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.
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;
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
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
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.
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.
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