Significant changes have been made to the taxation of
trusts and estates that may have a major impact on your tax and
estate planning. This bulletin highlights the main tax planning
considerations now required to deal with these recent changes.
Only an estate which meets the definition of a "Graduated
Rate Estate" will be eligible for graduated income tax rates
starting January 1, 2016. A "Graduated Rate Estate"
is a testamentary trust (i.e. a trust arising as a consequence of
death) that is specifically designated and that has not been in
existence for more than 36 months. If an estate qualifies as
a "Graduated Rate Estate," it can save you up to $32,000
in taxes per year. The wording in your will may need to be
amended to ensure that your estate can benefit from these tax
Testamentary trusts that arise out of your estate will
generally be subject to the highest rate of income tax on every
dollar earned. If your sole objective in establishing
testamentary trusts in your will was to multiply the potential tax
savings by creating many trusts eligible for graduated income tax
rates, you may wish to reconsider and provide outright bequests
instead. There still remain many valid non-tax reasons for
the creation of testamentary trusts and these may need to be
Alter ego, joint partner and spousal trusts generate a deemed
disposition of their assets when you or the second spouse
dies. Under the previous rules, the income tax on any gain
realized at that time was paid by the trust. Now any capital
gains will be attributed to your or your spouse's final tax
return, and the responsibility for the tax will generally belong to
the deceased's estate and not the trust. Adequate plans
for funding this tax need to be put in place. This can be of
particular concern for second marriages and blended families to
ensure that the tax is borne by the appropriate beneficiaries.
Donations of marketable securities to public charities can
eliminate capital gains tax for your estate. New changes
restrict this benefit to "Graduated Rate Estates"
only. Therefore, you need to review your will(s) to ensure
your post-mortem donation plans will still be effective.
The donation rules have become more flexible but also more
complex starting January 1, 2016. Donations specified in your
will can be claimable only when the gift is completed by your
estate. The tax benefit will generally be claimed on your
final return, the return for the year before your death, or any of
your estate's tax returns if made by a "Graduated Rate
Estate". However, there are situations now where the
donation tax credit may go unused based on the new rules. A
review of your donation planning is vital to ensure that the
maximum desired tax savings will still be achieved.
If you own shares of private corporations, tax planning is
usually undertaken after death to avoid double taxation.
Typically this may involve a redemption of shares or a wind-up of
your corporation. The new rules can eliminate the
effectiveness of these strategies unless you structure your will
appropriately. As your corporation may be your largest asset,
thousands of dollars of tax could be at stake.
You may have previously filed a tax election to tax income in
your trust at lower tax rates in another jurisdiction or in a
testamentary trust. This election is effectively eliminated
unless your trust has losses. You will need to plan for the
additional tax that will apply.
The new rules allow for a "Qualifying Disability
Trust" to be established for a disabled beneficiary.
This type of trust will still be able to benefit from lower
graduated income tax rates during the lifetime of the disabled
beneficiary. Ensuring that your will contains appropriate
provisions to establish one of these trusts should now be
considered if you plan to make a bequest to a disabled
The Ontario Estate Administration Act now requires an executor
to file a tax return disclosing the assets subject to Estate
Administration Tax (i.e. probate fees) and their fair market
value. Assets put into joint names may no longer escape the
tax. Alternative arrangements, such as alter ego trusts or
corporate bare trustee arrangements, may need to be
Please note that this publication should not be considered a
substitute for personalized tax advice related to your particular
situation.We strongly recommend that you
discuss these changes with your Crowe Soberman advisor to ensure
that your existing planning continues to be
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Connect with the Authors
This article was prepared by Karen Slezak and Aaron Schechter
who are both partners in Crowe Soberman's Tax Group. If
you have any questions relating to this article, we encourage you
to contact them.
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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