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Preparing for New Taxation Legislation

Steven R. Reed, partner at Manning Elliott, breaks down the upcoming changes to three types of taxation and how to lessen its impact on those who will be affected by the new rules

Along with the February 2014 federal budget came significant changes to the taxation of testamentary trusts, charitable donations made in a will and life interest trusts (such as alter ego or joint spousal trusts).

“New legislation, which will become effective January 1, 2016, will significantly affect estate planning,” says Manning Elliott LLP partner Steven R. Reed. “We advise early planning for the implications of these new rules and a review of current wills.”

With decades of experience and a team of dedicated accountants and business advisors, Manning Elliott can guide you through the new legislative rules.

The most significant change relates to testamentary trusts. The graduated rate taxation that these trusts have had since 1971 will be eliminated.

Created through a will, testamentary trusts currently have access to graduated personal tax rates that could result in annual savings of approximately $10,000 in federal taxes. After January 1, 2016, however, all income retained in a testamentary trust will be taxed at the highest tax rate in the trust’s province of residence.

“This means that there will no longer be a tax benefit to having income earned through a testamentary trust,” says Reed. “However, graduated rate estates will be afforded a number of benefits, including access to the graduated personal tax rates.”

A graduated rate estate (GRE) is an estate that arose as a consequence of an individual’s death within the previous 36 months. The estate must be designated by the executor as a GRE on the tax return filed for its first taxation year.  “After 36 months GREs will lose status and be subject to top rate taxation,” Reed notes, adding that from that point onward the estate has a December 31 year-end. 

The legislative changes also introduce the concept of qualified disability trusts (QDTs). A QDT is defined as a testamentary trust with a beneficiary who qualifies for the disability tax credit.

The testamentary trust must be designated as a QDT by the trustee and the qualified beneficiary. Each qualified beneficiary is allowed to have one QDT, which may be subject to a recovery tax on distribution to non-qualified beneficiaries.

“The QDT will have the ability to select an off-calendar year-end and will have access to graduated personal tax rates,” says Reed. This may yield annual savings of about $10,000 in federal taxes.   

The taxation of charitable donations will also change. At present, charitable donations made in a will must be claimed on the deceased’s final tax return.  The amount of the donation credit is equal to the value of the property donated at the time of death.

For deaths that occur on or after January 1, 2016, however, the tax credit for charitable donations made in a will can be claimed by the deceased in his or her final tax return or by the deceased’s graduated rate estate. The amount of the donation credit is equal to the value of the property donated at the time it’s donated as opposed to the value at the time of death.

 “The flexibility afforded by the carryover of the donation credit to subsequent and prior years is welcome. However, changes in value from the time of death to the time the donation is made may create tax inefficiencies,” Reed says.

Taxation of life interest trusts will also require additional consideration. Life interest trusts, which include alter ego trusts, spousal/common law trusts, or joint partner trusts, have a deemed disposition and reacquisition of the trust’s assets upon the death of the life interest beneficiary. The income on this deemed disposition is included in the life interest trust’s income, and the life interest trust is liable for taxes owing upon this deemed disposition.

For deaths that occur on or after January 1, 2016, the life interest trust will have a deemed year-end and a deemed disposition and reacquisition of the trust’s assets upon the death of the life interest beneficiary. However, the income arising upon the deemed disposition will be included in the deceased’s terminal tax return.

“The deceased’s estate, rather than the life interest trust, will need to fund this tax liability,” Reed explains. 

It’s important to plan well ahead of time for the implications of these new rules. With more than six decades of experience, Manning Elliott can assist with all aspects of estate planning and taxation. For more information on these new rules, give our offices a call at 604-714-3600 in Vancouver or 604-557-5750 in Abbotsford.

  

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