On June 3, 2013 a consultation paper was published by Finance Canada addressing the concern that the graduated tax rates currently in place for testamentary trusts are “unfair” since they are depriving the federal government from tax revenues.

Currently, a testamentary trust is given the same treatment as an individual when it comes to graduated tax rates. In essence, a testamentary trust will pay 15% federal tax on the first $43,561 of its taxable income, compared to 29% if the trust was a living trust. (a living trust is one where the parties involved are alive. Living trusts are useful in patrimony protection as well as in tax planning)

Finance Canada has long associated the testamentary trusts with certain tax planning opportunities such the use of multiple testamentary trusts, avoidance of the Old Age Security Recovery Tax, and tax motivated delays in completing the administration of the estates.

An example of a tax motivated delay is when the beneficiaries of testamentary trusts i.e. the heirs, are in an elevated tax bracket, and elect to have the testamentary trust pay the taxes at the lower rates and distribute the after tax income in the form of capital. Sizeable tax savings are achieved in delaying the settlement of the estate.

Finance is proposing to amend the income tax rules to apply flat top-rate taxation trusts created by will. In addition, flat top-rate taxation is proposed to apply to estates (“flat top-rate estates”) after a reasonable period of administration. Specifically, a deceased individual’s estate would be considered a flat top-rate estate starting immediately after the 36-month period that follows the individual’s passing.

If this proposal becomes law, significant and profound changes will have to be implemented to existing estate plans and new estate plans would have to consider the impact of these changes.

We will continue to keep current on the evolvement of the consultation paper and as more details are announced by Finance Canada.

For more information please contact:

HACHEM W. HALABI, D.FISC, CPA CA
Partner
Tél: 514-842-3911 poste 240

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