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The following is a collection of slides from a recent presentation given by Brent England, Partner of Hutcheson and Co. LLP. For more information about the recent changes to Trust rules please contact Brent at 250-381-2400 or by email at brent@hutcheson.ca

Changes to Trust Rules

Notice of Ways and Means, Federal Budget February 11, 2014

Background

Testamentary Trust 108(1) – “means a trust that arose on and as a consequence of the death of an individual,” with some exceptions defined. These types of trusts are often included as part of an individual’s will. Until January 1, 2016:

  • Enjoy graduated rates of income tax
  • Can have non-calendar year-ends
  • Are not required to pay instalments
  • Spouse trusts are allowed a rollover (i.e. no deemed disposition) until second spouse dies
  • Income paid or payable to beneficiaries can be designated as taxed in the trust or flowed out to the beneficiaries

Inter Vivos Trust 108(1) – “means a trust other than a testamentary trust.” That is, a trust created while an individual is living.

  • Must have calendar year-ends
  • Pay tax at the highest marginal rate
  • Generally no rollover of assets going in to the trust
  • Special examples are Joint Spousal and Alter Ego Trusts which allow a rollover into the trust with restrictions on distributions
  • Requirement to make instalments but CRA’s administrative policy has been not to assess interest and penalties
  • Income paid or payable to beneficiaries can be designated as taxed in the trust or flowed out to the beneficiaries
  • Deemed dispositions (spouse trust, alter ego and joint spousal trusts) as a result of death is income of the trust

Proposed Amendments

Graduated Rate Estate (“GRE”) proposed 248(1) –“at any time, means an estate that arose on and as a consequence of death, if that time is no more than 36 months after death and at the time the estate is a testamentary trust.”

  • Deemed year-end at the later of: immediately before ceasing to be a “GRE” or December 31, 2015. So for trusts with year-ends after December 31, 2015 they will only qualify as “GRE” for 36 months after death
  • Non GRE’s must have a calendar year-end )stub year-end may be created for any non-calendar year testament trusts lasting longer than 36 months), must pay quarterly instalments, may be required to pay part X.II tax on certain income to non-resident beneficiaries and cannot claim the $40,000 basic AMT exemption
  • Qualified Disability Trusts still qualify for the graduated rates

Other Unexpected Amendments – Some beneficial, some not

  1. Paid or Payable Designations 104 (13.1 and 13.2) — Designation to tax in the trust can only be made if the trust income remains nil. That is, can only use to the extent the trust uses capital and non-capital loss amounts from other years.
    • Provides less flexibility to use the graduated rates in the trust
  1. Deemed Disposition 104(2) – capital gains arising as a result of death will be deemed to payable by the deceased.
    • May be beneficial or not depending on attributes of estates e.g. marginal rate of deceased etc.
    • More difficult to match capital loss of deemed dividend resulting from redemption of private company shares (see above).
  1. Donations – Starting 2016 more flexibility is provide to choose were to claim the claim charitable donations made after death.
    • No longer deemed ”made immediately before death” and included only on final return
    • If made by a “GRE”, then the trustees will be able to allocate donation among: the year the donation is paid, an earlier year of the “GRE”, or the last two years of the individual
    • To date, no similar rules announced for spouse trusts, alter ego and joint spousal trusts

Take Away

  1. Estate plans need to be revised to account for the new trust rules
  2. Wills need to be reviewed and the use of testamentary trusts re-evaluated. The use of alter ego and joint spousal trust may be more beneficial than prior to changes
  3. Testamentary and inter vivos donation strategies need to be reviewed to provide maximum tax efficiency

Phil Hogan

Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@hutcheson.ca or via telephone at 250-661-9417. You can also read more about Phil at Hutcheson.ca/phil.
Phil Hogan

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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.

Phil Hogan

Phil Hogan is a Canadian and US CPA working with clients throughout Canada and the US. Phil advises on cross border tax and financial planning matters. Phil can be reached at phil@hutcheson.ca or via telephone at 250-661-9417. You can also read more about Phil at Hutcheson.ca/phil.
Phil Hogan

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