CFIB’s July 2015 newsletter has just been published:
In December 2014, the new rules affecting all trusts received royal assent. Many of these rules will change the way trusts are used and taxed in Canada.
Firstly, as a reminder, if you have had a trust for several years, you should be mindful of the 21-year rule for trusts – essentially, after 21 years, capital property in the trust is deemed to be transferred to the beneficiaries at fair market value. There are some exceptions to the 21-year rule, specifically for spousal trusts, alter ego trusts, joint partner trusts. In these cases, disposals are deferred until the settlor dies in an alter ego trust; the spouse/common law partner dies in a spousal trust, or the last to die in a joint partner trust. If you see the 21 year date on the horizon (within the next year) and you have not planned your taxes accordingly, check with your tax professional as soon as possible.
There are big changes for trusts effective Jan 1, 2016 – the taxation of trusts, especially testamentary trusts will change.
The biggest change is that in most cases, graduated taxation on the testamentary trust no longer exists. This means that all income in the trust will be taxed at the top marginal rates. There are, however, two exceptions:
– Graduated Rate Estates (GREs)
– Qualified Disability Trusts(QDTs)
A GRE designation allows a testamentary trust to be taxed at graduated rates for the first 36 months after the date of death. This means that testamentary trusts will have a limited period in which to be wound up before higher income tax rates begin to apply.
You may notice that I used the word designation in the preceding paragraph. The GRE, from what we understand will not be automatic. The CRA should change the T3 return to include a checkbox to designate if an estate is to be a GRE. If not, RHN will have to develop a form for all new estates after January 1, 2016 to be filed with the T3 return. The GRE must be designated in the first year of the estate return – otherwise, the GRE designation will no longer be available.
Another change with respect to these GREs is the limiting of a testamentary trust’s ability to have off-calendar year-ends. As long as a trust is a GRE, it may have an off-calendar yearend. However, after the 36 months is up, testamentary trusts must have a December 31 yearend.
If you currently have a testamentary trust that has an off-calendar year-end, and it has been in existence for more than 36 months after the date of the person’s death, you will have a deemed yearend as of December 31, 2015. For greater simplicity – if you have a testamentary trust with an off calendar year-end in 2015 and more than 36 months has passed since the date of death, 2015 you will need to file two 2015 returns.
The main requirement for QDT trusts is that one of the beneficiaries of the testamentary trust must be disabled within the current meaning of the ITA. An important consideration to note is that the QDT designation is only available for one trust where the disabled person is a beneficiary. For example, say both mom and dad (who are separated) pass away and make the disabled child the sole beneficiary of each of their estates. For whatever reason, these trusts exist beyond the 36 month rules. Only one of the trusts will be eligible for the QDT exemption, meaning the other trust will have all its income taxed at top marginal rates after the GRE period is extinguished.
New subsection 104(13.3) eliminates the designation to make income payable to beneficiaries to be taxed within a testamentary spousal trust. This designation will now be limited to any accumulated losses in the trust.
Finally, new subsection 104(13.4) will have a greater effect on those with trusts, so it is important that it is brought to your attention. Spousal, alter ego, and joint spousal trusts will now have a deemed year end on the passing of the remaining spouse, and any accumulated gains and losses in the trust will be taxed in the income tax return of the deceased, not of the trust.
It will be interesting to see how CRA rolls out these new changes to trusts, and what, if any, administrative relief will be granted in the case of trust compliance. It is never too early to start planning to see how the new legislation will affect you and your specific situation. Contact us and set up an appointment so we can help you ensure you are ready for these changes on January 1, 2016.
The information presented is only of a general nature, may omit many details and special rules, is current only as of its published date, and accordingly cannot be regarded as legal or tax advice. Please contact our office for more information on this subject and how it pertains to your specific tax or financial situation.