On August 29, 2014, the Department of Finance released draft legislation to implement measures introduced in the 2014 federal budget, which is expected to be enacted by the end of the year.

Background

Under the current rules, testamentary trusts – trusts created by will – are taxed at the same graduated rates that are applicable to individuals as compared to an inter vivos trust – a trust established during one's lifetime – which is generally taxed at the highest marginal tax rate for individuals. This difference in tax treatment has allowed taxpayers to access lower graduated rates by creating multiple testamentary trusts upon death.

The draft legislation acts to mitigate this perceived abuse and eliminates the preferential treatment afforded to testamentary trusts by taxing the trusts at the highest individual tax rate, effective January 1, 2016.  Testamentary trusts, other than graduated rate estates discussed below, will be subject to the following additional changes:

  • No longer be eligible for a $40,000 exemption in computing alternative minimum tax;
  • Required to have a calendar-year taxation year;
  • No longer be exempt from remitting quarterly tax instalments; and
  • No longer be able to access the extended time period to file a notice of objection.

Certain Graduated Rate Estates (GRE) and qualified disability trusts will continue to benefit from graduated individual tax rates, with limitations.

Graduated Rate Estates (GRE)

A GRE may continue to be subject to tax at graduated rates for up to 36 months, provided the estate meets the following conditions:

  • it arose as a consequence of an individual's death;
  • no more than 36 months have passed from the date of death;
  • the estate is a testamentary trust;
  • the estate designates itself as the individual's GRE in its tax return for its first taxation year; and
  • no other estate can have designated itself as a GRE of the individual.

Qualified Disability Trusts

A qualified disability trust is a testamentary trust that is resident in Canada and has one or more beneficiaries with a disability tax credit certificate.  These trusts will continue to be eligible to be taxed at graduated tax rates. 

Port-Mortem Estate Planning  

The explanatory notes suggests that the ability to utilize post-mortem loss-carryback planning to eliminate the double tax liability inherent in the shares of private corporations held by the estate may be lost where the estate is not a GRE.  The Department of Finance and the Canada Revenue Agency (CRA) have not yet clarified whether they will consider there to be multiple estates where a deceased taxpayer has more than one will (e.g., for probate planning purposes) and each will appoints different trustees, as only one trust can be a GRE. This may have implications on current estate plans in place where multiple wills have been created.

Other Changes

The draft legislation also includes changes to the taxation of accrued gains of certain trusts (e.g., spousal trusts) and allows for greater flexibility on the treatment of charitable donations for the deceased and their estate.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.