Trusts and Estates Proposals: Little Consultation but More Information
The consultation paper on graduated taxation for trusts and estates,
which was promised in the 2013 budget, was released on June 3. It
contains several new details on the budget proposals. Comments are
invited until December 2, 2013. However, there is no list of questions
or any indication of the topics on which Finance is seeking comments;
the measures seem clearly defined as they stand.
Certain estates and trusts created by will (testamentary trusts) and
inter vivos trusts created before June 18, 1971 (grandfathered inter
vivos trusts) compute federal income tax on taxable income using the
graduated tax rates applicable to individuals (subsection 104(2)). Other
trusts (ordinary inter vivos trusts) are subject to flat top-rate
taxation--that is, they pay federal tax at a flat rate of 29 percent,
which is the highest federal tax rate for individuals (subsection
122(1)). The budget proposed eliminating the tax benefits that arise
from taxing at graduated rates grandfathered inter vivos trusts, trusts
created by will, and estates (after a reasonable period).
The consultation paper provides several new details:
The new rules will apply to existing and new arrangements for the
2016 and later taxation years. This unexpected delay for new
arrangements is taxpayer-favourable, but the lack of full grandfathering
of existing arrangements is a surprise.
There will be no changes to the preferred beneficiary election,
the trust rules for minor children, or the rollover on the death of a
spouse or common-law partner.
The "reasonable period" after which estates will be subject to
flat top-rate taxation is 36 months after the individual's death. A
deemed year-end occurs at that time. An estate in existence after that
time will be called a flat top-rate estate.
Quarterly tax instalments are required for testamentary trusts and flat top-rate estates, where applicable.
The basic exemption of $40,000 for alternative minimum tax
afforded to grandfathered inter vivos trusts, trusts created by will,
and flat top-rate estates is eliminated.
Trusts created by will and flat top-rate estates are no longer allowed to have off-calendar year-ends.
Trusts created by will and flat top-rate estates are no longer exempt from part XII.2 tax under subsection 210(2).
Trusts created by will and flat top-rate estates are no longer able to flow out investment tax credits to their beneficiaries.
Changes are proposed to current administrative policies that
ordinarily would apply only to individuals but administratively were
extended to testamentary trusts.
As was apparent from the budget, the intention of the proposed
measures is twofold: (1) to discourage the use of testamentary trusts
for tax planning and (2) to remove any legislative or administrative
advantages that were previously extended to testamentary trusts.
Specific plans targeted by this measure, as reported in the budget, are
the settling of multiple testamentary trusts on the death of an
individual, delaying the windup of the administration of an estate, and
avoiding the Old Age Security Recovery Tax. The consultation paper
provides no further details about these perceived abuses.
One would have hoped for more details on why Finance wants to remove
the grandfathering of the 40-year-old group of grandfathered inter vivos
trusts created in 1971 and previous years. Ironically, the present tax
treatment of trusts stems from that time; the 1966 report of the Royal
Commission on Taxation (vol. 4, ch. 21, p. 157) proposed measures "to
impose tax on trusts at equitable rates and to prevent the use of trusts
to avoid or defer payment of tax," a project that seems to be
Riaz S. Mohamed
Moodys LLP, Calgary