The New Year will bring several important income tax changes to
estates and testamentary trusts. Effective January 1, 2016 estates
and testamentary trusts will be subject to new rules which alter
the rates of taxation, year end, and way in which spousal trusts
and other life interest trusts are taxed.
Changes to rates of taxation
Currently, estates and testamentary trusts are taxed at
graduated tax rates. This permits income splitting between the
estate or trust and its beneficiaries, which can result in tax
savings. Income earned by a testamentary trust that is not paid out
to a beneficiary will soon be taxed at the top marginal personal
tax rate – 49.53 per cent. The exceptions to this rule are
few: trusts established for the benefit of someone eligible for the
disability tax credit, or estates which qualify as graduated rate
estates ("GRE"). GREs are a new concept which will apply
to an estate for the first 36 months of the estate if certain
criteria are met. If the estate continues to exist past 36 months
following the date of death it will be then be taxed at the top
Changes to year end
Until now, testamentary trusts have been able to choose a
non-calendar year end, up to one year after the date of death.
Under the new rules, testamentary trusts and estates that exist for
longer than 36 months will have a December 31st year
end. Existing testamentary trusts that have already had a year end
in 2015, will be deemed to have another year end at December 31,
2015, and must file a tax return within 90 days.
Changes to tax liability
Another significant change is to the way spousal and other life
interest trusts such as alter ego and joint partner trusts are
taxed, with the trust and estate being jointly and severally liable
for any tax on capital gains payable as a result of the deemed
disposition upon the life tenant's death. This could mean an
unexpected cost for the beneficiaries of the life tenant's
estate, and where the beneficiaries of the life tenant's trust
are different from the beneficiaries of the life estate, this could
lead to unfairness and disputes; for example, in a second marriage
situation where a spousal trust is used to provide income and
assets to the spouse from a second marriage, with the children from
the first marriage being the ultimate beneficiaries of the spousal
trust. Previously the spousal trust would have been responsible for
the tax related to the deemed disposition on the second
spouse's death and the first spouse's children would have
inherited after the taxes were paid. With the new rules, the estate
of the second spouse will be required to pay the tax arising from
the deemed disposition at the death of the second spouse.
Possible future changes?
The Department of Finance recently issued a letter acknowledging
concerns of practitioners to such a scenario and seeking input on a
possible solution. One solution being considered is to amend the
Income Tax Act so that it would not apply to a trust in
respect of the death of a particular beneficiary unless the
beneficiary's GRE and the trust jointly elect to have it apply.
The Department of Finance's openness to explore the subject of
amendments comes as good news to practitioners and individuals
concerned about the amendments as they stand. Nevertheless, those
whose estate planning involves spousal trusts may wish to speak
with their practitioner about what the changes in 2016 could mean
for their estate plan.
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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It is not uncommon for parents to provide monetary gifts to their adult children. Parents may wish to help their child with a down payment on a property, or help pay out their child's existing mortgage.
On March 31, 2014, BC's new Wills, Estates and Succession Act1 ("WESA") will come into force. WESA introduces new protections for beneficiaries of estates that are in danger of being disputed or deemed ineffective by a court.
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