In the federal budget unveiled Tuesday, the federal government is proposing to effectively eliminate tax benefits associated with the graduated rate taxation available to testamentary trusts, going ahead with possible measures it had first raised as part of last year’s budget.
Specifically, Ottawa is proposing to apply flat top-rate taxation to trusts created by will; certain estates; and certain grandfathered inter vivos trusts that still benefit from graduated rate taxation in this year’s budget. These proposed changes are largely in line with those it proposed in a consultation paper the government released in June 2013.
Currently, testamentary trusts are taxed at the same graduated rates that apply to individuals, effectively giving beneficiaries access to more than one set of graduated rates. The government wants to eliminate the practice of setting up multiple testamentary trusts in order to obtain the tax benefit of access to multiple sets of graduated rates.
The government is proposing two exceptions to top-rate taxation of testamentary trusts:
The first is that graduated rates will continue to apply for the first 36 months of an estate following the death of an individual. This would provide adequate period of time for the administration of the estate, the government says. After the 36-month period, the estate would become subject to flat top-rate taxation.
The second is that graduated rates will continue to be available for testamentary trusts that have individuals who are eligible for the disability tax credit (DTC) as their beneficiaries. This exception represents a concession on the part of the government from the rules it first proposed in the consultation paper. The government says it will be providing greater detail regarding the parameters of the DTC exception in the coming months.
Although the proposed changes will affect the use of testamentary trusts for tax and estate planning, it will not mean these vehicles will lose a place in the estate-planning toolkit, says Jamie Golombek, managing director of tax and estate planning with Canadian Imperial Bank of Commerce’s private wealth-management division.
“Notwithstanding the elimination of the graduated tax rates for testamentary trusts, these trusts continue to be valuable estate planning tools for numerous non-tax reasons,” he says.
Testamentary trusts that don’t already have a calendar year taxation year will have a deemed taxation yearend on Dec. 31, 2015. For cases of an estate for which the 36-month administration period ends after 2015, the day on which that period ends will be considered the deemed taxation yearend. This measure will apply to the 2016 and subsequent taxation years.