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The provinces have been dropping basic income tax rates for individuals, but some are curbing any tax cut with higher surtaxes. For example, in 1997 the top BC surtax rate is 54.5 percent of basic BC tax; Ontario surtax is 46 percent and is set for 56 percent in 1999. Income splitting with family members at lower marginal tax rates enjoys continued popularity, but significant provincial surtax rate increases also make splitting income with one's inter vivos trust attractive.
| Province |
Maximum surtax
savings in a trust |
Interest/taxable
capital gains |
Canadian
dividends |
| British Columbia |
$4,358 |
$59,128 |
$87,560 |
| Ontario |
3,143 |
44,397 |
66,745 |
| Quebec--provincial |
2,352 |
50,000 |
60,542 |
| Quebec--federal |
625 |
43,104 |
63,830 |
If an inter vivos trust's beneficiaries are taxed at the top marginal rate, leaving income to be taxed in the trust may reduce the family's surtax liability. Because federal and provincial surtaxes are imposed at graduated rates, savings accrue even though the trust is taxed at the highest federal rate. For Quebec provincial tax purposes, an inter vivos trust is taxed at the greater of the liability calculated at graduated rates and a flat 20 percent (23 percent next year). The accompanying table outlines the maximum surtax savings available in 1997 to British Columbia, Ontario, and Quebec residents who leave income to be taxed in an inter vivos trust. The level and the type of trust income necessary to maximize surtax savings are also set out. Residents of other provinces cannot achieve such significant savings primarily because of lower surtax rates and the income levels at which they apply.
Louis J. Provenzano and Donald E. Carson
Coopers & Lybrand, North York
CANADIAN TAX Highlights
Volume 5, Number 7, July 22, 1997
© 1997, Canadian Tax Foundation
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