Client Update: Taxation of Trusts, Estates and Charitable Donation Rules Changing January 1, 2016
This client update is an attempt to summarize the more significant aspects of the rules. However, there is a great degree of complexity caused by these changes, and it is important for individuals to seek advice specific to their circumstances. The primary aspects of these changes are set out below:
- Testamentary trusts (trusts that are established in a will and arise as a consequence of death of an individual) will now be taxed at the high marginal tax rates for income retained in the trust (currently testamentary trusts are taxed at the graduated tax rates) – this significantly curtails the opportunities to use testamentary trusts for pure tax planning (although many non-tax estate planning reasons for such trusts remain).
- One exception to this is the “graduated rate estate” (“GRE”) which will continue to obtain the benefit of graduated rates for 36 months after the date of death.
- Testamentary trusts established for the benefit of a disabled individual (a qualified disability trust) will also continue to obtain graduated rate taxation.
- Existing testamentary trusts will have a deemed year end on December 31, 2015, and all testamentary trusts (except GREs) will have to have a calendar year end going forward.
- Only GREs are eligible for certain tax planning provisions related to loss carry backs (which are particularly relevant with private company shares) or utilize the new estate donation rules (including the continued elimination of taxable capital gains on donations of marketable securities to public charities).
- Life interest trusts will now have a deemed year end at the end of the day of death of the life beneficiary and all income (including realized capital gains on that deemed disposition) will be deemed payable to the life interest beneficiary and taxable by his or her estate – this shifts the tax burden from the life interest trust to the estate of the life interest beneficiary which is a significant change, and particularly problematic for second relationship, blended family and family-controlled business situations.
- Strategies do exist to avoid this mismatch, but revisions to existing trusts are required for those to be implemented.
- A court ordered variation of irrevocable trusts might be required.
- The new estate donation rules give greater flexibility for those persons who wish to make charitable donations on death – as long as the donation is made by a GRE within 36 months of the date of death, the charitable tax receipt can be carried back to reduce 100% of taxes in the year of death and the year immediately preceding, or 75% of the taxes in the three years of the estate itself or a five year carry forward in the estate, but the donor must be a GRE.
- The new donation rules do not apply to gifts by life interest trusts, so the possibility of charitable giving through life interest trusts has been fully eliminated.
- For more specific information about the new charitable donation rules, please see our separate update “New Tax Rules For Charitable Gifts”.
These rules are extremely significant and affect a great many different estate planning scenarios. We would encourage everyone to review their wills, testamentary trusts and life interest trusts with their professional advisors to determine what changes may need to be made at this time to address these new rules.
Archive
Rick Dunlop In my December 15, 2016 article, Federal Government’s Cannabis Report: What does it mean for employers?, I noted the Report’s1 suggestion that there was a lack of research to reliably determine when individuals are impaired…
Read MoreRick Dunlop and Michelle Black On March 14, 2014, CanMar Contracting Limited (“CanMar”) granted a day off to two of its hard working and longer serving employees so they could spend time with their respective families. That…
Read MoreJoe Thorne and Meaghan McCaw The doctrine of unconscionability is an equitable remedy available in exceptional circumstances where a bargain between parties, be it a settlement or a release, may be set aside on the basis that…
Read MoreJonathan Coady After more than five years, the Prince Edward Island Information and Privacy Commissioner (the “Privacy Commissioner”) has completed her review into more than sixty records withheld by a local school board on the…
Read MorePeter McLellan, QC & Richard Jordan Introduction On February 21, 2017 the Nova Scotia Government passed Bill 75 – the Teachers’ Professional Agreement and Classroom Improvement (2017) Act. This Bulletin will provide some background to what is, today,…
Read MoreBruce Grant, QC and Justin Hewitt In the recent decision of Scotia Mortgage Corporation v Furlong1 the Supreme Court of Newfoundland and Labrador confirmed that where a law firm acts jointly for the borrower and lender in the placement…
Read MoreThe Supreme Court of Canada released its decision in Sabean v Portage La Prairie Mutual Insurance Co, 2017 SCC 7 at the end of January, finally answering an insurance policy question that had divided the lower…
Read MoreIn preparing for the 2017 proxy season, you should be aware of some regulatory changes and institutional investor guidance that may impact disclosure to, and interactions with, your shareholders. This update highlights what is new…
Read MorePerlene Morrison and Hilary Newman During the fall 2016 legislative sitting, the Province of Prince Edward Island passed legislation that results in significant changes to the Planning Act. The amendments received royal assent on December 15, 2016 and…
Read MoreJoe Thorne1 and Justin Hewitt2 In Unifund Assurance Company v Churchill,3 the Newfoundland and Labrador Court of Appeal considered the application of our rules of court and the common law as they relate to disclosure of documents produced in…
Read More