partnership interest for Canadian tax purposes.⁴⁰ In direct opposition to the Canadian position, the IRS would treat the Canadian expat grantor as the owner of the limited partnership interest subject to U.S. withholding taxes. The CRA, however, would treat the trust as the owner of the limited partnership interest, and the trust would be subject to tax on income distributions at ordinary income tax rates.

Unlike private equity funds that are structured as limited partnerships, private equity funds that are LLCs for U.S. purposes are treated as foreign corporations in Canada.⁴¹ As foreign corporations, they are subject to adverse Canadian tax treatment if the funds generate passive income or own passive assets (for example, portfolio securities), regardless of whether held directly by a Canadian resident or indirectly through a Canadian company.

The bottom line in this regard is that the Canadian expat grantor would be better off liquidating any U.S.-based private equity funds held through the revocable trust upon becoming resident in Canada. Because most private equity fund investments are composed of passive assets (portfolio securities), they would attract high Canadian tax rates even if held through a Canadian company.

Foreign mutual funds

Mutual funds that are not based in Canada are treated as foreign corporations for Canadian tax purposes, generating dividends from passive assets. Generally, all U.S. dividend distributions made to the revocable trust that is now resident in Canada will be subject to U.S. withholding taxes, which would be creditable against the Canadian expat grantor’s tax liability as FTCs.

However, a foreign mutual fund that is organized as an LLC or corporation in the United States would attract U.S. taxes that would not be directly creditable to the Canadian expat grantor’s taxes in Canada. This is because dividend distributions of income and capital gains from the mutual fund would be subject to the adverse Canadian tax treatment under the FAPI regime and not eligible for a capital gains exemption in Canada. Taxes on FAPI are not creditable to the Canadian expat grantor because they are considered to have been incurred by the LLC as a corporate entity.

If the foreign mutual fund is organized as a Delaware statutory trust that is a registered investment corporation in the United States, it will likely also be treated as a foreign trust, which would subject income and capital gain distributions to tax in Canada at ordinary income tax rates, which would be the liability of the Canadian expat grantor-turned-resident.

Canadian taxes on general assignments to a trust

As explained in the foregoing sections, relocating to Canada can be tricky if you have a revocable trust. The cross-border tax complexities attracted by a Canadian expat grantor to a revocable trust that is now resident in Canada require analysis to mitigate potential double taxation of trust income and capital gains generated from U.S. assets that remain in the trust.

And it’s unlikely that the passage of time will ease the tax burdens that a move to Canada triggers whenever a revocable trust is involved. There is also the inadvertent Canadian CGT that is triggered by a general assignment of property clause in the revocable trust deed. The general assignment clause is a common provision found in most California revocable trusts to automatically transfer all property that is acquired by the Canadian expat grantor after the initial contribution to the trust. This general assignment of property would result in the automatic transfer of new property acquired by the Canadian expat grantor to the trust under California law. Although this contribution is not taxable for U.S. tax purposes, it would likely cause Canadian taxes to be incurred by the expat grantor for recurring transfers of property to the revocable trust for as long as they are a resident of Canada. One cannot guarantee that the ordinary Canadian expat grantor who is the trustee of their own revocable trust maintains a meticulous record of all after-acquired property that is automatically transferred to the trust under this general assignment clause. An individual who cannot commit to monitoring their assets at this micro level would be better off revoking the general assignment clause or terminating the trust altogether before relocating to Canada. 

There are exceptions, however. For example, when the revocable trust qualifies as a spousal or common-law partner trust in Canada,⁴² the Canadian expat grantor’s contribution of property to the revocable trust of a spouse or common-law partner (but not to his own revocable trust) would be tax-neutral. However, for this to work, both the grantor and the spouse or common-law partner must be residents of Canada.

Alternatively, the revocable trust may qualify as an alter-ego or joint-spousal trust in Canada,⁴³ in which case the ongoing transfers of property to the trust under a general assignment clause would be treated as a tax-deferred transfer (or rollover) for Canadian tax purposes. For an alter-ego trust, the Canadian resident grantor-trustee-beneficiary must be at least 65 and have the exclusive right to receive income from the trust property for as long as they live. If the Canadian expat grantor to the revocable trust is single or unmarried under U.S. law, then the gift to the Canadian common-law partner’s alter-ego or spousal trust could be a taxable event in the United States.

21-year deemed disposition rule in Canada

If you can hurdle the initial salvo of cross-border tax complexities that comes with having a revocable trust when you move to Canada, you, as a Canadian expat grantor-turned-resident, must remain vigilant. You must watch for the 21-year anniversary of the revocable trust because under Canadian tax laws, the trust will be deemed to sell all of its assets at FMV every 21 years.⁴⁴ The 21-year deemed disposition rule turns the cross-border administration of a revocable trust topsy-turvy.

From the U.S. side of the border, you alone can terminate your revocable trust at any time voluntarily before you die. If you have lived many years in Canada with a California revocable trust, the thought of terminating the trust voluntarily makes no sense, given that the termination would trigger Canadian CGT on the trust assets in the year of termination without any concurrent U.S. tax on the same gain to offset the Canadian tax. Unfortunately, your ability to control the existence of the revocable trust is limited to fewer than 21 years.

Therefore, prudence would dictate that before making any decisions to move to Canada, you review your revocable trust and determine whether the aggravations caused by crossing the border are sufficiently outweighed by the benefits you stand to gain in Canada. The grass may not be as green as you thought.

So perhaps the ties that bind the United States to Australia and Canada have a few more knots than those already made apparent by public media over the past few weeks. Maybe the issue is not about trade and tariffs. But rather, it is really all about the fundamental issue of trust.