My recent blog posts Changes to the Taxation of Trusts
and Estates – What You Need to Know and
Graduated Rate Estates – Benefits and
Drawbacks touched on issues with the newly enacted tax
rules for trusts and estates. Bill C-43, which came into effect
January 1, 2016 (the "new rules"), was widely questioned
in regards to its treatment of life interest trusts and estate
donations. On January 15, 2016, the Department of Finance
took steps to bring clarity to these issues by releasing
legislative proposals that, if enacted, would further modify the
income tax treatment of certain trusts and their beneficiaries.
Spousal and Joint Partner Trusts
The new rules changed the tax liability imposed on spousal and
joint partner trusts - otherwise known as life interest trusts. The
testator's estate had been traditionally responsible for the
payment of tax that occurs due to the deemed disposition of assets
on the death of the life interest beneficiary. The new rules
shifted this liability to the income beneficiary's estate (or
the surviving income beneficiary's estate in the case of a
joint partner trust). In other words, the estate of the testator
receives the assets and the estate of the life tenant receives the
tax bill for those assets. As noted by many practitioners, this
shift has the potential to produce an inequitable result where the
beneficiaries of the estate and the trust are different and, if not
addressed, this could lead to disputes.
The proposed amendments would (in most cases) remedy the
above-noted issue. They would shift the tax liability only in the
context of a spousal or common law partner trust that arose on and
as a consequence of a death before 2017, where the trust and the
legal representative of the Graduated Rate Estate ("GRE")
of the life interest beneficiary jointly elect for this. Where such
an election is not jointly made, the testator's estate will be
liable for the taxes triggered on the deemed disposition of the
death of the life interest beneficiary.
Charitable Donation Tax Credits ("credits") have
traditionally been available to those making charitable donations
by their Will or by way of a direct beneficiary designation. These
donations have, for tax purposes, been considered to have been made
immediately prior to death, resulting in a credit that is based on
the value of the asset at the time of death. The credits can be
applied against taxes that are owed in the year of death or the
year before death.
As I mentioned in my last blog, the new rules offer more
flexibility to the way credits can be used. For instance, a GRE can
claim the credits in the deceased's tax return against income
taxes of the deceased's terminal tax year, or the tax year
immediately prior. A GRE can also claim the credits in the
estate's tax return for the year the donation is made, a prior
year, or five years following the year of the donation. The
downside identified with the new rules for credits is that if an
estate is not a GRE at the time the donation is made, then it
cannot apply the credits in the deceased's terminal tax year,
the immediately preceding year, or any prior tax years of the
estate. As GRE's cease to exist after 36 months, this
effectively imposes a 36 month time-limit for a donation to be made
in order to be eligible for the flexible benefits of the
The legislative proposals address this limitation. They extend
the rules to apply to donations made by the GRE after it ceases to
have that status because of the expiry of the 36 month period. The
legislative proposals extend the gifting period to 60 months,
meaning that an estate can make a donation within 60 months of the
deceased's death and receive the credit. The donation value is
determined by the value of the asset in the year of the donation.
This flexibility will allow estate trustees to gift when it is most
advantageous to do so from a tax perspective.
In addition to the proposed tax changes noted above for spousal
and joint partner trusts, the legislative proposals also mention
donations made by life interest trusts. The new rules stipulate
that where donations are made by a life interest trust after the
death of the life interest beneficiary, the resulting credit cannot
be applied to the income beneficiary's estate to offset the
taxes triggered as a result of death. Due to this restriction the
credit is effectively wasted. The legislative proposals permit a
life interest trust to allocate credits in respect of a donation
made by the life interest trust within 90 days after the end of the
calendar year in which the life interest beneficiary dies.
Although the legislative proposals are simply a draft, they are
a step in the right direction for those looking for clarification
on the tax rules for trusts.
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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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.
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.
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