Many of the Wills and much of the more sophisticated estate planning which we do for our clients utilize both testamentary and inter vivos trusts. Following amendments proposed to the Income Tax Act (Canada) to become effective on January 1st 2016, certain trusts will now be taxed at the top marginal tax rate rather than the lower graduated tax rates that some trusts currently pay. In addition, these changes will also tax accrued gains in spousal, alter ego and joint partner trusts in the deceased beneficiary’s hands and not in the trust itself. To be complete, I should note that the rules also introduce certain planning opportunities with regard to the allocation of charitable donations between the deceased and their estate.
The new legislation includes changes to eliminate the gradual taxation of testamentary trusts, to tax accrued capital gains of certain trusts as referenced above in the deceased beneficiary’s terminal return instead of in the trust itself and will allow a charitable donation to be allocated between the deceased and there a state in certain circumstances.
We will be providing additional commentary on the specifics of these amendments, as we approach year end. Despite these amendments, testamentary trusts can still be used to achieve tax savings, such as income splitting by paying testamentary trust income to discretionary beneficiaries who have no or low income. In addition, trust income that has vested in a beneficiary under 21 years old can be taxed in their hands, but the income can be retained in the trust as long as it is distributed to the beneficiary before he or she turns 40. There may also be tax savings where a testamentary non-spousal trust resides in a province with a lower tax rate than the beneficiary’s province of residence, provided the trust is resident in that particular province, based on its central management in control.
These new rules do introduce an additional level of complexity which must be accommodated for in a well planned estate structure. We would be happy to guide you through the estate planning process.