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Seniors’ Series – Part IV - Financial Planning: the Taxation of Estates and Trusts
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Provided by David J. Pallett Partner BDO Canada LLP

Last January, the new legislation came into effect that brought fundamental changes to the way that estates and certain personal trusts will be taxed in Canada. Since trusts are frequently employed in tax and estate planning, these new rules are likely to have a significant impact on the taxation of trusts and estates going forward.

To assist you in determining whether these changes may impact any trusts that you or your family have set up or that you may have provided for in your will, this article poses several questions that aim to pinpoint certain features of tax and estate planning which may create an exposure to the new rules. In all cases, if you think we have described your situation or one that is similar, it will be essential that you speak to your BDO advisor as soon as possible.

Does your will provide for multiple testamentary trusts to be created?

A testamentary trust is a type of personal trust that is established upon the death of an individual. Under the current rules, a testamentary trust has access to graduated rates that are normally only applicable to individuals. As a consequence, multiple testamentary trusts are frequently provided for in an individual’s will so that each beneficiary of that individual’s estate can benefit from an additional set of graduated rates, and thus potentially lower their overall tax burden.

The new rules will see the tax advantages from multiple testamentary trusts evaporate as testamentary trusts will no longer be allowed to benefit from graduated rates. Instead, access to graduated rates will be limited to the first 36 months of an estate following the death of an individual. These estates are referred to as Graduated Rate Estates (GREs). Accordingly, after January 1, 2016, all existing and new testamentary trusts (other than GREs) have been subject to tax at a flat income tax rate of 29 percent the highest rate of federal tax for individuals) plus provincial tax at the top rate, like ordinary inter vivos trusts, including family trusts.

There may be other non-tax-related reasons why you may want to provide for multiple testamentary trusts in your will. These reasons may include, for example, protecting and managing the assets of the trust that are for the benefit of a disabled beneficiary or a beneficiary who is a minor child. However, if no compelling reason exists for you to provide for multiple testamentary trusts in your will, creating additional trusts will only serve to increase the administrative burden on your beneficiaries and your estate.

Do you have a disabled child or family member that you wish to provide for in your will?

As mentioned above, an individual with a disabled child or family member may often include provisions in their will to establish a trust for the benefit of that person. The federal government recognized that the trust changes would have a negative impact on disabled individuals and consequently introduced legislation to allow certain testamentary trusts that have disabled beneficiaries to continue to have access to graduated rates. In particular, a new category of testamentary trusts was created called Qualified Disability Trusts (QDTs).

It is important to note that establishing a QDT for the benefit of a disabled beneficiary does not happen automatically. The executor(s) of your estate must be aware that you intend to utilize these provisions, since one of the requirements to qualify as a QDT is for the beneficiary and the trust to jointly elect that the trust be a QDT. Furthermore, you should also be aware that certain rules that come into effect upon the death of the last remaining disabled beneficiary of the QDT may potentially have punitive consequences. In order to minimize the tax burden at the time the trust ceases to be a QDT, advanced tax planning will be required.

For these, and many other reasons, if someone you love is disabled and you are planning to provide for that person after your death, it is important that these new rules be considered. Doing so will ensure that you initiate the plans necessary to maximize any tax saving strategies available to protect the assets you wish to designate for the ongoing support of your loved one.

Are you planning to leave a bequest to a registered charity after your death?

New rules governing these types of gifts were introduced in the 2014 federal budget as part of a plan to provide more flexibility in claiming. While these changes are in respect of the rules governing charitable bequests, the new trust and estate taxation rules act in conjunction with the charitable bequest rules to add further complexity to the taxation of such gifts.

The new trust and estate taxation rules impact the ability to maximize the tax benefit from making a charitable bequest in a variety of ways. For example, while the changes to the rules governing charitable bequests should generally make estate planning around large donations much easier, qualifying for this more flexible tax treatment will require that the transfer be made by the estate to a qualified donee within the first 36 months following the death of the individual. This may not always be possible, especially if the estate is complex, if it is subject to litigation, or if the trust is a spousal trust where it was intended that the gift be made after the death of the surviving spouse.

A further example of how these new rules can complicate estate planning can be seen where the intention is to make a gift of a residual interest. A gift of a residual interest essentially allows an individual to benefit from making a large charitable donation after first retaining the funds in a trust for the benefit of a family member and delaying the gift until after the death of that family member.

Will you or your spouse or common-law partner become, or are you already, a beneficiary of a “life-interest” trust? A life-interest trust is a particular kind of personal trust that provides a specified beneficiary with a right to receive income from the trust during their lifetime. These types of trusts include spousal (or common-law partner) trusts, joint-spousal (or joint common law partner) trusts and alter-ego trusts.

The new trust taxation rules bring significant changes to what happens upon the death of the life-interest beneficiary. Under the current rules, when the life-interest beneficiary dies, there is a deemed disposition of all of the capital property held in the trust, following which the trustees will generally use the assets of the trust to pay the resulting tax liability before distributing the remaining assets of the trust to the trust’s capital (or “residual”) beneficiaries.

Conversely when a life-interest beneficiary dies there will be a deemed year-end of the trust for tax purposes at the time of death and all of the income of the trust, including any capital gains arising from the deemed disposition of the trust’s assets, will be included on the terminal tax return of the deceased beneficiary.

On its surface, it would appear as if this new rule would yield a beneficial tax result since it allows the income arising from the final year of the trust to be taxed at the beneficiary’s applicable marginal rate. However, there are certain situations where this change could create negative income tax implications for some taxpayers.

Specifically, there may be a problem where the income beneficiary of the life-interest trust is not also the residual beneficiary. If you are a beneficiary of a life-interest trust, or if your will provides for a life-interest trust for the benefit of your spouse (or common-law partner), it’s best that you contact your BDO advisor without delay to identify whether additional planning may be required in light of last year’s changes to the taxation of trusts.

If you answered “yes” to any of the questions listed above, your tax or estate plan may need to be revisited in order to make sure that your estate and your beneficiaries are not subject to unintended income tax results as a consequence of the new rules.

At a minimum, your existing will and estate plan should be reviewed in the context of these revisions to these 2016 revisions. Speaking to your financial advisor is the first step in ensuring that your intended goals are met.

For more information visit www.bdo.ca



FEATURE BUSINESSES

Ashwood Manor

79 David St. | London, ON, N6P1B4 | Phone: 519-652-9006 | Website: http://www.ashwoodmanor.com/ | Email: ashwood.manor.ldt@gmail.com

Bentley Landscape Ltd.

474 Colborne St. | London, ON N6B 2T3 | Phone: 519-452-0334 | Website: http://www.lawncarelondonontario.ca/ | Email: bentley45@rogers.com

Creation Bookstore

900 Oxford St E (Bellwood Place), Unit #12 | London ON N5Y 5A1 | Phone: 519-659-2610 | Fax: 519-659-2615 | Website: http://www.creationbookstore.ca/ | Email: info@creationbookstore.ca

Donohue Funeral Home

362 Waterloo Street | London, ON N6B 2N6 | Phone: 519-434-2708 | Website: http://donohuefuneralhome.ca/ | Email: donohue@donohuefuneralhome.ca

Forest Lawn Funeral Home & Cemetery

2001 Dundas Street E. | London, Ontario N5V 1P6 | Phone: 519-451-2410 | Website: http://www.forestlawnmemorial.ca/ | Email: ttidridge@arbormemorial.com

Hardick Chiropractic Centre

331 Queens Ave | London, ON N6B 1X2 | Phone: 519-673-1132 | Website: http://www.hardickchiropractic.com/ | Email: bj@hardickchiropractic.com

Jackson Monuments and Stone Works

316B Neptune Crescent | London, ON N6M 1A1 | Phone: 519-451-3838 | Website: http://jacksonmonuments.ca/ | Email: admin@jacksonmonuments.ca

Masonville Manor

350 North Centre Rd. | London, ON, N6G 5G3 | Phone: 519-663-0220 | Website: http://www.masonvillemanor.com/ | Email: mmathers@masonvillemanor.com

McFarlane and Roberts Funeral Home

2240 Wharncliffe Rd. S. | London, ON, N6P 1L1 | Phone: 519-652-2020 | Website: http://www.mcfarlane-roberts.ca/ | Email: mcfarlanerobertsfh@rogers.com

Melekare

170 Hamilton Rd. | London ON N6B 1N5 | Phone: 519-518-6353 | Website: http://www.melekare.ca/ | Email: info@melekare.ca

Mount Pleasant Cemetery and Crematorium

303 Riverside Dr. | London, ON | Phone: 519-434-6504 | Website: www.mpcemetery.ca | Email: info@mpcemetery.ca

Oakland Cemetery

390 Oxford St. W | London, ON | Phone: 519-434-6504 | Website: http://www.mountpleasantcemeterylondon.ca/

Precision Home Medical Equipment

390 Springbank Drive, Unit 13A (Southcrest Plaza) | London, ON N6J 1G9 | Phone: 519-657-1032 | Website: http://www.precisionhme.ca/ | Email: info@precisionhme.ca

Right To Life Associations

1193 Oxford Street Unit 3 | London, ON N5Y 3M2 | Phone: 519-659-3334 | Website: http://www.right2life.ca | Email: info@right2life.ca

Soccer Express

1070 Wellington Rd. #17 | London, ON, N6E 3V8 | Phone: 519-601-4625 | Website: http://www.soccerx.com/ | Email: dant@soccerx.com

Southwest Pet Store

1641 Dundas St. E. | London, ON N5W 3C3 | Phone: 519-451-7279 | Website: https://www.facebook.com/pg/SouthwestPet/about/?ref=page_internal | Email: info@southwestpet.ca

Southwest Pet Store

1063 Talbot St. | St. Thomas, ON N5P 1G4 | Phone: 519-633-2334 | Website: https://www.facebook.com/pg/SouthwestPet/about/?ref=page_internal | Email: info@southwestpet.ca