Recent changes to legislation governing the taxation of testamentary trusts is likely to have dramatic implications for estate planning in Canada, particularly when the new rules kick in next year.
“It’s the most significant change we’ve seen in [trust and estate planning] in decades,” said Pamela Cross, a tax partner with Borden Ladner Gervais LLP in Ottawa, speaking at the 2015 national conference of the Canadian chapter of the Society of Trust and Estate Practitioners (STEP Canada) in Toronto on Thursday.
In 2014, the federal government confirmed its intention to eliminate access to graduated rate taxation — the rates that apply to individuals – for testamentary trusts, which are trusts created by a will at death. Starting in 2016, all testamentary trusts will be taxed at flat top rate of taxation.
Exceptions have been made for “qualifying disability trusts” (QDTs) and for estates for the first 36 months after death to allow for the administration of the estate. These two exceptions would continue to have access to the graduated rates.
Existing estate-planning strategies involving life insurance or life interest trusts – i.e. spousal trusts, alter ego and joint partners trusts, and self-benefit trusts – may be affected negatively by the new rules, in particular. For example, a life insurance testamentary trust will be subject to flat top-rate taxation in 2016 unless it qualifies as a QDT.
Trust and estate practitioners are awaiting guidance from the Department of Finance Canada in the coming weeks to provide more clarity on a variety of questions and concerns regarding the legislative changes.
Trust and estate practitioners who attended this year’s STEP Canada conference also heard from speakers on key legislative changes, including limitations on the freedom to make a gift in a will in cases in which a testator has left directions in the will that contravene public policy, such as gifts intended for controversial organizations.
Another subject that was addressed was U.S. tax law as it affects U.S. citizens living in Canada. Such dual citizens or green-card holders have a myriad of onerous tax-reporting obligations. Expatriations from the U.S. are rising, with one U.S. tax expert suggesting that expatriations from the U.S. this year will top 5,000 people, a new record, if current trends continue.