This is a question I recieve quite frequently from various clients and prospects in regards to the STS program.
Although this answer is not to be treated as authoritative tax advice, since we don't do taxes, I have herein summarized my findings after discussing this question with several tax people whom I believe to be credible. I have added my own research to try to coherelty asnswer this sensitve question.
As I explain to anyone who asks, the simple act of “transferring” money into the Trust account is NOT automatically treated as “income” to the trust. “Income” has a very specific meaning in the statutory realm of the tax code. In our case, the money is being transferred to be held “in trust” for the benefit of the beneficiaries (the trust certificate holders). In exchange for Trust certificates, the trust legally OWNS all the present and future income streams and assets from all sources of the contractor from the moment the application was sent in to MPG, regardless of which bank account it is held in, personal, business or trust.
A “transfer” into the account can simply be likened to a capital contribution (owners’ equity in statutory law) in payment for the trust certificates. In fact, the contractors will be “settling” the trust contract for the certificates and the financial consideration will be paid for the rest of their lives by way of transfers into the trust. It is like they acquired the certificates on credit and have not fully paid for them until death. The trust gave up very valuable certificates for an unknown future cash flow and current assets. The contractor exchanged his financial life for the certificates (which have no ascertainable value) and the contractor is perpetually settling that contract.
Imagine trading all your future “after tax” income for a rare automobile that you really wanted. Is that future stream of cash payments to be treated as “income” to the seller as defined in the tax act? NO. It is treated as a simple disposition of personal property. The capital gain, if applicable, might be taxed depending on the current tax law and the taxpayer’s tax position. The Trust exchanged personal property (the certificates) in exchange for the contractor’s assets, now and in the future. That is no more a taxable transaction than would be a piece of furniture at a yard sale. It is a transfer or exchange of personal property. Money, certificates, assets, are all well-defined in case law as personal property.
In the financial world, if we buy common shares of XYZ Corp. from a broker, we are merely providing shareholder’s equity to the company in exchange for its common stock. The company (or broker) receiving the funds does not pay “income” tax on the monies received because it is a capital contribution (acquisition) and not “income” as defined by the tax act. When the shares are redeemed or “sold”, any difference on the adjusted cost base (acquisition price) becomes a gain or loss for tax purposes and THAT is then taxed if applicable, but the portion of the proceeds considered to be a return of capital from the company is not taxable. If it were, who would ever invest in stocks if both the issuer and the buyer paid income tax on both sides of the transaction?
Also, the monies being transferred from the personal to the trust accounts are typically sourced from AFTER TAX income. We cannot be “taxed” twice on the same money just because it was transferred to a different account which is also “owned” by the Trust. That would be ludicrous and against the spirit of the tax code and “income” laws. A transfer is NOT “income” to the Trust unless it was “selling” a product or service. Of course, if the contractor is renting the property from the trust, then that would be “income” to the trust. Likewise, management fees paid to the trustees would be treated as an “expense” to the trust.
One of the reasons for putting a lien on the financial assets, and on the net personal incomes of the contractors using schedule B-7, is so that the Trust can ensure eventual full payment (consideration) in settlement of the contract for the trust certificates (which have no ascertainable value).
If clients choose to leave money in their personal accounts, after already having paid tax on it, and that money gets taken by a creditor, then shame on them for taking the risk and leaving it exposed.
I challenge an accountant to prove me wrong on this interpretation. I am quite sure my position was validated by a top accountant during my 2-hour discussion with him last year. In fact, he was of the view that it is up to taxing authorities to prove the taxpayer wrong and not the other way around. He said that if you have your paperwork in order, and a valid reason for your position, THEY need to prove their case in law. Ambiguity favors the taxpayer. The IRS and CRA are private entities operating under merchant or admiralty law and, as with any commercial entity under the law of contract, needs to prove its position just like anyone else. Besides, I would like to see them produce “the tax contract” in court as evidence of an agreement with the “taxpayer”, but that is a whole new discussion for another day.
Of course I am open to being corrected on this if someone can put forth contrary evidence that we can argue.