Canada: New Estate Rules Start Jan. 1: Large Implications For Taxes On Trusts, Contents Of Secondary Wills

Last Updated: September 14 2015
Article by Margaret E. Rintoul

In the December, 2013 issue of Blaneys on Business, our colleague, Paul Schnier discussed the advantages and issues involved in using more than one will and, in particular, noted the anticipated change in tax rates for trusts starting in 2016. 

Sure enough, the federal government did pass the legislation, in spite of many representations from the legal, accounting and financial planning communities about the benefits of testamentary trusts (those established in wills) , which will eliminate most of the advantages that have been enjoyed by those trusts since 1972.

Under the new rules that come into effect on January 1, 2016, estates will be allowed 36 months as "graduated rate estates", where income that is taxed in the estate will be taxed at the marginal rates appropriate to the income of the estates, much as happens now in testamentary trusts. 

For estates that are to be distributed as soon as possible, and therefore would be fully distributed within three years of the death of the testator (the person who has made the will), any income that is, for some reason, taxable in the estate will be taxed at marginal rates. 

For on-going trusts created by wills, after the first 36 months, any income that is not taxed in the hands of a beneficiary will be taxed at the top tax rate, which is approximately 46 per cent in Ontario. 

Therefore the income-splitting potential that motivated the establishment of many testamentary trusts, where some of the income would be taxed in the trust and some in the hands of the beneficiary, will not exist after the end of this year.   

In past years, many spousal trusts, in which the sole beneficiary, and often the sole executor, was the spouse, were established because of the potential for income splitting between the spouse and the trust.  Anyone who has structured estate plans with trusts like that will want to rethink whether the additional administration issues accompanying an on-going trust, including an additional tax return for each year that the trust operates, and the need to maintain a separate set of estate investments, is worthwhile when there are no tax benefits to be obtained.

There is one exception to the tax rate change for income taxed in a trust, and that is for a trust that is established for a disabled beneficiary.  It has been common planning practice for many years to set up a fully discretionary trust for the benefit of a disabled person who is otherwise entitled to government benefits that are severely income tested.  (These trusts are often referred to as Henson trusts, so named for the original case where the court approved the use of such vehicles.) This discretionary trust structure prevents any capital or income of the trust from being treated as belonging as of right to the disabled person, and therefore enables the disabled beneficiary to remain entitled to whatever provincial disability benefits are available and still have extras provided through the trust. 

Under the new rules that come into place on January 1st, undistributed income in such trusts will still be taxed at marginal rates, but the beneficiary will have to qualify under the income tax rules for a disability tax credit and the trustee will have to file an annual election to keep the trust qualified to pay tax at the marginal rates. 

As well, and an important point in terms of family estate planning, only one discretionary trust per disabled person will qualify for marginal tax rates.  Therefore, if both the parents and grandparents of a disabled child set up Henson trusts in their wills, for example, only one of those trusts will qualify for marginal tax rates on the accumulating income. 

Insofar as multiple wills are concerned, as Paul Schnier noted in his earlier article, there has been a significant advantage from the perspective of Estate Administration Tax (formerly probate fees) in having one will intended for probate (and therefore subject to the Estate Administration Tax) and another that deals with assets that can be transferred without the need for a Certificate of Appointment of Estate Trustee with a Will (probate) and therefore without the need to pay Estate Administration Tax on the value of those assets.  That advantage remains and, in fact, may be greater now than was anticipated in 2013. 

From January 1, 2015, there has been an obligation on estate trustees to file a very detailed Information Return with the Ontario Minister of Finance setting out the nature and history of the assets in the estate.  The filing must be made by the estate trustee within 90 days of the issue of a Certificate of Appointment of Estate Trustee, and the Ministry of Finance has the authority to audit and reassess tax, and is in fact carrying out audits and issuing reassessments already.

To the extent that assets can be transferred through a Secondary or Non-Probate or Private Will without the need for a certificate of appointment, not only does it save paying Estate Administration Tax on the value, but there is no need to report the asset and its value in the Information Return that must be filed. 

Secondary or Non-Probate wills have generally been used to deal with shares in private companies controlled by the testator (the person who has made the will) or by close family members, because the shares can be transferred by the company directors.  In addition to private company shares, there are a number of other assets that can be included in such a will.  These include art and jewellery, motor vehicles and boats which can be transferred or sold without having to have a Certificate of Appointment of Estate Trustee to secure the transfer. 

To reduce Estate Administration Taxes, people have also used joint accounts, simply adding the name of another family member or members to a bank account, investment account or real estate title, with the notion that the asset would go to the surviving owner but with the further expectation (sometimes set out in a form of side agreement) that the survivor would deal with the assets according to terms set out in a will (in effect trying to create a form of trust where the surviving owner will hold the assets in trust for other estate beneficiaries.) 

The Supreme Court of Canada in 2007 essentially confirmed that holdings of this sort are trusts for the estate beneficiaries, but the new Information Return required in Ontario also treats such joint accounts as estate assets and therefore subject to Estate Administration Tax. 

Anyone intending to have a joint bank or investment account or jointly held real estate held by the surviving holder for the benefit of estate beneficiaries other that the surviving holder needs to deal specifically with such an account in a Secondary or Non-Probate Will in order to keep the asset out of the Estate Administration Tax jurisdiction. 

In terms of income tax treatment of multiple wills, as long as the executors or estate trustees of each will are the same, CRA has said that, for tax purposes, there is one trust.   Therefore during the first 36 months of the estate administration, if income is not distributed, it can be taxed in the overall estate at marginal rates as a Graduated Rate Estate.

If the terms of either the primary or secondary will call for an on-going trust, however, any income not paid out to a beneficiary and therefore taxable in the trust, whether it comes from an asset in the primary or the secondary estate, will be taxed at the highest marginal rate.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Margaret E. Rintoul
Similar Articles
Relevancy Powered by MondaqAI
O'Sullivan Estate Lawyers LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
O'Sullivan Estate Lawyers LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions